Registration No. 33-43446
811-6444
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
X
Pre-Effective Amendment No.
Post-Effective Amendment No. 6
X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 7
X
SMITH BARNEY INCOME TRUST
(formerly known as Smith Barney Shearson Income Trust)
of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(212)72 3 -9218
Christina T. Sydor
Secretary
Smith Barney Income Trust
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485(b)
X on January 29, 1995 pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)
on pursuant to Rule 485(a)
___________________________________________________________________________
__
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. The Registrant's Rule 24f-2 Notice for
the fiscal year ended November 30, 1994 was filed on January 27,
1995.
SMITH BARNEY INCOME TRUST
FORM N-1A
CROSS REFERENCE SHEET*
PURSUANT TO RULE 495(b)
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund
Management of the Trust and the
Fund; Distributor; Additional
Information; Annual Report
6. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares; Valuation of
Shares; Exchange Privilege ;
Redemption of Shares; Minimum
Account Size; Distributor;
Additional Information
8 Redemption or Repurchase
Purchase of Shares; Redemption
of Shares; Exchange
Privilege
9. Pending Legal Proceedings
Not applicable
__________________________________________________________
* Part A and Part B (Prospectus and Statement of Additional Information)
for Smith Barney Limited Maturity Treasury Fund are incorporated by
reference to Post-Effective Amendment No. 4 as filed with the Securities
and Exchange Commission (the "SEC") on February 1, 1994 as Accession
#0000053798-94-000061 ("Post-Effective Amendment No. 4").
Part B
Item No.
Statement of
Additional Information Caption
10. Cover Page
Cover page
11. Table of Contents
Contents
12. General Information and
History
Distributor; Additional
Information
13. Investment Objectives and
Policies
Investment Objective and
Management Policies
14. Management of the Fund
Management of the Trust;
Distributor
15. Control Persons and Principal
Holders
of Securities
Management of the Trust
16. Investment Advisory and Other
Services
Management of the Trust;
Distributor
17. Brokerage Allocation and
Other Services
Investment Objective and
Management Policies; Distributor
18. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing
of Securities Being
Offered
Purchase of Shares; Redemption of
Shares; Valuation of Shares;
Distributor; Exchange
Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
SMITH BARNEY
INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
PROSPECTUS January 29, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Intermediate Maturity California Municipals Fund (the "Fund")
seeks to provide California investors with as high a level of current in-
come exempt from Federal income taxes and California State personal income
tax as is consistent with preservation of principal by investing in in-
vestment grade obligations issued by the State of California and its po-
litical subdivisions, agencies and public authorities. The Fund is one of
a number of funds, each having distinct investment objectives and policies
making up the Smith Barney Income Trust (the "Trust"). The Trust is an
open-end management investment company commonly referred to as a mutual
fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses,
that prospective investors will find helpful in making an investment deci-
sion. Investors are encouraged to read this Prospectus carefully and re-
tain it for future reference. Shares of the other funds offered by the
Trust are described in separate prospectuses that may be obtained by call-
ing or writing the Trust at the telephone number or address set forth
above or by contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated January 29, 1995, 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
set forth above or by contacting a Smith Barney 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 INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SE-
CURITIES 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.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
FINANCIAL HIGHLIGHTS 10
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 12
VALUATION OF SHARES 26
DIVIDENDS, DISTRIBUTIONS AND TAXES 26
PURCHASE OF SHARES 30
EXCHANGE PRIVILEGE 36
REDEMPTION OF SHARES 39
MINIMUM ACCOUNT SIZE 41
PERFORMANCE 41
MANAGEMENT OF THE TRUST AND THE FUND 43
DISTRIBUTOR 44
ADDITIONAL INFORMATION 45
</TABLE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those con-
tained in this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Fund or the distributor. This Prospectus does not constitute an offer by
the Fund or the distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdic-
tion.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed infor-
mation appearing elsewhere in this Prospectus and in the Statement of Ad-
ditional Information. Cross references in this summary are to headings in
the Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is a non-diversified intermediate-term mu-
nicipal bond fund that seeks to provide California investors with as high
a level of current income exempt from Federal income taxes and California
State personal income tax as is consistent with the preservation of prin-
cipal by investing in investment-grade obligations issued by the State of
California and its political subdivisions, agencies and public authori-
ties. The weighted average maturity of the Fund's portfolio securities
will normally not be less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally in-
vest will be no greater than 20 years. See "Investment Objective and Man-
agement Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which
differ principally in terms of sales charges and rates of expenses to
which they are subject. A third Class of shares, Class Y shares, is of-
fered only to investors meeting an initial investment minimum of
$5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an ini-
tial sales charge of 2.00% and are subject to an annual service fee of
0.15% of the average daily net assets of the Class. The initial sales
charge may be waived for certain purchases. Purchases of Class A shares,
which when combined with current holdings of Class A shares offered with a
sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made
within 12 months of purchase. See "Prospectus Summary -- No Initial Sales
Charge."
Class C Shares. Class C shares are sold at net asset value with no ini-
tial sales charge. They are subject to an annual service fee of 0.15% and
an annual distribution fee of 0.20% of the average daily net assets of the
Class, and investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of purchase. The CDSC may be waived for certain redemp-
tions. The Class C shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Class C shares, which when combined with current holdings of Class C
shares of the Fund equal or exceed $500,000 in the aggregate, should be
made in Class A shares at net asset value with no sales charge, and will
be subject to a CDSC of 1.00% on redemptions made within 12 months of pur-
chase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to
any service or distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and cir-
cumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify to purchase shares without an initial
sales charge and the shares are subject to lower ongoing expenses over the
term of the investment. As an alternative, Class C shares are sold without
any initial sales charge so the entire purchase price is immediately in-
vested in the Fund. Any investment return on these additional invested
amounts may partially or wholly offset the higher annual expenses of this
Class. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case. Finally, investors
should consider the effect of the CDSC period in the context of their own
investment time frame.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or dis-
tribution fees. The maximum purchase amount for Class A shares is
$4,999,999 and Class C shares is $499,999. There is no maximum purchase
amount for Class Y shares.
No Initial Sales Charge. The initial sales charge on Class A shares may
be waived for certain eligible purchasers, and the entire purchase price
would be immediately invested in the Fund. In addition, Class A share pur-
chases, which when combined with current holdings of Class A shares of-
fered with a sales charge equal or exceed $500,000 in the aggregate, will
be made at net asset value with no initial sales charge, but will be sub-
ject to a CDSC of 1.00% on redemptions made within 12 months of purchase.
The $500,000 aggregate investment may be met by adding the purchase to the
net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Ex-
change Privilege." See "Purchase of Shares." Because the ongoing expenses
of Class A shares may be lower than those for Class C shares, purchasers
eligible to purchase Class A shares at net asset value should consider
doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose
of the CDSC on the Class C shares is the same as that of the initial sales
charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution
fees for each Class of shares and "Valuation of Shares," "Dividends, Dis-
tributions and Taxes" and "Exchange Privilege" for other differences be-
tween the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distribu-
tor, Smith Barney, a broker that clears securities transactions through
Smith Barney on a fully disclosed basis (an "Introducing Broker") or an
investment dealer in the selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class C shares may open an
account by making an initial investment of at least $1,000 for each ac-
count. Investors in Class Y shares may open an account for an initial in-
vestment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum initial investment requirement for Class A
and Class C shares and the subsequent investment requirement for all
Classes through the Systematic Investment Plan described below is $100.
There is no minimum investment requirement in Class A for unitholders who
invest distributions from a unit investment trust ("UIT") sponsored by
Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic In-
vestment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Fund shares in an amount of at
least $100. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual Funds Mangement
Inc. ("SBMFM") serves as the Fund's investment adviser. SBMFM (formerly
known as Smith, Barney Advisers, Inc.) is a wholly owned subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned sub-
sidiary of The Travelers Inc. ("Travelers"), a diversified financial ser-
vices holding company engaged, through its subsidiaries, principally in
four business segments: Investment Services, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services.
SBMFM also serves as the Fund's administrator. The Boston Company Advi-
sors, Inc. ("Boston Advisors") serves as the Fund's sub-administrator.
Boston Advisors is a wholly owned subsidiary of The Boston Company, Inc.
("TBC"), which in turn is a wholly owned subsidiary of Mellon Bank Corpo-
ration ("Mellon"). See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined, plus any applicable sales
charge differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day gener-
ally is quoted daily in the financial section of most newspapers and also
is available from a Smith Barney Financial Consultant. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are de-
clared daily and generally paid on the 10th day of the calendar month.
Distributions of net realized capital gains, if any, are paid annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of
any Class will be reinvested automatically, unless otherwise specified by
an investor, in additional shares of the same Class at current net asset
value. Shares acquired by 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. Shares of the Fund, unlike
certain bank deposit accounts, are not guaranteed or insured by any Fed-
eral or state authority. Changes in interest rates generally will result
in increases or decreases in the market value of the obligations held by
the Fund. The yield of the Fund 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 tax-exempt money market fund and therefore its investment portfolio
can be expected to experience greater volatility than that of a tax-exempt
money market fund. The net asset value of the Fund will be subject to
greater fluctuation to the extent that the Fund invests in zero coupon se-
curities. The Fund's net asset value per share will fluctuate depending on
a combination of factors such as current market interest rates and the
creditworthiness of the issuers in whose securities the Fund invests. The
Fund will not invest in obligations that are rated lower than Baa by
Moody's Investors Service, Inc. ("Moody's"), BBB by Standard & Poor's Cor-
poration ("S&P") or BBB by Fitch Investors Service, Inc. ("Fitch"), at the
time of purchase. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the obligations that they undertake to rate;
the ratings are relative and subjective and are not absolute standards of
quality.
The Fund may invest up to 20% of its total assets in unrated securities
that SBMFM determines to be of comparable quality to the securities rated
investment grade in which the Fund may invest. Dealers may not maintain
daily markets in unrated securities and retail secondary markets for many
of them may not exist; lack of markets may affect the Fund's ability to
sell these securities when SBMFM deems it appropriate. The Fund has the
right to invest without limitation in state and local obligations that are
"private activity bonds," the income from which may be taxable as a spe-
cific preference item for purposes of the Federal alternative minimum tax.
Thus, the Fund may not be a suitable investment for investors who are sub-
ject to the alternative minimum tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain
risks. The instruments presenting the Fund with risks are municipal
leases, zero coupon securities, custodial receipts, municipal obligation
components, floating and variable rate demand notes and bonds, and partic-
ipation interests. Entering into securities transactions on a when-issued
or delayed-delivery basis are investment techniques involving risks to the
Fund. See "Investment Objective and Management Policies -- Investment
Techniques -- Risk Factors and Special Considerations" and "Dividends,
Distributions and Taxes."
Investment in the Fund which is classified as a non-diversified fund, may
present a greater risk than an investment in a diversified fund. See "In-
vestment Objective and Management Policies -- Risk Factors and Special
Considerations." Investment in the Fund involves risks and special consid-
erations applicable to the State of California. See "Investment Objective
and Management Policies -- Risk Factors and Special Considerations."
THE FUND'S EXPENSES The following expense table lists the costs and ex-
penses an investor will incur, either directly or indirectly, as a share-
holder of the Fund, based upon the maximum sales charge or maximum CDSC
that may be incurred at the time of purchase or redemption and, unless
otherwise noted, the Fund's operating expenses for its most recent fiscal
year:
<TABLE>
<CAPTION>
CLASS A* CLASS C CLASS Y
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) 1.00% 1.00% None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees (net of waivers) 0.06% 0.06% 0.06%
12b-1 fees** 0.15% 0.35% None
Other expenses*** 0.54% 0.54% 0.54%
TOTAL OPERATING EXPENSES
(after waivers) 0.75% 0.95% 0.60%
<FN>
*Purchases of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge, equal or exceed $500,000
in the aggregate, will be made at net asset value with no sales charge,
but may be subject to a CDSC of 1.00% on redemptions made within 12
months.
**Class C shares are subject to an ongoing distribution fee and, as a re-
sult, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
***For Class Y shares, "Other expenses" have been estimated based on ex-
penses incurred by Class A shares because prior to November 30, 1994 no
Class Y shares were sold.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors
actually may pay lower or no charges, depending on the amount purchased
and the length of time the shares are held. See "Purchase of Shares" and
"Redemption of Shares." Smith Barney receives an annual 12b-1 service fee
of 0.15% of the value of average daily net assets of Class A shares. Smith
Barney also receives with respect to Class C shares an annual 12b-1 fee of
0.35% of the value of average daily net assets of that Class, consisting
of a 0.20% distribution fee and a 0.15% service fee. The nature of the
services for which the Fund pays management fees is described under "Man-
agement of the Trust and the Fund." "Other expenses" in the above table
includes fees for shareholder services not provided by Smith Barney, cus-
todial fees, legal and accounting fees, printing costs and registration
fees, the costs of regulatory compliance, the costs associated with main-
taining the Trust's legal existence and the costs involved in communicat-
ing with shareholders of the Fund.
During the fiscal year ended November 30, 1994, the Fund's investment ad-
viser and administrator voluntarily waived portions of their respective
fees in the aggregate amount equal to 0.49% of the value of the Fund's av-
erage daily net assets. This had the effect of lowering the Fund's overall
expenses ratio and increasing the returns available to investors. If these
fees had not been waived, the Fund's total operating expenses for Class A
and Class C shares for the fiscal year ended November 30, 1994, would have
been 1.24% and 1.44%, respectively, as a percentage of the value of the
Fund's average daily net assets.
EXAMPLE The following example is intended to assist an investor in under-
standing the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating ex-
penses at the levels set forth in the table above. See "Purchase of
Shares," "Redemption of Shares" and "Management of the Trust and the
Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
An investor would pay the following ex-
penses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemp-
tion at the end of each time period:
Class A $38 $44 $61 $111
Class C 20 30 53 117
Class Y 6 19 33 75
An investor would pay the following ex-
penses on the same investment, assuming
the same annual return and no redemp-
tion:
Class A $28 $44 $61 $111
Class C 10 30 53 117
Class Y 6 19 33 75
</TABLE>
The example also provides a means for the investor to compare expense lev-
els of funds with different fee structures over varying investment peri-
ods. To facilitate such comparison, all funds are required to utilize a
5.00% annual return assumption. However, the Fund's actual return will
vary and may be greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following information has been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report thereon appears in the Fund's Annual
Report dated November 30, 1994. This information should be read in con-
junction 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 CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
11/30/94* 11/30/93 11/30/92*
<S> <C> <C> <C>
Net asset value, beginning of year $ 8.50 $ 8.04 $ 7.90
Income from investment operations:
Net investment income+ 0.39 0.39 0.35
Net realized and unrealized gain/(loss) on investments (0.69) 0.46 0.14
Total from investment operations (0.30) 0.85 0.49
Less distributions:
Distributions from net investment income (0.39) (0.39) (0.35)
Distributions from net realized capital gains (0.01) -- --
Total distributions (0.40) (0.39) (0.35)
Net asset value, end of year $ 7.80 $ 8.50 $ 8.04
Total return++ (3.65)% 10.70% 6.33%
Ratios/supplemental data:
Net assets, end of year (in 000's) $25,359 $32,514 $10,667
Ratio of operating expenses to average net assets+++ 0.75% 0.72% 0.65%**
Ratio of net investment income to average net assets 4.73% 4.45% 4.81%**
Portfolio turnover rate 39% 16% 46%
<FN>
* The Fund commenced operations on December 31, 1991.
** Annualized.
+ Net investment income before waiver of fees by investment adviser, ad-
ministrator and distributor for the year ended November 30, 1994 and
waiver of fees and reimbursement of expenses by investment adviser,
sub-investment adviser and administrator and/or custodian and distribu-
tor for the year ended November 30, 1993 and the period ended November
30, 1992 was $0.35, $0.32 and $0.24, respectively.
++ Total return represents aggregate total returns for the periods indi-
cated and does not reflect any applicable sales charges.
+++ Annualized operating expense ratio before waiver of fees by investment
adviser, administrator and distributor for the year ended November 30,
1994 and before waiver of fees and reimbursement of expenses by in-
vestment adviser, sub-investment adviser and administrator and/or cus-
todian and distributor for the year ended November 30, 1993 and the
period ended November 30, 1992 were 1.24%, 1.49% and 2.18%
respectively.
</TABLE>
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
YEAR
ENDED
11/30/94*
<S> <C>
Net asset value, beginning of period $ 7.76
Income from investment operations:
Net investment income+ 0.01
Net realized and unrealized gain on investments 0.05#
Total from investment operations 0.06
Less distributions:
Distributions from net investment income (0.02)
Total distributions (0.02)
Net asset value, end of period $ 7.80
Total return++ 0.72%
Ratios/Supplemental data:
Net assets, end of period (in 000's) $ 45
Ratio of operating expenses to average net assets+++ 0.95%**
Ratio of net investment income to average net assets 4.53%**
Portfolio turnover rate 39%
<FN>
* The Fund commenced selling Class C shares on November 8, 1994.
** Annualized.
+ Net investment income before waiver of fees by investment adviser and
administrator for the period ended November 30, 1994 was $0.01.
++ Total return represents aggregate total return for the period indi-
cated and does not reflect any
applicable sales charges.
+++ Annualized operating expense ratio before waiver of fees by investment
adviser and administrator for the period ended November 30, 1994 was
1.44%.
# The amount in this caption for each share outstanding throughout the
period may not accord with the change in aggregate gains and losses in
the portfolio securities for the period because of the timing of pur-
chases and withdrawals of shares in relation to the fluctuating market
values of the portfolio.
</TABLE>
As of November 30, 1994 the Fund had not sold any Class Y shares, and ac-
cordingly, no comparable financial information is available at this time
for that Class.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Set out below is a description of the investment objective and principal
investment policies of the Fund. 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 a majority of the Fund's outstanding shares.
The Fund's investment objective is to provide California investors with as
high a level of current income exempt from Federal income taxes and Cali-
fornia State personal income taxes as is consistent with preservation of
principal. Under normal market conditions, the Fund attempts to invest
100% in a portfolio of investment grade debt obligations issued by or on
behalf of the State of California and other states, territories and pos-
sessions of the United States, the District of Columbia and their respec-
tive authorities, agencies, instrumentalities and political subdivisions
("Municipal Obligations"). For purposes of this Prospectus, debt obliga-
tions issued by the State of California and its political subdivisions,
agencies and public authorities (together with certain other governmental
issuers such as the Commonwealth of Puerto Rico), the interest from which
debt obligations is, in the opinion of bond counsel to the issuer, ex-
cluded from gross income for Federal income tax purposes and exempt from
California State personal income tax are defined as "California Exempt Ob-
ligations." The Fund will operate subject to a fundamental investment pol-
icy providing that, under normal market conditions, the Fund will invest
at least 80% of its net assets in California Exempt Obligations.
The Fund is classified as a non-diversified fund under the Investment Com-
pany Act of 1940, as amended (the "1940 Act"), which means that the Fund
is not limited by the 1940 Act in the proportion of its assets that it may
invest in the obligations of a single issuer. The Fund intends to conduct
its operations, however, so as to qualify as a "regulated investment com-
pany" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"), which will relieve the Fund of any liability for Federal income
tax and California State franchise tax to the extent that its earnings are
distributed to shareholders. To qualify as a regulated investment company,
the Fund will, among other things, limit its investments so that, at the
close of each quarter of the taxable year (a) not more than 25% of the
market value of the Fund's total assets will be invested in the securities
of a single issuer and (b) with respect to 50% of the market value of its
total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer and the Fund will
not own more than 10% of the outstanding voting securities of a single is-
suer.
The Fund will invest at least 80% of its total assets in California Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG
3 or Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch.
Up to 20% of the Fund's total assets may be invested in unrated securities
that are deemed by SBMFM to be of a quality comparable to investment
grade. The Fund will not invest in California Exempt Obligations that are
rated lower than Baa by Moody's, BBB by S&P or BBB by Fitch, at the time
of purchase. Although California Exempt Obligations rated Baa by Moody's,
BBB by S&P or BBB by Fitch are considered to be investment grade, they may
be viewed as being subject to greater risks than other investment grade
securities. California Exempt Obligations rated Baa by Moody's, for exam-
ple, are considered medium grade obligations that lack outstanding invest-
ment characteristics and have speculative characteristics as well. Cali-
fornia Exempt Obligations rated BBB by S&P are regarded as having an ade-
quate capacity to pay principal and interest. California Exempt
Obligations rated BBB by Fitch are deemed to be subject to a higher like-
lihood that their rating will fall below investment grade than higher
rated bonds.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the California Exempt Obligations that they undertake to rate;
the ratings are relative and subjective and are not absolute standards of
quality. SBMFM's judgment as to credit quality of a California Exempt Ob-
ligation, thus, may differ from that suggested by the ratings published by
a rating service. A description of Moody's, S&P and Fitch ratings relevant
to the Fund's investments is included as an appendix to the Statement of
Additional Information. The policies of the Fund described above as to
ratings of portfolio investments will apply only at the time of the pur-
chase of a security, and the Fund will not be required to dispose of a se-
curity in the event Moody's, S&P or Fitch downgrades its assessment of the
credit characteristics of the security's issuer.
California Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issu-
er's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenue derived
from a particular facility or class of facilities or, in some cases, from
the proceeds of a special excise or other specific revenue source, but not
from the general taxing power. Notes are short-term obligations of issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. California Exempt Obli-
gations bear fixed, floating and variable rates of interest, and varia-
tions exist in the security of California Exempt Obligations, both within
a particular classification and between classifications.
The yields on, and values of, California Exempt Obligations are dependent
on a variety of factors, including general economic and monetary condi-
tions, conditions in the California Exempt Obligation markets, size of a
particular offering, maturity of the obligation and rating of the issue.
Consequently, California Exempt Obligations with the same maturity, coupon
and rating may have different yields or values, whereas obligations of the
same maturity and coupon with different ratings may have the same yield or
value. See "Risk Factors and Special Considerations -- California Exempt
Obligations."
Issuers of California Exempt Obligations may be subject to the provisions
of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy
Reform Act of 1978, affecting the rights and remedies of creditors. In ad-
dition, the obligations of those issuers may become subject to laws en-
acted in the future by Congress, state legislatures or referenda extending
the time for payment of principal and/or interest, or imposing other con-
straints upon enforcement of the obligations or upon the ability of munic-
ipalities to levy taxes. The possibility also exists that, as a result of
litigation or other conditions, the power or ability of any issuer to pay,
when due, the principal of, and interest on, its obligations may be mate-
rially affected.
MATURITY OF OBLIGATIONS HELD BY THE FUND
SBMFM believes that the Fund may offer an attractive investment opportu-
nity for investors seeking a higher effective tax yield than a tax-exempt
money market fund or a tax-exempt short-term bond fund and less fluctua-
tion in net asset value than a longer term tax-exempt bond fund. The Fund
will normally invest in intermediate maturity securities; the weighted av-
erage maturity of the Fund will normally be not less than three nor more
than 10 years. The maximum remaining maturity of the securities in which
the Fund will normally invest will be no greater than 20 years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in California Obligations that are tax-
exempt "private activity bonds," as defined in the Code, which are in most
cases revenue bonds. Private activity bonds generally do not carry the
pledge of the credit of the issuing municipality, but are guaranteed by
the corporate entity on whose behalf they are issued. Interest income on
certain types of private activity bonds issued after August 7, 1986 to fi-
nance nongovernmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be subject to a Federal
alternative minimum tax to the extent the Fund's dividends are derived
from interest on these bonds. Dividends derived from interest income on
California Exempt Obligations are a "current earnings" adjustment item for
purposes of the Federal corporate alternative minimum tax. See "Dividends,
Distributions and Taxes." Private activity bonds held by the Fund will be
included in the term California Exempt Obligations for purposes of deter-
mining compliance with the Fund's policy of investing at least 80% of its
total assets in California Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in California Exempt Obligations that
are repayable out of revenues generated from economically related projects
or facilities or debt obligations whose issuers are located in the same
state. Sizeable investments in these obligations could involve an in-
creased risk to the Fund should any of the related projects or facilities
experience financial difficulties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to an aggregate amount equal to 10% of its net as-
sets in illiquid securities, which term includes securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets. In addition, up to 5% of the value of the
Fund's assets may be invested in securities of entities that have been in
continuous operation for fewer than three years.
TYPES OF CALIFORNIA EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal
leases." Municipal leases may take the form of a lease or an installment
purchase contract issued by state and local government authorities to ob-
tain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
Interest payments on qualifying municipal leases are exempt from Federal
income taxes and state income taxes within the state of issuance. Although
lease obligations do not constitute general obligations of the municipal-
ity for which the municipality's taxing power is pledged, a lease obliga-
tion is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which pro-
vide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such
purpose on a yearly basis. In addition to the "non-appropriation" risk,
these securities represent a relatively new type of financing that has not
yet developed the depth of marketability associated with more conventional
bonds. Although "non-appropriation" lease obligations are often secured by
the underlying property, disposition of the property in the event of fore-
closure might prove difficult. The Fund may invest in municipal leases
without non-appropriation clauses only when the municipality is required
to continue the lease under all circumstances except bankruptcy. There is
no limitation on the percentage of the Fund's assets that may be invested
in municipal lease obligations. In evaluating municipal lease obligations,
SBMFM will consider such factors as it deems appropriate, which may in-
clude: (a) whether the lease can be canceled; (b) the ability of the lease
obligee to direct the sale of the underlying assets; (c) the general cred-
itworthiness of the lease obligor; (d) the likelihood that the municipal-
ity will discontinue appropriating funding for the leased property in the
event such property is no longer considered essential by the municipality;
(e) the legal recourse of the lease obligee in the event of such a failure
to appropriate funding; (f) whether the security is backed by a credit en-
hancement such as insurance; and (g) any limitations which are imposed on
the lease obligor's ability to utilize substitute property or services
other than those covered by the lease obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of invest-
ment or those issued by issuers whose senior debt is rated investment
grade at the time of investment. The Fund may acquire unrated issues that
SBMFM deems to be comparable in quality to rated issues in which the Fund
is authorized to invest. A determination that an unrated lease obligation
is comparable in quality to a rated lease obligation will be subject to
oversight and approval by the Trust's Board of Trustees.
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that
the leases are readily marketable. An unrated municipal lease with a non-
appropriation risk that is backed by an irrevocable bank letter of credit
or an insurance policy issued by a bank or insurer deemed by SBMFM to be
of high quality and minimal credit risk, will not be deemed to be illiquid
solely because the underlying municipal lease is unrated, if SBMFM deter-
mines that the lease is readily marketable because it is backed by the
letter of credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in
zero coupon California Exempt Obligations. Zero coupon California Exempt
Obligations are generally divided into two categories: pure zero obliga-
tions, which are those that pay no interest for their entire life and zer-
o/fixed obligations, which pay no interest for some initial period and
thereafter pay interest currently. In the case of a pure zero obligation,
the failure to pay interest currently may result from the obligation's
having no stated interest rate, in which case the obligation pays only
principal at maturity and is issued at a discount from its stated princi-
pal amount. A pure zero obligation may, in the alternative, provide for a
stated interest rate, but provide that no interest is payable until matu-
rity, in which case accrued, unpaid interest on the obligation may be cap-
italized as incremental principal. The value to the investor of a zero
coupon California Exempt Obligation consists of the economic accretion ei-
ther of the difference between the purchase price and the nominal princi-
pal amount (if no interest is stated to accrue) or of accrued, unpaid in-
terest during the California Exempt Obligation's life or payment deferral
period.
Custodial Receipts. The Fund may acquire custodial receipts or certifi-
cates underwritten by securities dealers or banks that evidence ownership
of future interest payments, principal payments, or both, on certain Cali-
fornia Exempt Obligations. The underwriter of these certificates or re-
ceipts typically purchases California Exempt Obligations and deposits the
obligations in an irrevocable trust or custodial account with a custodian
bank, which then issues receipts or certificates that evidence ownership
of the periodic unmatured coupon payments and the final principal payment
on the obligations. Custodial receipts evidencing specific coupon or prin-
cipal payments have the same general attributes as zero coupon California
Exempt Obligations described above. Although under the terms of a custo-
dial receipt, the Fund would be typically authorized to assert its rights
directly against the issuer of the underlying obligation, the Fund could
be required to assert through the custodian bank those rights as may exist
against the underlying issuer. Thus, in the event the underlying issuer
fails to pay principal and/or interest when due, the Fund may be subject
to delays, expenses and risks that are greater than those that would have
been involved if the Fund had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on
the underlying security would be reduced in recognition of any taxes paid.
California Exempt Obligation Components. The Fund may invest in Califor-
nia Exempt Obligations, the interest rate on which has been divided by the
issuer into two different and variable components, which together result
in a fixed interest rate. Typically, the first of the components (the
"Auction Component") pays an interest rate that is reset periodically
through an auction process, whereas the second of the components (the "Re-
sidual Component") pays a residual interest rate based on the difference
between the total interest paid by the issuer on the California Exempt Ob-
ligation and the auction rate paid on the Auction Component. The Fund may
purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is gener-
ally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
Component holders will decrease as the Auction Component's rate increases
and increase as the Auction Component's rate decreases. Moreover, the mag-
nitude of the increases and decreases in market value of Residual Compo-
nents may be larger than comparable changes in the market value of an
equal principal amount of a fixed rate California Exempt Obligation having
similar credit quality, redemption provisions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating
and variable rate demand notes and bonds, which are California Exempt Ob-
ligations normally having a stated maturity in excess of one year, but
which permit their holder to demand payment of principal at any time, or
at specified intervals. The maturity of a floating or variable rate demand
note or bond will not be deemed shortened by virtue of a demand feature
for purposes of calculating the Fund's net asset value or determining its
weighted average maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the obligations plus accrued interest upon
a specified number of days' notice to the holders of these obligations.
The interest rate on a floating rate demand obligation is based on a known
lending rate, such as a bank's prime rate, and is adjusted automatically
each time that rate is adjusted. The interest rate on a variable rate de-
mand obligation is adjusted automatically at specified intervals. Fre-
quently, floating and variable rate obligations are secured by letters of
credit or other credit support arrangements provided by banks. Use of let-
ters of credit or other credit support arrangements will not adversely af-
fect the tax-exempt status of these obligations. Because they are direct
lending arrangements between the lender and borrower, floating and vari-
able rate obligations will generally not be traded. In addition, no sec-
ondary market generally exists for these obligations, although their hold-
ers may demand their payment at face value. For these reasons, when float-
ing and variable rate obligations held by the Fund are not secured by
letters of credit or other credit support arrangements, the Fund's right
to demand payment is dependent on the ability of the borrower to pay prin-
cipal and interest on demand. SBMFM on behalf of the Fund, will consider
the creditworthiness of the issuers of floating and variable rate demand
obligations in the Fund on an ongoing basis.
Participation Interests. The Fund may purchase from financial institu-
tions tax-exempt participation interests in California Exempt Obligations.
A participation interest gives the Fund an undivided interest in the Cali-
fornia Exempt Obligation in the proportion that the Fund's participation
interest bears to the total amount of the California Exempt Obligation.
These instruments may have floating or variable rates of interest. If the
participation interest is unrated, it will be backed by an irrevocable
letter of credit or guarantee of a bank that the Trust's Board of Trustees
has determined meets certain quality standards or the payment obligation
otherwise will be collateralized by obligations of the United States gov-
ernment and its agencies and instrumentalities ("U.S. government securi-
ties"). The Fund will have the right, with respect to certain participa-
tion interests, to demand payment, on a specified number of days' notice,
for all or any part of the Fund's interest in the California Exempt Obli-
gation, plus accrued interest. The Fund intends to exercise its right with
respect to these instruments to demand payment only upon a default under
the terms of the California Exempt Obligation or to maintain or improve
the quality of its investment portfolio.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets
in cash or money market instruments, including taxable money market in-
struments (collectively, "Taxable Investments"). In addition, when SBMFM
believes that market conditions warrant, the Fund may take a temporary de-
fensive posture and invest without limitation in short-term California Ex-
empt Obligations and Taxable Investments. To the extent the Fund holds
Taxable Investments and, under certain market conditions, certain floating
and variable rate demand obligations or Auction Components, the Fund may
not achieve its investment objective.
Money market instruments in which the Fund may invest include: U.S. gov-
ernment securities; tax-exempt notes of municipal issuers rated, at the
time of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by
Fitch or, if not rated, by issuers having outstanding, unsecured debt then
rated within the three highest rating categories; bank obligations (in-
cluding certificates of deposit, time deposits and bankers' acceptances of
domestic banks, domestic savings and loan associations and similar insti-
tutions); commercial paper rated no lower than P-1 by Moody's, A-1 by S&P
or F-1 by Fitch or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; and repurchase agree-
ments. At no time will the Fund's investments in bank obligations, includ-
ing time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct ob-
ligations of the United States and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the
United States are Treasury Bills, Treasury Notes and Treasury Bonds, which
differ principally in terms of their maturities. Included among the secu-
rities issued by U.S. government agencies and instrumentalities are: secu-
rities that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association certificates);
securities that are supported by the right of the issuer to borrow from
the United States Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported by the credit of the instrumen-
tality (such as Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase secu-
rities on a when-issued basis, or may purchase or sell securities for de-
layed delivery. In when-issued or delayed-delivery transactions, delivery
of the securities occurs beyond normal settlement periods, but no payment
or delivery will be made by the Fund prior to the actual delivery or pay-
ment by the other party to the transaction. The Fund will not accrue in-
come with respect to a when-issued or delayed-delivery security prior to
its stated delivery date. The Fund will establish with Boston Safe Deposit
and Trust Company ("Boston Safe"), the Trust's custodian, a segregated ac-
count consisting of cash or U.S. government securities in an amount equal
to the amount of the when-issued and delayed-delivery purchase commit-
ments. Placing securities rather than cash in a segregated account may
have a leveraging effect on the Fund's net assets.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to California Exempt Obligations held in its portfolio. Under a
stand-by commitment, a broker, dealer or bank is obligated to repurchase
at the Fund's option specified securities at a specified price and, in
this way, stand-by commitments are comparable to put options. Each exer-
cise of a stand-by commitment, therefore, is subject to the ability of the
seller to make payment on demand. The Fund will acquire stand-by commit-
ments solely to facilitate portfolio liquidity and does not intend to ex-
ercise the rights afforded by the commitments for trading purposes. The
Trust anticipates that stand-by commitments will be available from bro-
kers, dealers and banks without the payment of any direct or indirect con-
sideration. The Fund may pay for stand-by commitments if payment is deemed
necessary, thus increasing to a degree the cost of the underlying Califor-
nia Exempt Obligation and similarly decreasing the security's yield to in-
vestors.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with re-
spect to the Fund that may not be changed without approval of a majority
of the Fund's outstanding voting securities as defined in the 1940 Act.
Included among those fundamental restrictions are the following:
1. The Fund will not purchase securities other than Municipal and Cali-
fornia Exempt Obligations and Taxable Investments as those terms are de-
fined in this Prospectus or the Statement of Additional Information.
2. The Fund will 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 distri-
butions that might otherwise require the untimely disposition of securi-
ties, in an amount not to exceed 10% of the value of the Fund's total as-
sets (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 will not make any additional investments.
3. The Fund will not lend money to other persons, except through purchas-
ing Municipal and California Exempt Obligations or Taxable Investments and
entering into repurchase agreements in a manner consistent with the Fund's
investment objective.
4. The Fund will not invest more than 25% of the value of its total as-
sets in securities of issuers in any one industry, except that this limi-
tation is not applicable to a Fund's investments in U.S. government secu-
rities.
5. The Fund will 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
California Exempt Obligations. Even though California Exempt Obligations
are interest-bearing investments that promise a stable stream of income,
their prices are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. The val-
ues of California Exempt Obligations with longer remaining maturities typ-
ically fluctuate more than those of similarly rated California Exempt Ob-
ligations with shorter remaining maturities such as the Fund intends to
hold. The values of fixed- income securities also may be affected by
changes in the credit rating or financial condition of the issuing enti-
ties.
Opinions relating to the validity of Municipal Obligations and to the ex-
emption of interest on them from Federal income taxes (and, with respect
to California Exempt Obligations, to the exemption of interest on them
from California state personal income taxes) are rendered by bond counsel
to the respective issuers at the time of issuance. Neither the Fund nor
SBMFM will review the proceedings relating to the issuance of California
Exempt Obligations or the basis for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax ex-
emption on various types of Municipal Obligations and may enact other sim-
ilar laws in the future. If any such laws are enacted that would reduce
the availability of California Exempt Obligations for investment by the
Fund so as to affect the Fund's shareholders adversely, the Trust will re-
evaluate the Fund's investment objective and policies and might submit
possible changes in the Fund's structure to shareholders for their consid-
eration. If legislation were enacted that would treat a type of California
Exempt Obligation as taxable for Federal income tax purposes, the Fund
would treat the security as a permissible Taxable Investment within the
applicable limits set forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that SBMFM
determines to be of comparable quality to the rated securities in which
the Fund may invest. Dealers may not maintain daily markets in unrated se-
curities and retail secondary markets for many of them may not exist. As a
result, the Fund's ability to sell these securities when SBMFM deems it
appropriate may be diminished.
Municipal Leases. Municipal leases in which the Fund may invest have spe-
cial risks not normally associated with Municipal Obligations. These obli-
gations frequently contain non-appropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under
the lease or contract unless money is appropriated for that purpose by a
legislative body annually or on another periodic basis. Municipal leases
have additional risks because they represent a type of financing that has
not yet developed the depth of marketability generally associated with
other Municipal Obligations. Moreover, although a municipal lease will be
secured by financed equipment or facilities, the disposition of the equip-
ment or facilities in the event of foreclosure might prove difficult. In
addition, in certain instances the tax-exempt status of the municipal
lease will not be subject to the legal opinion of a nationally recognized
bond counsel, although in all cases the Fund will require that a municipal
lease purchased by the Fund be covered by a legal opinion to the effect
that, as of each effective date of the municipal lease, the lease is the
valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability
of issuers of municipal leases to make timely lease payments may be ad-
versely impacted in general economic downturns and as relative governmen-
tal cost burdens are allocated and reallocated among Federal, state and
local governmental units. Such non-payment would result in a reduction of
income to the Fund, and could result in a reduction in the value of the
municipal lease experiencing non- payment and a potential decrease in the
net asset value of the Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such
an issuer, the Fund could experience delays and limitations with respect
to the collection of principal and interest on such municipal leases and
the Fund may not, in all circumstances, be able to collect all principal
and interest to which it is entitled. To enforce its rights in the event
of a default in the lease payments, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities,
which may increase the Fund's operating expenses and adversely affect the
net asset value of the Fund. Any income derived from the Fund's ownership
or operation of such assets may not be tax-exempt. In addition, the Fund's
intention to qualify as a "regulated investment company" under the Code,
may limit the extent to which the Fund may exercise its rights by taking
possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the na-
ture of its income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from
time to time, invest a portion of its assets in non-publicly traded Cali-
fornia Exempt Obligations. Non-publicly traded securities may be less liq-
uid than publicly traded securities. Although non-publicly traded securi-
ties may be resold in privately negotiated transactions, the prices real-
ized from these sales could be less than those originally paid by the
Fund.
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 deliv-
ery. 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 transac-
tion itself.
Non-Diversified Classification. Investment in the Fund, which is classi-
fied as a non-diversified fund under the 1940 Act, may present greater
risks to investors than an investment in a diversified fund. The invest-
ment return on a non-diversified fund typically is dependent upon the per-
formance of a smaller number of securities relative to the number of secu-
rities held in a diversified fund. The Fund's assumption of large posi-
tions in the obligations of a small number of issuers will affect the
value of its portfolio to a greater extent than that of a diversified fund
in the event of changes in the financial condition, or in the market's as-
sessment, of the issuers.
Special Considerations Affecting the Fund. In seeking to achieve its ob-
jective, the Fund may invest without limit in Municipal Obligations which
are private activity bonds. Moreover, although the Fund does not currently
intend to do so on a regular basis, it may invest more than 20% of its as-
sets in Municipal Obligations which are repayable out of revenue streams
generated from economically related projects or facilities, if such in-
vestment is deemed necessary or appropriate by SBMFM. To the extent the
Fund's assets are concentrated in Municipal Obligations payable from reve-
nues on economically related projects and facilities, the Fund will be
subject to the particular risks presented by such projects to a greater
extent than it would be if the Fund's assets were not so concentrated.
The payment of principal and interest on most securities purchased by the
Fund will depend on the ability of the issuers to meet their obligations.
The Fund's portfolio will be affected by general changes in interest
rates, which will result in increases or decreases in the value of the ob-
ligations held by the Fund. The market value of the obligations in the
Fund's portfolio can be expected to vary inversely to changes in prevail-
ing interest rates. On July 15, 1994, Moody's and S&P, citing the State's
deteriorating financial position, lowered California's general obligation
bond rating from Aa to A1 and from A+ to A, respectively.
Investors should be aware that certain California constitutional amend-
ments, legislative measures, executive orders, administrative regulations
and voter initiatives could result in certain adverse consequences affect-
ing California Exempt Obligations. For instance, certain provisions of the
California Constitution and statutes that limit the taxing and spending
authority of California governmental entities may impair the ability of
the issuers of some California Exempt Obligations to maintain debt service
on their obligations. Other measures affecting the taxing or spending au-
thority of California or its political sub-divisions may be approved or
enacted in the future. Some of the significant financial considerations
relating to the Fund's investments in California Exempt Obligations are
summarized in the Statement of Additional Information.
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 ordi-
narily 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 antic-
ipates that the 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. SBMFM will not consider turn-
over rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Fund.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of reg-
ular trading on the NYSE on each day that the NYSE is open, by dividing
the value of the Fund's net assets attributable to each Class by the total
number of shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, 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 at amor-
tized cost. Amortized cost involves valuing an investment at its cost ini-
tially and, thereafter, assuming a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. Further information regarding
the Fund's valuation policies is contained in the Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's policy to declare daily and distribute monthly, generally
on the 10th day of each calendar month, substantially all of the Fund's
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.
If a shareholder does not otherwise instruct, dividends or capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. 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 a distribution shortly before December 31 of each year of any undis-
tributed ordinary income or capital gains and expects to pay any other
distributions as are necessary to avoid the application of this tax.
The per share dividends on Class C shares of the Fund may be lower than
the per share dividends on Class A and Class Y shares principally as a re-
sult of the distribution fee applicable with respect to Class C shares.
The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the
service fee applicable to Class A shares. Distributions of capital gains,
if any, will be in the same amount for Class A, Class C and Class Y
shares.
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 (other than dividends derived from interest
earned on qualifying tax-exempt obligations as described below) and dis-
tributions of the Fund's net realized short-term capital gains are taxable
to shareholders as ordinary income, regardless of how long shareholders in
the Fund have held their shares and whether the dividends or distributions
are received in cash or reinvested in additional shares of the Fund. Dis-
tributions of the Fund's net realized long-term capital gains will be tax-
able to shareholders as long-term capital gains, regardless of how long
shareholders have held their shares of the Fund and whether the distribu-
tions 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 re-
demption of shares of the Fund 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.
Dividends paid by the Fund that are derived from interest earned on quali-
fying tax-exempt obligations are expected to be "exempt-interest" divi-
dends that shareholders may exclude from their gross incomes for Federal
income tax purposes if the Fund satisfies certain asset percentage re-
quirements. Any exempt- interest dividends of the Fund derived from inter-
est on California Exempt Obligations, the interest on which is a specific
tax preference item for Federal income tax purposes, will be a specific
tax preference item for purposes of the Federal individual and corporate
alternative minimum taxes. In addition, all exempt-interest dividends will
be a component of the "current earnings" adjustment item for purposes of
the Federal corporate alternative minimum income tax and corporate share-
holders may incur a larger Federal environmental tax liability through the
receipt of Fund dividends and distributions from the Fund. Dividends of
the Fund derived from interest on California Exempt Obligations will be
exempt from California State personal income (but not corporate franchise
or income) taxes.
Statements as to the tax status of the dividends and distributions re-
ceived by shareholders of the Fund are mailed annually. These statements
set forth the dollar amount of income excluded from Federal income taxes
and the dollar amount, if any, subject to Federal income taxes. Statements
from the Fund will also show the dollar amount of income excluded or ex-
empted from California State personal income taxes and the dollar amount,
if any, subject to these taxes. These statements will also designate the
amount of exempt- interest dividends that are a specific preference item
for purposes of the Federal individual and corporate alternative minimum
taxes and will indicate the shareholder's share of the investment expenses
of the Fund.
Shareholders of the Fund should consult their tax advisors with specific
reference to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows California taxpayers how to translate Federal and
California State tax savings from investments such as the Fund into an
equivalent return from a taxable investment. To the extent that the equiv-
alent taxable yields illustrated in this table are based on an effective
tax rate which combines the Federal and California marginal income tax
rates, the table is not applicable to individuals who do not pay Califor-
nia State personal income (but not corporate franchise or income) taxes.
The yields used below are for illustration only and are not intended to
represent current or future yields for the Fund, which may be higher or
lower than those shown.
A CALIFORNIA TAX-EXEMPT
INCOME FUND YIELD OF:
1995
COMBINED
CALIFORNIA
STATE FEDERAL AND FEDERAL
TAXABLE INCOME* RATE*** RATE TAX BRACKET** 2.00% 3.00% 4.00% 5.00%
SINGLE JOINT
$ 0-23,350 $ 0-39,000 6.00% 15.00% 20.10% 2.50% 3.75% 5.01%6.25%
23,351-56,550 39,001-94,250 9.30 28.00 34.70 3.06 4.59 6.13 7.65
56,551-117,950 94,251-143,600 9.65 31.00 37.66 3.21 4.81 6.42 6.02
117,951-256,500 143,601-256,500 10.50 36.00 42.72 4.49 5.24 6.98 8.73
over 256,500 over 256,500 10.50 39.60 45.94 3.70 5.55 7.40 9.25
<TABLE>
<CAPTION>
A CALIFORNIA TAX-EXEMPT
INCOME FUND YIELD OF:
1995
COMBINED
CALIFORNIA
STATE FEDERAL AND FEDERAL
TAXABLE INCOME* RATE*** RATE TAX BRACKET** 6.00% 7.00% 8.00% 9.00%
SINGLE JOINT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-23,350 $ 0-39,000 6.00% 15.00% 20.10% 7.51% 8.76% 10.01% 11.26%
23,351-56,550 39,001-94,250 9.30 28.00 34.70 9.19 10.72 12.25 13.78
56,551-117,950 94,251-143,600 9.65 31.00 37.66 9.62 11.23 12.83 14.44
117,951-256,500 143,601-256,500 10.50 36.00 42.72 10.47 12.22 13.97 15.71
over 256,500 over 256,500 10.50 39.60 45.94 11.10 12.95 14.80 16.65
<FN>
* This amount represents taxable income as defined in the Code. It is
assumed that taxable income as defined in the Code is the same as
under the California personal income tax law, however, California tax-
able income may differ due to differences in exemptions, itemized de-
ductions, and other items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates for 1995, including indexing for inflation. These rates
include the effect of deducting state and city taxes on your Federal
return.
*** These rates represent the highest California personal income tax rates
within the applicable Federal income tax brackets for 1995. Where
there is a difference between the California personal income tax rates
for single and married filing joint, an average rate was used.
</TABLE>
PURCHASE OF SHARES
GENERAL
The Fund offers three Classes of shares. Class A shares are sold to inves-
tors with an initial sales charge and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain re-
demptions. Class Y shares are sold without an initial sales charge or a
CDSC and are available only to investors investing a minimum of
$5,000,000. See "Prospectus Summary -- Alternative Purchase Arrangements"
for a discussion of factors to consider in selecting which Class of shares
to purchase.
Purchases of Fund shares must by made through a brokerage account main-
tained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Fund. Inves-
tors in Class Y shares may open an account by making an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in the Fund's Systematic Investment Plan, the
minimum initial investment requirement for Class A and Class C shares and
the subsequent investment requirement for all Classes is $100. There are
no minimum investment requirements in Class A shares for employees of
Travelers and its subsidiaries, including Smith Barney, Trustees of the
Trust and their spouses and children and unitholders who invest distribu-
tions from a UIT sponsored by Smith Barney. The Fund reserves the right to
waive or change minimums, to decline any order to purchase its shares and
to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by the Fund's transfer agent, The
Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data Cor-
poration. Share certificates are issued only upon a shareholder's written
request to TSSG.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day, pro-
vided the order is received by Smith Barney prior to Smith Barney's close
of business (the "trade date"). Currently, payment for Fund shares is due
on the fifth business day after the trade date (the "settlement date").
The Fund anticipates that, in accordance with regulatory changes, begin-
ning on or about June 1, 1995, the settlement date will be the third busi-
ness day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchas-
ing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or TSSG is authorized
through preauthorized transfers of $100 or more to charge the regular bank
account or other financial institution indicated by the shareholder on a
monthly or quarterly basis to provide systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or
TSSG. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make addi-
tions to the account. Additional information is available from the Fund or
a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
AMOUNT OF INVESTMENT % OF OFFERING PRICE % OF AMOUNT INVESTED % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
<FN>
* Purchases of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge equal or exceed $500,000
in the aggregate, will be made at net asset value without any initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The CDSC on Class A shares is payable to
Smith Barney, which compensates Smith Barney Financial Consultants and
other dealers whose clients make purchases of $500,000 or more. The CDSC
is waived in the same circumstances in which the CDSC applicable to
Class C shares is waived. See "Deferred Sales Charge Alternatives" and
"Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities
Act of 1933, as amended.
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an in-
dividual, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. It may also be met
by aggregating the purchase with the net asset value of all Class A shares
offered with a sales charge held in funds sponsored by Smith Barney listed
under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to
Trustees of the Trust and employees of Travelers and its subsidiaries, or
to the spouses and children of such persons (including the surviving
spouse of a deceased Trustee or employee, and retired Trustees or employ-
ees); (b) offers of Class A shares to any other investment company in con-
nection with the combination of such company with the Fund by merger, ac-
quisition of assets or otherwise; (c) purchases of Class A shares by any
client of a newly employed Smith Barney Financial Consultant (for a period
up to 90 days from the commencement of the Financial Consultant's employ-
ment with Smith Barney), on the condition the purchase of Class A shares
is made with the proceeds of the redemption of shares of a mutual fund
which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject
to a sales charge; (d) shareholders who have redeemed Class A shares in
the Fund (or Class A shares of another fund of the Smith Barney Mutual
Funds that are offered with a sales charge equal to or greater than the
maximum sales charge of the Fund) and who wish to reinvest their redemp-
tion proceeds in the Fund, provided the reinvestment is made within 60
calendar days of the redemption; (e) accounts managed by registered in-
vestment advisory subsidiaries of Travelers; and (f) investments of dis-
tributions from a UIT sponsored by Smith Barney. In order to obtain such
discounts, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at net asset value determined by aggregating the dollar amount of
the new purchase and the total net asset value of all Class A shares of
the Fund and of funds sponsored by Smith Barney which are offered with a
sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at
the time of purchase to permit verification that the purchase qualifies
for purchase at net asset value. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, purchases at net asset value
will also be available to employees (and partners) of the same employer
purchasing as a group, provided each participant makes the minimum initial
investment required. The sales charge, if any, applicable to purchases by
each member of such a group will be determined by the table set forth
above under "Initial Sales Charge Alternative -- Class A Shares" and will
be based upon the aggregate sales of Class A shares of the Smith Barney
Mutual Funds offered with a sales charge to, and share holdings of, all
members of the group. To be eligible for such purchase at net asset value,
all purchases must be pursuant to an employer- or partnership-sanctioned
plan meeting certain requirements. One such requirement is that the plan
must be open to specified partners or employees of the employer and its
subsidiaries, if any. Such plan may, but is not required to, provide for
payroll deductions. Smith Barney also may offer net asset value purchase
for aggregating related fiduciary accounts under such conditions that
Smith Barney will realize economies of sales efforts and sales related ex-
penses. An individual who is a member of a qualified group may also pur-
chase Class A shares at the sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of Class
A shares offered with a sales charge that have been previously purchased
and are still owned by the group, plus the amount of the current purchase.
A "qualified group" is one which (a) has been in existence for more than
six months, (b) has a purpose other than acquiring Fund shares at a dis-
count and (c) satisfies uniform criteria which enable Smith Barney to re-
alize economies of scale in its costs of distributing shares. A qualified
group must have more than 10 members, must be available to arrange for
group meetings between representatives of the Fund and the members, and
must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order
to purchase at net asset value, the purchaser must provide sufficient in-
formation at the time of purchase to permit verification that the purchase
qualifies for purchase at net asset value. Approval of group purchases at
net asset value is subject to the discretion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $500,000 or more provides an opportunity
for an investor to purchase shares at net asset value by aggregating the
investments over a 13 month period, provided that the investor refers to
such Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of
the Smith Barney Mutual Funds offered with a sales charge over a 13 month
period based on the total amount of intended purchases plus the value of
all Class A shares previously purchased and still owned. An alternative is
to compute the 13 month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period
receives the sales charge applicable to the total amount of the investment
goal. If the goal is not achieved within the period, the investor must pay
the difference between the sales charges applicable to the purchases made
and the charges previously paid, or an appropriate number of escrowed
shares will be redeemed. Please contact a Smith Barney Financial Consult-
ant or TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase pay-
ment may be immediately invested in the Fund. A CDSC, however, may be im-
posed on certain redemptions of these shares. "CDSC Shares" are: (a) Class
C shares; and (b) Class A shares, which when combined with Class A shares
offered with a sales charge currently held by an investor, equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appre-
ciation of Fund assets; (b) reinvestment of dividends or capital gain dis-
tributions; or (c) shares redeemed more than 12 months after their pur-
chase. CDSC Shares are subject to a 1.00% CDSC if redeemed within 12
months of purchase.
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next
of shares representing the reinvestment of dividends and capital gain dis-
tributions and finally of other shares held by the shareholder for the
longest period of time. The length of time that CDSC Shares acquired
through an exchange have been held will be calculated from the date that
the shares exchanged were initially acquired in one of the other Smith
Barney Mutual Funds, and Fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital
gain distribution reinvestments in such other funds. For Federal income
tax purposes, the amount of the CDSC will reduce the gain or increase the
loss, as the case may be, on the amount realized on redemption. The amount
of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class C shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the tenth month
after the purchase, the investor decided to redeem $500 of his or her in-
vestment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the
amount which represents appreciation ($200) and the value of the rein-
vested dividend shares ($60). Therefore, $240 of the $500 redemption pro-
ceeds ($500 minus $260) would be charged at a rate of 1.00% (the applica-
ble rate for Class C shares) for a total deferred sales charge of $2.40.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per
month of the value of the shareholder's shares at the time the withdrawal
plan commences (see below) (provided, however, that automatic cash with-
drawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) invol-
untary redemptions; and (e) redemptions of shares in connection with a
combination of the Fund with any investment company by merger, acquisition
of assets or otherwise. In addition, a shareholder who has redeemed shares
from other funds of the Smith Barney Mutual Funds may, under certain cir-
cumstances, reinvest all or part of the redemption proceeds within 60 days
and receive pro rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in
the case of all other shareholders) of the shareholder's status or hold-
ings, as the case may be.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's
state of residence. Exchanges of Class A and Class C shares are subject to
minimum investment requirements and all shares are subject to other re-
quirements of the fund into which exchanges are made and a sales charge
differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
*Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfo-
lio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
*Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
**Smith Barney Exchange Reserve Fund
*Smith Barney Money Funds, Inc. -- Cash Portfolio
*Smith Barney Money Funds, Inc. -- Government Portfolio
***Smith Barney Money Funds, Inc. -- Retirement Portfolio
*Smith Barney Municipal Money Market Fund, Inc.
*Smith Barney Muni Funds -- California Money Market Portfolio
*Smith Barney Muni Funds -- New York Money Market Portfolio
*Available for exchange with Class A and Class Y shares of the Fund.
**Available for exchange with Class C shares of the Fund.
***Available for exchange with Class A shares of the Fund.
Class A Exchanges. Class A shares of the Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the
maximum charged by other Smith Barney Mutual Funds will be subject to the
appropriate "sales charge differential" upon the exchange of such shares
for Class A shares of a fund 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 privi-
lege, shares obtained through automatic reinvestment of dividends and cap-
ital gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were
paid; however, 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. Class A shares held
in the Fund prior to November 7, 1994, will be deemed to have paid a maxi-
mum sales charge of 2.00% for exchange purposes.
Class C Exchanges. Upon an exchange, the new Class C shares will be
deemed to have been purchased on the same date as the Class C shares of
the Fund that have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the
funds identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the ex-
change privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. SBMFM
may determine that a pattern of frequent exchanges is excessive and con-
trary to the best interests of the Fund's other shareholders. In this
event, SBMFM will notify Smith Barney, and Smith Barney may, at its dis-
cretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, Smith Barney 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 share-
holder 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 of the Smith
Barney Mutual 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 pat-
tern of exchanges.
Exchanges will be processed at the net asset value next determined, plus
any applicable sales charge differential. Redemption procedures discussed
below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the ac-
count registration of the shares of the fund being acquired is identical
to the registration of the shares of the fund exchanged, no signature
guarantee is required. A capital gain or loss for tax purposes will be re-
alized upon the exchange, depending upon the cost or other basis of shares
redeemed. Before exchanging shares, investors should read the current pro-
spectus describing the shares to be acquired. The Fund reserves the right
to modify or discontinue exchange privileges upon 60 days' prior notice to
shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per
share next determined after receipt of a written request in proper form at
no charge other than any applicable CDSC. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined.
If a shareholder holds shares in more than one Class, any request for re-
demption must specify the Class being redeemed. In the event of a failure
to specify which Class, or if the investor owns fewer shares of the Class
than specified, the redemption request will be delayed until the Fund's
transfer agent receives further instructions from Smith Barney, or if the
shareholder's account is not with Smith Barney, from the shareholder di-
rectly. The redemption proceeds will be remitted on or before the seventh
day following receipt of proper tender, except on any day on which the
NYSE is closed or as permitted under the 1940 Act in extraordinary circum-
stances. The Fund anticipates that, in accordance with regulatory changes,
beginning on or about June 1, 1995, payment will be made on the third
business day after receipt of proper tender. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific in-
struction and Smith Barney will benefit from the use of temporarily unin-
vested funds. Redemption proceeds for shares purchased by check, other
than a certified or official bank check, will be remitted upon clearance
of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an inves-
tor's Financial Consultant, Introducing Broker or dealer in the selling
group or by submitting a written request for redemption to:
Smith Barney Intermediate Maturity California Municipals Fund
Class A, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account
number and (c) be signed by each registered owner exactly as the shares
are registered. If the shares to be redeemed were issued in certificate
form, the certificates must be endorsed for transfer (or be accompanied by
an endorsed stock power) and must be submitted to TSSG together with the
redemption request. Any signature appearing on a redemption request, share
certificate or stock power must be guaranteed by an eligible guarantor in-
stitution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or 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.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may
elect to receive periodic cash payments of at least $100 monthly or quar-
terly. The withdrawal plan will be carried over on exchanges between funds
or Classes of the Fund. Any applicable CDSC will not be waived on amounts
withdrawn by a shareholder that exceed 1.00% per month of the value of the
shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November
7, 1994, any applicable CDSC will be waived on amounts withdrawn that do
not exceed 2.00% per month of the value of a shareholder's shares subject
to the CDSC.) For further information regarding the automatic cash with-
drawal plan, shareholders should contact a Smith Barney Financial Consult-
ant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in
the Fund account is less than $500. (If a shareholder has more than one
account in this Fund, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reduc-
tions in net asset value. Before the Fund exercises such right, sharehold-
ers will receive written notice and will be permitted 60 days to bring ac-
counts up to the minimum to avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30 day "yield" and "equiva-
lent taxable yield" for each Class of shares. The yield refers to the in-
come generated by an investment in those shares over the 30 day period
identified in the advertisement and is computed by dividing the net in-
vestment income per share earned by the Class during the period by the
maximum public offering price per share on the last day of the period.
This income is "annualized" by assuming the amount of income is generated
each month over a one-year period and is compounded semi-annually. The an-
nualized income is then shown as a percentage of the net asset value.
The equivalent taxable yield demonstrates the yield on a taxable invest-
ment necessary to produce an after-tax yield equal to the Fund's tax-
exempt yield for each Class. It is calculated by increasing the yield
shown for the Class to the extent necessary to reflect the payment of
taxes at specified tax rates. Thus, the equivalent taxable yield always
will exceed the Fund's yield. For more information on equivalent taxable
yields, refer to the table under "Dividends, Distributions and Taxes."
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class
A, Class C and Class Y shares of the Fund. These figures are based on his-
torical earnings and are not intended to indicate future performance.
Total return is computed for a specific period of time assuming deduction
of the maximum sales charge, if any, from the initial amount invested and
reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calcu-
lated by the initial amount invested and subtracting 100%. The standard
average annual total return, as prescribed by the SEC, is derived from
this total return, which provides the ending redeemable value. Such stan-
dard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner
but without annualizing the total return or taking sales charges into ac-
count. The Fund calculates current dividend return for each Class by annu-
alizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the
last day of the period for which current dividend return is presented. The
current dividend return for each Class may vary from time to time depend-
ing on market conditions, the composition of its investment portfolio and
operating expenses. These factors and possible differences in the methods
used in calculating current dividend return should be considered when com-
paring a Class' current return to yields published for other investment
companies and other investment vehicles. The Fund may also include compar-
ative performance information in advertising or marketing its shares. Such
performance information may include data from Lipper Analytical Services,
Inc. or similar independent services that monitor the performance of mu-
tual funds or other industry publications. The Fund will include perfor-
mance data for each Class in any advertisement or information including
performance data of the Fund.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and 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, sub-administrator, distributor, custo-
dian and transfer agent. The day-to-day operations of the Fund have been
delegated to the Fund's investment adviser, administrator and sub-
administrator. The Statement of Additional Information contains background
information regarding each Trustee of the Trust and the executive officers
of the Fund.
INVESTMENT ADVISER -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as the Fund's investment adviser pursuant to a transfer of the investment
advisory agreement, effective November 7, 1994, from its affiliate, Mutual
Management Corp. (Mutual Management Corp. and SBMFM are both wholly owned
subsidiaries of Holdings.) Investment advisory services continue to be
provided to the Fund by the same portfolio managers who had provided ser-
vices under the agreement with Mutual Management Corp. SBMFM (through pre-
decessor entities) has been in the investment counseling business since
1934 and is a registered investment adviser. SBMFM renders investment ad-
vice to investment companies that had aggregate assets under management as
of December 31, 1994, in excess of $50.4 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and employs profes-
sional portfolio managers and securities analysts who provide research
services to the Fund. For investment advisory services rendered to the
Fund, the Fund pays SBMFM a fee at the annual rate of 0.35% of the value
of the Fund's average daily net assets. For the fiscal year ended November
30, 1994, the Fund paid investment advisory fees to SBMFM (and its prede-
cessor) in an amount equal to 0.04% of the Fund's average daily net as-
sets. During the same period, the Fund's investment adviser waived invest-
ment advisory fees in an amount equal to 0.31% of the value of the Fund's
average daily net assets.
PORTFOLIO MANAGEMENT
Joseph P. Deane, Portfolio Manager of SBMFM, has served as Vice President
and Investment Officer of the Fund since it commenced operations on Decem-
ber 31, 1991, and manages the day-to-day operations of the Fund, including
making all investment decisions.
Management's discussion and analysis, and additional performance informa-
tion regarding the Fund during the fiscal year ended November 30, 1994, is
included in the Annual Report dated November 30, 1994. A copy of the An-
nual Report may be obtained upon request without charge from a Smith Bar-
ney Financial Consultant or by writing or calling the Fund at the address
or phone number listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered to the
Fund, the Fund pays SBMFM a fee at the annual rate of 0.20% of the value
of the Fund's average daily net assets. For the fiscal year ended November
30, 1994, the Fund paid an administration fee of 0.02% of the value of its
average daily net assets and the administrator voluntarily waived 0.18%.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides invest-
ment management, investment advisory, administrative and/or sub-
administrative services to investment companies which had aggregate assets
under management as of December 31, 1994, in excess of $69.2 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and opera-
tion. Under a sub-administration agreement dated July 20, 1994, Boston Ad-
visors is paid a portion of the administration fee paid by the Fund to
SBMFM at a rate agreed upon from time to time between Boston Advisors and
SBMFM. Prior to July 20, 1994, Boston Advisors served as the Fund's admin-
istrator.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" ar-
rangement requiring Smith Barney to take and pay for only such securities
as may be sold to the public. Pursuant to a plan of distribution adopted
by the Fund under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney
is paid a service fee with respect to Class A and Class C shares of the
Fund at the annual rate of 0.15% of the average daily net assets of the
respective Class. Smith Barney is also paid a distribution fee with re-
spect to Class C shares at the annual rate of 0.20% of the average daily
net assets attributable to that Class. The fees are used by Smith Barney
to pay its Financial Consultants for servicing shareholder accounts and,
in the case of Class C shares, to cover expenses primarily intended to re-
sult in the sale of those shares. These expenses include: advertising ex-
penses; the cost of printing and mailing prospectuses to potential inves-
tors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distri-
bution of shares; interest and/or carrying charges; and indirect and over-
head costs of Smith Barney associated with the sale of Fund shares, in-
cluding lease, utility, communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at
the time of sale and, with respect to Class C shares, a continuing fee for
servicing shareholder accounts for as long as a shareholder remains a
holder of that Class. Smith Barney Financial Consultants may receive dif-
ferent levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the shareholder dis-
tribution and service expenses actually incurred by Smith Barney, and the
payments may exceed expenses actually incurred by Smith Barney. The
Trust's Board of Trustees will evaluate 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 and amounts it receives under the Plan.
ADDITIONAL INFORMATION
Each Class of the Fund represents an identical interest in the Fund's in-
vestment portfolio. As a result, the Classes have the same rights, privi-
leges and preferences, except with respect to: (a) the designation of each
Class; (b) the effect of the respective sales charges for each Class; (c)
the distribution and/or service fees borne by each Class pursuant to the
Plan; (d) the expenses allocable exclusively to each Class; (e) voting
rights on matters exclusively affecting a single Class; and (f) the ex-
change privilege of each Class. The Trust's Board of Trustees does not an-
ticipate that there will be any conflicts among the interests of the hold-
ers of the different Classes. The Trustees, on an ongoing basis, will con-
sider whether any such conflict exists and, if so, take appropriate
action.
When matters are submitted for shareholder vote, shareholders of each
Class will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Generally,
shares of the Fund will be voted on a Fund-wide basis on all matters ex-
cept matters affecting only the interests of one Class, in which case only
shares of the affected Class would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will be
no meetings 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, at which time the Trustees then in of-
fice 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 pur-
pose. The Trustees will call a meeting for any purpose upon written re-
quest of shareholders holding at least 10% of the Trust's outstanding
shares and the Trust will assist shareholders in calling such a meeting as
required by the 1940 Act.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as custodian of
the Fund's investments.
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 re-
port, each of which includes a listing of 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 its 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 sin-
gle copy of each report. In addition, the Fund also plans to consolidate
the mailing of its Prospectus so that a shareholder having multiple ac-
counts will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their
Financial Consultants or TSSG.
SMITH BARNEY
INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND
PROSPECTUS January 29, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Intermediate Maturity New York Municipals Fund (the "Fund")
seeks to provide New York investors with as high a level of current income
exempt from Federal income taxes and New York State and New York City per-
sonal income taxes as is consistent with preservation of principal by
investing in investment-grade obligations issued by the State of New York
and its political subdivisions, agencies and public authorities. The Fund
is one of a number of funds, each having distinct investment objectives
and policies making up Smith Barney Income Trust (the "Trust"). The Trust
is an open-end management investment company commonly referred to as a mu-
tual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses,
that prospective investors will find helpful in making an investment deci-
sion. Investors are encouraged to read this Prospectus carefully and re-
tain it for future reference. Shares of the other funds offered by the
Trust are described in separate prospectuses that may be obtained by call-
ing or writing the Trust at the telephone number or address set forth
above or by contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated January 29, 1995, 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
set forth above or by contacting a Smith Barney 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 INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and 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 REPRESENTA-
TION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
FINANCIAL HIGHLIGHTS 10
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 11
VALUATION OF SHARES 25
DIVIDENDS, DISTRIBUTIONS AND TAXES 25
PURCHASE OF SHARES 28
EXCHANGE PRIVILEGE 34
REDEMPTION OF SHARES 38
MINIMUM ACCOUNT SIZE 39
PERFORMANCE 40
MANAGEMENT OF THE TRUST AND THE FUND 41
DISTRIBUTOR 43
ADDITIONAL INFORMATION 44
</TABLE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those con-
tained in this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Fund or the distributor. This Prospectus does not constitute an offer by
the Fund or the distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdic-
tion.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Pro-
spectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is a non-diversified intermediate-term mu-
nicipal bond fund that seeks to provide New York investors with as high a
level of current income exempt from Federal income taxes and New York
State and New York City personal income taxes as is consistent with the
preservation of principal by investing in investment-grade obligations is-
sued by the State of New York and its political subdivisions, agencies and
public authorities. The weighted average maturity of the Fund's portfolio
securities will normally not be less than three nor more than 10 years.
The maximum remaining maturity of the securities in which the Fund will
normally invest will be no greater than 20 years. See "Investment Objec-
tive and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which
differ principally in terms of sales charges and rates of expenses to
which they are subject. A third Class of shares, Class Y shares, is of-
fered only to investors meeting an initial investment minimum of
$5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an ini-
tial sales charge of 2.00% and are subject to an annual service fee of
0.15% of the average daily net assets of the Class. The initial sales
charge may be waived for certain purchases. Purchases of Class A shares,
which when combined with current holdings of Class A shares offered with a
sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made
within 12 months of purchase. See "Prospectus Summary -- No Initial Sales
Charge."
Class C Shares. Class C shares are sold at net asset value with no ini-
tial sales charge. They are subject to an annual service fee of 0.15% and
an annual distribution fee of 0.20% of the average daily net assets of the
Class, and investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of purchase. The CDSC may be waived for certain redemp-
tions. The Class C shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Class C shares, which when combined with current holdings of Class C
shares of the Fund equal or exceed $500,000 in the aggregate, should be
made in Class A shares at net asset value with no sales charge, and will
be subject to a CDSC of 1.00% on redemptions made within 12 months of pur-
chase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to
any service or distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and cir-
cumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify to purchase shares without an initial
sales charge and the shares are subject to lower ongoing expenses over the
term of the investment. As an alternative, Class C shares are sold without
any initial sales charge so the entire purchase price is immediately in-
vested in the Fund. Any investment return on these additional invested
amounts may partially or wholly offset the higher annual expenses of this
Class. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case. Finally, investors
should consider the effect of the CDSC period in the context of their own
investment time frame.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or dis-
tribution fees. The maximum purchase amount for Class A shares is
$4,999,999 and Class C shares is $499,999. There is no maximum purchase
amount for Class Y shares.
No Initial Sales Charge. The initial sales charge on Class A shares may
be waived for certain eligible purchasers, and the entire purchase price
would be immediately invested in the Fund. In addition, Class A share pur-
chases, which when combined with current holdings of Class A shares of-
fered with a sales charge equal or exceed $500,000 in the aggregate, will
be made at net asset value with no initial sales charge, but will be sub-
ject to a CDSC of 1.00% on redemptions made within 12 months of purchase.
The $500,000 aggregate investment may be met by adding the purchase to the
net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Ex-
change Privilege." See "Purchase of Shares." Because the ongoing expenses
of Class A shares may be lower than those for Class C shares, purchasers
eligible to purchase Class A shares at net asset value should consider
doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose
of the CDSC on the Class C shares is the same as that of the initial sales
charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution
fees for each Class of shares and "Valuation of Shares," "Dividends, Dis-
tributions and Taxes" and "Exchange Privilege" for other differences be-
tween the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distribu-
tor, Smith Barney, a broker that clears securities transactions through
Smith Barney on a fully disclosed basis (an "Introducing Broker") or an
investment dealer in the selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class C shares may open an
account by making an initial investment of at least $1,000 for each ac-
count. Investors in Class Y shares may open an account for an initial in-
vestment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum initial investment requirement for Class A
and Class C shares and the subsequent investment requirement for all
Classes through the Systematic Investment Plan described below is $100.
There is no minimum investment requirement in Class A for unitholders who
invest distributions from a unit investment trust ("UIT") sponsored by
Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic In-
vestment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Fund shares in an amount of at
least $100. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual Funds Mangement
Inc. ("SBMFM") serves as the Fund's investment adviser. SBMFM (formerly
known as Smith, Barney Advisers, Inc.) is a wholly owned subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned sub-
sidiary of The Travelers Inc. ("Travelers"), a diversified financial ser-
vices holding company engaged, through its subsidiaries, principally in
four business segments: Investment Services, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services.
SBMFM also serves as the Fund's administrator. The Boston Company Advi-
sors, Inc. ("Boston Advisors"), serves as the Fund's sub-administrator.
Boston Advisors is a wholly owned subsidiary of The Boston Company, Inc.
("TBC"), which in turn is a wholly owned subsidiary of Mellon Bank Corpo-
ration ("Mellon"). See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined, plus any applicable sales
charge differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day gener-
ally is quoted daily in the financial section of most newspapers and also
is available from a Smith Barney Financial Consultant. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are de-
clared daily and generally paid on the 10th day of the calendar month.
Distributions of net realized capital gains, if any, are paid annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of
any Class will be reinvested automatically, unless otherwise specified by
an investor, in additional shares of the same Class at current net asset
value. Shares acquired by 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. Shares of the Fund, unlike
certain bank deposit accounts, are not guaranteed or insured by any Fed-
eral or state authority. Changes in interest rates generally will result
in increases or decreases in the market value of the obligations held by
the Fund. The yield of the Fund 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 tax-exempt money market fund and therefore its investment portfolio
can be expected to experience greater volatility than that of a tax-exempt
money market fund. The net asset value of the Fund will be subject to
greater fluctuation to the extent that the Fund invests in zero coupon se-
curities. The Fund's net asset value per share will fluctuate depending on
a combination of factors such as current market interest rates and the
creditworthiness of the issuers in whose securities the Fund invests. The
Fund will not invest in obligations that are rated lower than Baa by
Moody's Investors Service, Inc. ("Moody's"), BBB by Standard & Poor's Cor-
poration ("S&P") or BBB by Fitch Investor Service, Inc. ("Fitch"), at the
time of purchase. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the obligations that they undertake to rate;
the ratings are relative and subjective and are not absolute standards of
quality.
The Fund may invest up to 20% of its total assets in unrated securities
that SBMFM determines to be of comparable quality to the securities rated
investment grade in which the Fund may invest. Dealers may not maintain
daily markets in unrated securities and retail secondary markets for many
of them may not exist; lack of markets may affect the Fund's ability to
sell these securities when SBMFM deems it appropriate. The Fund has the
right to invest without limitation in state and local obligations that are
"private activity bonds," the income from which may be taxable as a spe-
cific preference item for purposes of the Federal alternative minimum tax.
Thus, the Fund may not be a suitable investment for investors who are sub-
ject to the alternative minimum tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain
risks. The instruments presenting the Fund with risks are municipal
leases, zero coupon securities, custodial receipts, municipal obligation
components, floating and variable rate demand notes and bonds, and partic-
ipation interests. Entering into securities transactions on a when-issued
or delayed-delivery basis are investment techniques involving risks to the
Fund. See "Investment Objective and Management Policies -- Investment
Techniques -- Risk Factors and Special Considerations" and "Dividends,
Distributions and Taxes."
Investment in the Fund, which is classified as a non-diversified fund
under the Investment Company Act of 1940, as amended (the "1940 Act"), may
present a greater risk than an investment in a diversified fund. See "In-
vestment Objective and Management Policies -- Risk Factors and Special
Considerations." Investment in the Fund involves risks and special consid-
erations applicable to the State of New York and the City of New York. See
"Investment Objective and Management Policies -- Risk Factors and Special
Considerations."
THE FUND'S EXPENSES The following expense table lists the costs and ex-
penses an investor will incur, either directly or indirectly, as a share-
holder of the Fund, based upon the maximum sales charge or maximum CDSC
that may be incurred at the time of purchase or redemption and, unless
otherwise noted, the Fund's operating expenses for its most recent fiscal
year:
<TABLE>
<CAPTION>
CLASS A* CLASS C CLASS Y
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) 1.00% 1.00% None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees (net of waivers) 0.22% 0.22% 0.22%
12b-1 fees** 0.15% 0.35% None
Other expenses*** 0.28% 0.28% 0.28%
TOTAL OPERATING EXPENSES
(after waivers) 0.65% 0.85% 0.50%
<FN>
*Purchases of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge, equal or exceed $500,000
in the aggregate, will be made at net asset value with no sales charge,
but may be subject to a CDSC of 1.00% on redemptions made within 12
months.
**Class C shares are subject to an ongoing distribution fee and, as a re-
sult, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
***For Class C and Class Y shares, "Other expenses" have been estimated
based on expenses incurred by Class A shares because prior to November
30, 1994 no Class C or Class Y shares were sold.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors
actually may pay lower or no charges depending on the amount purchased and
the length of time the shares are held. See "Purchase of Shares" and "Re-
demption of Shares." Smith Barney receives an annual 12b-1 service fee of
0.15% of the value of average daily net assets of Class A shares. Smith
Barney also receives with respect to Class C shares an annual 12b-1 fee of
0.35% of the value of average daily net assets of that Class, consisting
of a 0.20% distribution fee and a 0.15% service fee." The nature of the
services for which the Fund pays management fees is described under "Man-
agement of the Trust and the Fund." "Other expenses" in the above table
includes fees for shareholder services not provided by Smith Barney, cus-
todial fees, legal and accounting fees, printing costs and registration
fees, the costs of regulatory compliance, the costs associated with main-
taining the Trust's legal existence and the costs involved in communicat-
ing with shareholders of the Fund.
During the fiscal year ended November 30, 1994, the Fund's investment ad-
viser and administrator voluntarily waived portions of their respective
fees in the aggregate amount equal to 0.33% of the value of the Fund's av-
erage daily net assets. This had the effect of lowering the Fund's overall
expenses and increasing the returns available to investors. If SBMFM had
not elected to waive fees and reimburse expenses, the Fund's total operat-
ing expenses for Class A shares for the fiscal year ended November 30,
1994, would have been 0.98% as a percentage of the value of the Fund's av-
erage daily net assets.
EXAMPLE The following example is intended to assist an investor in under-
standing the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating ex-
penses at the levels set forth in the table above. See "Purchase of
Shares," "Redemption of Shares" and "Management of the Trust and the
Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
An investor would pay the following ex-
penses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemp-
tion at the end of each time period:
Class A $37 $41 $56 $101
Class C 19 27 47 105
Class Y 5 16 28 63
An investor would pay the following ex-
penses on the same investment, assuming
the same annual return and no redemp-
tion:
Class A $27 $41 $56 $101
Class C 9 27 47 105
Class Y 5 16 28 63
</TABLE>
The example also provides a means for the investor to compare expense lev-
els of funds with different fee structures over varying investment peri-
ods. To facilitate such comparison, all funds are required to utilize a
5.00% annual return assumption. However, the Fund's actual return will
vary and may be greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following information has been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report thereon appears in the Fund's Annual
Report dated November 30, 1994. This information should be read in con-
junction with the financial statements and related notes that also appear
in the Fund's Annual Report which are incorporated by reference into the
Statement of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
11/30/94 11/30/93 11/30/92*
<S> <C> <C> <C>
Net asset value, beginning of year $ 8.54 $ 8.18 $ 7.90
Income from investment operations:
Net investment income+ 0.40 0.40 0.38
Net realized and unrealized gain on investments (0.72) 0.38 0.28
Total from investment operations (0.32) 0.78 0.66
Less distributions:
Distributions from net investment income (0.40) (0.40) (0.38)
Distributions from net realized capital gains
on investments (0.02) (0.02) --
Total distributions (0.42) (0.42) (0.38)
Net asset value, end of year $ 7.80 $ 8.54 $ 8.18
Total return++ (3.97)% 9.76% 8.59%
Ratios/Supplemental data:
Net assets, end of year (in 000's) $62,090 $67,230 $24,543
Ratio of operating expenses to average net as-
sets+++ 0.65% 0.65% 0.65%**
Ratio of net investment income to average net
assets 4.77% 4.59% 4.95%**
Portfolio turnover rate 68% 22% 68%
<FN>
* The Fund commenced operations on December 31, 1991. Those shares in ex-
istence prior to November 7, 1994, were designated Class A shares.
** Annualized.
+ Net investment income before waiver of fees by investment adviser and
administrator for the years ended November 30, 1994 and 1993 was $0.37
and $0.36, respectively. Net investment income before waiver of fees
and reimbursement of expenses by investment adviser, sub-investment
adviser and administrator, custodian and distributor for the period
ended November 30, 1992 was $0.32.
++ Total return represents aggregate total returns for the periods indi-
cated and does not reflect any
applicable sales charges.
+++ Annualized operating expense ratios before waiver of fees by invest-
ment adviser and administrator for the years ended November 30, 1994
and 1993 were 0.98% and 1.10%, respectively. Annual operating expense
ratios before waiver of fees and reimbursement of expenses by invest-
ment adviser, sub-investment adviser and administrator, custodian and
distributor for the period ended November 30, 1992 was 1.45%.
</TABLE>
As of November 30, 1994, the Fund had not sold any Class C or Class Y
shares, and accordingly, no comparable financial information is available
at this time for those Classes.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Set out below is a description of the investment objective and principal
investment policies of the Fund. 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 a majority of the Fund's outstanding shares.
The Fund's investment objective is to provide New York investors with as
high a level of current income exempt from Federal income taxes and New
York State and New York City personal income taxes as is consistent with
preservation of principal. Under normal market conditions, the Fund at-
tempts to invest 100% in a portfolio of investment grade debt obligations
issued by or on behalf of the State of New York and other states, territo-
ries and possessions of the United States, the District of Columbia and
their respective authorities, agencies, instrumentalities and political
subdivisions ("Municipal Obligations"). For purposes of this Prospectus,
debt obligations issued by the State of New York and its political subdi-
visions, agencies and public authorities (together with certain other gov-
ernmental issuers such as Guam, Puerto Rico and the Virgin Islands), 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 and
exempt from New York State and New York City personal income tax are de-
fined as "New York Exempt Obligations." The Fund will operate subject to a
fundamental investment policy providing that, under normal market condi-
tions, the Fund will invest at least 80% of its net assets in New York Ex-
empt Obligations.
The Fund will invest at least 80% of its total assets in New York Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG
3 or Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch.
Up to 20% of the Fund's total assets may be invested in unrated securities
that are deemed by SBMFM to be of a quality comparable to investment
grade. The Fund will not invest in New York Exempt Obligations that are
rated lower than Baa by Moody's, BBB by S&P or BBB by Fitch, at the time
of purchase.
The Fund is classified as a non-diversified fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in the obligations of a single issuer. The
Fund intends to conduct its operations, however, so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code
of 1986, as amended (the "Code"), which will relieve the Fund of any lia-
bility for Federal income tax and New York State franchise tax to the ex-
tent that its earnings are distributed to shareholders. To qualify as a
regulated investment company, the Fund will, among other things, limit its
investments so that, at the close of each quarter of the taxable year (a)
not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer and (b) with respect to 50%
of the market value of its total assets, not more than 5% of the market
value of its total assets will be invested in the securities of a single
issuer and the Fund will not own more than 10% of the outstanding voting
securities of a single issuer.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the New York Exempt Obligations that they undertake to rate;
the ratings are relative and subjective and are not absolute standards of
quality. SBMFM's judgment as to credit quality of a New York Exempt Obli-
gation, thus, may differ from that suggested by the ratings published by a
rating service. A description of Moody's, S&P and Fitch ratings relevant
to the Fund's investments is included as an appendix to the Statement of
Additional Information. The policies of the Fund described above as to
ratings of portfolio investments will apply only at the time of the pur-
chase of a security, and the Fund will not be required to dispose of a se-
curity in the event Moody's, S&P or Fitch downgrades its assessment of the
credit characteristics of the security's issuer.
New York Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issu-
er's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenue derived
from a particular facility or class of facilities or, in some cases, from
the proceeds of a special excise or other specific revenue source, but not
from the general taxing power. Notes are short-term obligations of issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. New York Exempt Obliga-
tions bear fixed, floating and variable rates of interest, and variations
exist in the security of New York Exempt Obligations, both within a par-
ticular classification and between classifications.
The yields on, and values of, New York Exempt Obligations are dependent on
a variety of factors, including general economic and monetary conditions,
conditions in the New York Exempt Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Conse-
quently, New York Exempt Obligations with the same maturity, coupon and
rating may have different yields or values, whereas obligations of the
same maturity and coupon with different ratings may have the same yield or
value. See "Risk Factors and Special Considerations -- New York Exempt Ob-
ligations."
Issuers of New York Exempt Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Re-
form Act of 1978, affecting the rights and remedies of creditors. In addi-
tion, the obligations of those issuers may become subject to laws enacted
in the future by Congress, state legislatures or referenda extending the
time for payment of principal and/or interest, or imposing other con-
straints upon enforcement of the obligations or upon the ability of munic-
ipalities to levy taxes. The possibility also exists that, as a result of
litigation or other conditions, the power or ability of any issuer to pay,
when due, the principal of, and interest on, its obligations may be mate-
rially affected.
MATURITY OF OBLIGATIONS HELD BY THE FUND
SBMFM believes that the Fund may offer an attractive investment opportu-
nity for investors seeking a higher effective tax yield than a tax-exempt
money market fund or a tax-exempt short-term bond fund and less fluctua-
tion in net asset value than a longer term tax-exempt bond fund. The Fund
will normally invest in intermediate maturity securities; the weighted av-
erage maturity of the portfolio of the Fund will normally be not less than
three nor more than 10 years. The maximum remaining maturity of the secu-
rities in which the Fund will normally invest will be no greater than 20
years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in New York Exempt Obligations that are
tax-exempt "private activity bonds," as defined in the Code, which are in
most cases revenue bonds. Private activity bonds generally do not carry
the pledge of the credit of the issuing municipality, but are guaranteed
by the corporate entity on whose behalf they are issued. Interest income
on certain types of private activity bonds issued after August 7, 1986 to
finance nongovernmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be subject to a Federal
alternative minimum tax to the extent the Fund's dividends are derived
from interest on these bonds. Dividends derived from interest income on
New York Exempt Obligations are a "current earnings" adjustment item for
purposes of the Federal corporate alternative minimum tax. See "Dividends,
Distributions and Taxes."
RELATED INSTRUMENTS
The Fund may invest without limit in New York Exempt Obligations that are
repayable out of revenues generated from economically related projects or
facilities or debt obligations whose issuers are located in the same
state. Sizeable investments in these obligations could involve an in-
creased risk to a Fund should any of the related projects or facilities
experience financial difficulties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to an aggregate amount equal to 10% of its net as-
sets in illiquid securities, which term includes securities subject to
contractual or other restrictions on resale and other instruments that
lack readily available markets. In addition, up to 5% of the value of the
Fund's assets may be invested in securities of entities that have been in
continuous operation for fewer than three years.
TYPES OF NEW YORK EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal
leases." Municipal leases may take the form of a lease or an installment
purchase contract issued by state and local government authorities to ob-
tain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
Interest payments on qualifying municipal leases are exempt from Federal
income taxes and state income taxes within the state of issuance. Although
lease obligations do not constitute general obligations of the municipal-
ity for which the municipality's taxing power is pledged, a lease obliga-
tion is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under, the lease obligation. How-
ever, certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or install-
ment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. In addition to the "non-appropriation"
risk, these securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more con-
ventional bonds. Although "non-appropriation" lease obligations are often
secured by the underlying property, disposition of the property in the
event of foreclosure might prove difficult. The Fund may invest in munici-
pal leases without non-appropriation clauses only when the municipality is
required to continue the lease under all circumstances except bankruptcy.
There is no limitation on the percentage of the Fund's assets that may be
invested in municipal lease obligations. SBMFM will consider such factors
as it deems appropriate, which may include: (a) whether the lease can be
canceled; (b) the ability of the lease obligee to direct the sale of the
underlying assets; (c) the general creditworthiness of the lease obligor;
(d) the likelihood that the municipality will discontinue appropriating
funding for the leased property in the event such property is no longer
considered essential by the municipality; (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding; (f)
whether the security is backed by a credit enhancement such as insurance;
and (g) any limitations which are imposed on the lease obligor's ability
to utilize substitute property or services other than those covered by the
lease obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of invest-
ment or those issued by issuers whose senior debt is rated investment
grade at the time of investment. The Fund may acquire unrated issues that
SBMFM deems to be comparable in quality to rated issues in which the Fund
is authorized to invest. A determination that an unrated lease obligation
is comparable in quality to a rated lease obligation will be subject to
oversight and approval by the Trust's Board of Trustees.
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that
the leases are readily marketable. An unrated municipal lease with a non-
appropriation risk that is backed by an irrevocable bank letter of credit
or an insurance policy issued by a bank or insurer deemed by SBMFM to be
of high quality and minimal credit risk, will not be deemed to be illiquid
solely because the underlying municipal lease is unrated, if SBMFM deter-
mines that the lease is readily marketable because it is backed by the
letter of credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in
zero coupon Municipal and New York Exempt Obligations. Zero coupon Munici-
pal and New York Exempt Obligations are generally divided into two catego-
ries: pure zero obligations, which are those that pay no interest for
their entire life and zero/fixed obligations, which pay no interest for
some initial period and thereafter pay interest currently. In the case of
a pure zero obligation, the failure to pay interest currently may result
from the obligation's having no stated interest rate, in which case the
obligation pays only principal at maturity and is issued at a discount
from its stated principal amount. A pure zero obligation may, in the al-
ternative, provide for a stated interest rate, but provide that no inter-
est is payable until maturity, in which case accrued, unpaid interest on
the obligation may be capitalized as incremental principal. The value to
the investor of a zero coupon Municipal and New York Exempt Obligation
consists of the economic accretion either of the difference between the
purchase price and the nominal principal amount (if no interest is stated
to accrue) or of accrued, unpaid interest during the Municipal and New
York Exempt Obligation's life or payment deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or certifi-
cates underwritten by securities dealers or banks that evidence ownership
of future interest payments, principal payments, or both, on certain Mu-
nicipal and New York Exempt Obligations. The underwriter of these certifi-
cates or receipts typically purchases Municipal and New York Exempt Obli-
gations and deposits the obligations in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates
that evidence ownership of the periodic unmatured coupon payments and the
final principal payment on the obligations. Custodial receipts evidencing
specific coupon or principal payments have the same general attributes as
zero coupon Municipal and New York Exempt Obligations described above. Al-
though under the terms of a custodial receipt, the Fund would be typically
authorized to assert its rights directly against the issuer of the under-
lying obligation, the Fund could be required to assert through the custo-
dian bank those rights as may exist against the underlying issuer. Thus,
in the event the underlying issuer fails to pay principal and/or interest
when due, the Fund may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Fund had purchased
a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been de-
posited is determined to be an association taxable as a corporation, in-
stead of a non-taxable entity, the yield on the underlying security would
be reduced in recognition of any taxes paid.
Municipal and New York Exempt Obligation Components. The Fund may invest
in Municipal and New York Exempt Obligations, the interest rate on which
has been divided by the issuer into two different and variable components,
which together result in a fixed interest rate. Typically, the first of
the components (the "Auction Component") pays an interest rate that is
reset periodically through an auction process, whereas the second of the
components (the "Residual Component") pays a residual interest rate based
on the difference between the total interest paid by the issuer on the Mu-
nicipal and New York Exempt Obligation and the auction rate paid on the
Auction Component. The Fund may purchase both Auction and Residual Compo-
nents.
Because the interest rate paid to holders of Residual Components is gener-
ally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
Component holders will decrease as the Auction Component's rate increases
and increase as the Auction Component's rate decreases. Moreover, the mag-
nitude of the increases and decreases in market value of Residual Compo-
nents may be larger than comparable changes in the market value of an
equal principal amount of a fixed rate Municipal and New York Exempt Obli-
gation having similar credit quality, redemption provisions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating
and variable rate demand notes and bonds, which are Municipal and New York
Exempt Obligations normally having a stated maturity in excess of one
year, but which permit their holder to demand payment of principal at any
time, or at specified intervals. The maturity of a floating or variable
rate demand note or bond will not be deemed shortened by virtue of a de-
mand feature for purposes of calculating the Fund's net asset value or de-
termining its weighted average maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the obligations plus accrued interest upon
a specified number of days' notice to the holders of these obligations.
The interest rate on a floating rate demand obligation is based on a known
lending rate, such as a bank's prime rate, and is adjusted automatically
each time that rate is adjusted. The interest rate on a variable rate de-
mand obligation is adjusted automatically at specified intervals. Fre-
quently, floating and variable rate obligations are secured by letters of
credit or other credit support arrangements provided by banks. Use of let-
ters of credit or other credit support arrangements will not adversely af-
fect the tax-exempt status of these obligations. Because they are direct
lending arrangements between the lender and borrower, floating and vari-
able rate obligations will generally not be traded. In addition, no sec-
ondary market generally exists for these obligations, although their hold-
ers may demand their payment at face value. For these reasons, when float-
ing and variable rate obligations held by the Fund are not secured by
letters of credit or other credit support arrangements, the Fund's right
to demand payment is dependent on the ability of the borrower to pay prin-
cipal and interest on demand. SBMFM, on behalf of the Fund, will consider
the creditworthiness of the issuers of floating and variable rate demand
obligations in the Fund's portfolio on an ongoing basis.
Participation Interests. The Fund may purchase from financial institu-
tions tax-exempt participation interests in Municipal and New York Exempt
Obligations. A participation interest gives the Fund an undivided interest
in the Municipal and New York Exempt Obligation in the proportion that the
Fund's participation interest bears to the total amount of the Municipal
and New York Exempt Obligation. These instruments may have floating or
variable rates of interest. If the participation interest is unrated, it
will be backed by an irrevocable letter of credit or guarantee of a bank
that the Trust's Board of Trustees has determined meets certain quality
standards or the payment obligation otherwise will be collateralized by
obligations of the United States government and its agencies and instru-
mentalities ("U.S. government securities"). The Fund will have the right,
with respect to certain participation interests, to demand payment, on a
specified number of days' notice, for all or any part of the Fund's inter-
est in the Municipal and New York Exempt Obligation, plus accrued inter-
est. The Fund intends to exercise its right with respect to these instru-
ments to demand payment only upon a default under the terms of the Munici-
pal and New York Exempt Obligation or to maintain or improve the quality
of its investment portfolio.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets
in cash or money market instruments, including taxable money market in-
struments (collectively, "Taxable Investments"). In addition, when SBMFM
believes that market conditions warrant, the Fund may take a temporary de-
fensive posture and invest without limitation in short-term Municipal and
New York Exempt Obligations and Taxable Investments. To the extent the
Fund holds Taxable Investments and, under certain market conditions, cer-
tain floating and variable rate demand obligations or Auction Components,
the Fund may not achieve its investment objective.
Money market instruments in which the Fund may invest include: U.S. gov-
ernment securities; tax-exempt notes of municipal issuers rated, at the
time of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by
Fitch or, if not rated, by issuers having outstanding, unsecured debt then
rated within the three highest rating categories; bank obligations (in-
cluding certificates of deposit, time deposits and bankers' acceptances of
domestic banks, domestic savings and loan associations and similar insti-
tutions); commercial paper rated no lower than P-1 by Moody's, A-1 by S&P
or F-1 by Fitch or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; and repurchase agree-
ments. At no time will the Fund's investments in bank obligations, includ-
ing time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct ob-
ligations of the United States and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the
United States are Treasury Bills, Treasury Notes and Treasury Bonds, which
differ principally in terms of their maturities. Included among the secu-
rities issued by U.S. government agencies and instrumentalities are: secu-
rities that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association certificates);
securities that are supported by the right of the issuer to borrow from
the United States Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported by the credit of the instrumen-
tality (such as Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase secu-
rities on a when-issued basis, or may purchase or sell securities for de-
layed delivery. In when-issued or delayed-delivery transactions, delivery
of the securities occurs beyond normal settlement periods, but no payment
or delivery will be made by the Fund prior to the actual delivery or pay-
ment by the other party to the transaction. The Fund will not accrue in-
come with respect to a when-issued or delayed-delivery security prior to
its stated delivery date. The Fund will establish with Boston Safe Deposit
and Trust Company ("Boston Safe"), the Trust's custodian, a segregated ac-
count consisting of cash or U.S. government securities in an amount equal
to the amount of the when-issued and delayed-delivery purchase commit-
ments. Placing securities rather than cash in a segregated account may
have a leveraging effect on the Fund's net assets.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal and New York Exempt Obligations held in its portfo-
lio. Under a stand-by commitment, a broker, dealer or bank is obligated to
repurchase at the Fund's option specified securities at a specified price
and, in this way, stand-by commitments are comparable to put options. Each
exercise of a stand-by commitment, therefore, is subject to the ability of
the seller to make payment on demand. The Fund will acquire stand-by com-
mitments solely to facilitate portfolio liquidity and does not intend to
exercise the rights afforded by the commitments for trading purposes. The
Trust anticipates that stand-by commitments will be available from bro-
kers, dealers and banks without the payment of any direct or indirect con-
sideration. The Fund may pay for stand-by commitments if payment is deemed
necessary, thus increasing to a degree the cost of the underlying Munici-
pal and New York Exempt Obligation and similarly decreasing the security's
yield to investors.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with re-
spect to the Fund that may not be changed without approval of a majority
of the Fund's outstanding voting securities as defined in the 1940 Act.
Included among those fundamental restrictions are the following:
1. The Fund will not purchase securities other than Municipal and New
York Exempt Obligations and Taxable Investments as those terms are defined
in this Prospectus or the Statement of Additional Information.
2. The Fund will 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 distri-
butions that might otherwise require the untimely disposition of securi-
ties, in an amount not to exceed 10% of the value of the Fund's total as-
sets (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 will not make any additional investments.
3. The Fund will not lend money to other persons, except through purchas-
ing Municipal and New York Exempt Obligations or Taxable Investments and
entering into repurchase agreements in a manner consistent with the Fund's
investment objective.
4. The Fund will not invest more than 25% of the value of its total as-
sets in securities of issuers in any one industry, except that this limi-
tation is not applicable to a Fund's investments in U.S. government secu-
rities.
5. The Fund will 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
Municipal and New York Exempt Obligations. Even though Municipal and New
York Exempt Obligations are interest-bearing investments that promise a
stable stream of income, their prices are inversely affected by changes in
interest rates and, therefore, are subject to the risk of market price
fluctuations. The values of New York Exempt Obligations with longer re-
maining maturities typically fluctuate more than those of similarly rated
New York Exempt Obligations with shorter remaining maturities such as the
Fund intends to hold. The values of fixed-income securities also may be
affected by changes in the credit rating or financial condition of the is-
suing entities.
Opinions relating to the validity of Municipal Obligations and to the ex-
emption of interest on them from Federal income taxes (and, with respect
to New York Exempt Obligations, to the exemption of interest on them from
New York State and New York City personal income taxes) are rendered by
bond counsel to the respective issuers at the time of issuance. Neither
the Fund nor SBMFM will review the proceedings relating to the issuance of
Municipal and New York Exempt Obligations or the basis for opinions of
counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax ex-
emption on various types of Municipal and New York Exempt Obligations and
may enact other similar laws in the future. If any such laws are enacted
that would reduce the availability of Municipal and New York Exempt Obli-
gations for investment by the Fund so as to affect the Fund's shareholders
adversely, the Trust's Trustees will reevaluate the Fund's investment ob-
jective and policies and might submit possible changes in the Fund's
structure to shareholders for their consideration. If legislation were en-
acted that would treat a type of Municipal and New York Exempt Obligation
as taxable for Federal income tax purposes, the Fund would treat the secu-
rity as a permissible Taxable Investment within the applicable limits set
forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that SBMFM
determines to be of comparable quality to the rated securities in which
the Fund may invest. Dealers may not maintain daily markets in unrated se-
curities and retail secondary markets for many of them may not exist. As a
result, the Fund's ability to sell these securities when SBMFM deems it
appropriate may be diminished.
Municipal Leases. Municipal leases in which the Fund may invest have spe-
cial risks not normally associated with Municipal Obligations. These obli-
gations frequently contain non-appropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under
the lease or contract unless money is appropriated for that purpose by a
legislative body annually or on another periodic basis. Municipal leases
have additional risks because they represent a type of financing that has
not yet developed the depth of marketability generally associated with
other Municipal Obligations. Moreover, although a municipal lease will be
secured by financed equipment or facilities, the disposition of the equip-
ment or facilities in the event of foreclosure might prove difficult. In
addition, in certain instances the tax-exempt status of the municipal
lease will not be subject to the legal opinion of a nationally recognized
bond counsel, although in all cases the Fund will require that a municipal
lease purchased by the Fund be covered by a legal opinion to the effect
that, as of each effective date of the municipal lease, the lease is the
valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability
of issuers of municipal leases to make timely lease payments may be ad-
versely impacted in general economic downturns and as relative governmen-
tal cost burdens are allocated and reallocated among Federal, state and
local governmental units. Such non-payment would result in a reduction of
income to the Fund, and could result in a reduction in the value of the
municipal lease experiencing non- payment and a potential decrease in the
net asset value of the Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such
an issuer, the Fund could experience delays and limitations with respect
to the collection of principal and interest on such municipal leases and
the Fund may not, in all circumstances, be able to collect all principal
and interest to which it is entitled. To enforce its rights in the event
of a default in the lease payments, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities,
which may increase the Fund's operating expenses and adversely affect the
net asset value of the Fund. Any income derived from the Fund's ownership
or operation of such assets may not be tax-exempt. In addition, the Fund's
intention to qualify as a "regulated investment company" under the Code
may limit the extent to which the Fund may exercise its rights by taking
possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the na-
ture of its income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from
time to time, invest a portion of its assets in non-publicly traded Munic-
ipal and New York Exempt Obligations. Non-publicly traded securities may
be less liquid than publicly traded securities. Although non-publicly
traded securities may be resold in privately negotiated transactions, the
prices realized from these sales could be less than those originally paid
by the Fund.
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 deliv-
ery. 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 transac-
tion itself.
Non-Diversified Classification. Investment in the Fund, which is classi-
fied as a non-diversified fund under the 1940 Act, may present greater
risks to investors than an investment in a diversified fund. The invest-
ment return on a non-diversified fund typically is dependent upon the per-
formance of a smaller number of securities relative to the number of secu-
rities held in a diversified fund. The Fund's assumption of large posi-
tions in the obligations of a small number of issuers will affect the
value of its portfolio to a greater extent than that of a diversified fund
in the event of changes in the financial condition, or in the market's as-
sessment, of the issuers.
Special Considerations. The Fund's ability to achieve its investment ob-
jective is dependent upon the ability of the issuers of Municipal and New
York Exempt Obligations to meet their continuing obligations for the pay-
ment of principal and interest. New York State and New York City face
long-term economic problems that could seriously affect their ability and
that of other issuers of New York Exempt Obligations to meet their finan-
cial obligations.
Certain substantial issuers of New York Exempt Obligations (including is-
suers whose obligations may be acquired by the Fund) have experienced se-
rious financial difficulties in recent years. These difficulties have at
times jeopardized the credit standing and impaired the borrowing abilities
of all New York issuers and have generally contributed to higher interest
costs for their borrowing and fewer markets for their outstanding debt ob-
ligations. In recent years, several different issues of municipal securi-
ties of New York State and its agencies and instrumentalities and of New
York City have been downgraded by S&P and Moody's. On the other hand,
strong demand for New York Exempt Obligations has more recently had the
effect of permitting New York Exempt Obligations to be issued with yields
relatively lower, and after issuance, to trade in the market at prices
relatively higher, than comparably rated municipal obligations issued by
other jurisdictions. A recurrence of the financial difficulties previously
experienced by certain issuers of New York Exempt Obligations could result
in defaults or declines in the market values of those issuers' existing
obligations and, possibly, in the obligations of other issuers of New York
Exempt Obligations. Although, as of the date of this Prospectus, no issu-
ers of New York Exempt Obligations are in default with respect to the pay-
ment of their municipal obligations, the occurrence of any such default
could affect adversely the market values and marketability of all New York
Exempt Obligations and, consequently, the net asset value of the Fund's
portfolio.
Other considerations affecting the Fund's investment in New York Exempt
Obligations are summarized in the Statement of Additional Information.
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 ordi-
narily 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 antic-
ipates that the 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. SBMFM will not consider turn-
over rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Fund.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of reg-
ular trading on the NYSE on each day that the NYSE is open,
by dividing the value of the Fund's net assets attributable to each Class
by the total number of shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, 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 at amor-
tized cost. Amortized cost involves valuing an investment at its cost ini-
tially and, thereafter, assuming a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. Further information regarding
the Fund's valuation policies is contained in the Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's policy to declare daily and distribute monthly, generally
on the 10th day of each calendar month, substantially all of the Fund's
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.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. 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 pay any
other distributions as are necessary to avoid the application of this tax.
The per share dividends on Class C shares of the Fund may be lower than
the per share dividends on Class A and Class Y shares principally as a re-
sult of the distribution fee applicable with respect to Class C shares.
The per share dividends on Class A shares of the Fund may be lower than
the per share dividends on Class Y shares principally as a result of the
service fee applicable to Class A shares. Distributions of capital gains,
if any, will be in the same amount for Class A, Class C and Class Y
shares.
TAXES
The Trust intends that the Fund continue to qualify each year as a regu-
lated investment company under the Code. Dividends paid from the Fund's
net investment income (other than dividends derived from interest earned
on qualifying tax-exempt obligations as described below) and distributions
of the Fund's net realized short-term capital gains are taxable to share-
holders as ordinary income, regardless of how long shareholders in the
Fund have held their shares and whether the dividends or distributions are
received in cash or reinvested in additional shares of the Fund. Distribu-
tions of the Fund's net realized long-term capital gains will be taxable
to shareholders as long-term capital gains, regardless of how long share-
holders have held their shares of the Fund and whether the distributions
are received in cash or are reinvested in additional Fund shares. In addi-
tion, as a general rule, a shareholder's gain or loss on a sale or redemp-
tion of shares of the Fund 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.
Dividends paid by the Fund that are derived from interest earned on quali-
fying tax-exempt obligations are expected to be "exempt-interest" divi-
dends that shareholders may exclude from their gross incomes for Federal
incometax purposes if the Fund satisfies certain asset percentage require-
ments. Any exempt- interest dividends of the Fund derived from interest on
New York Exempt Obligations, the interest on which is a specific tax pref-
erence item for Federal income tax purposes, will be a specific tax pref-
erence item for purposes of the Federal individual and corporate alterna-
tive minimum taxes. In addition, all exempt-interest dividends will be a
component of the "current earnings" adjustment item for purposes of the
Federal corporate alternative minimum income tax and corporate sharehold-
ers may incur a larger Federal environmental tax liability through the re-
ceipt of Fund dividends and distributions from the Fund. Exempt interest
dividends of the Fund derived from interest on New York Exempt Obligations
will be exempt from New York State and New York City personal income (but
not corporate franchise) taxes.
Statements as to the tax status of the dividends and distributions re-
ceived by shareholders of the Fund are mailed annually. These statements
set forth the dollar amount of income excluded from Federal income taxes
and the dollar amount, if any, subject to Federal income taxes. Statements
from the Fund will show similar information with respect to New York State
and New York City personal income taxes. These statements will also desig-
nate the amount of exempt-interest dividends that are a specific prefer-
ence item for purposes of the Federal individual and corporate alternative
minimum taxes and will indicate the shareholder's share of the investment
expenses of the Fund.
Shareholders of the Fund should consult their tax advisors with specific
reference to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows New York taxpayers how to translate the triple tax
savings from investments such as the Fund into an equivalent return from a
taxable investment. The yields used below are for illustration only and
are not intended to represent current or future yields for the Fund, which
may be higher or lower than those shown.
<TABLE>
<CAPTION>
NEW YORK TAX-EXEMPT EQUIVALENT YIELDS***
NEW YORK,
COMBINED 1995 STATE, CITY
STATE FEDERAL AND FEDERAL
AND CITY MARGINAL EFFECTIVE
TAXABLE INCOME* RATES**** RATE RATE** 2.00% 3.00% 4.00% 5.00% 6.00%
SINGLE JOINT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-23,350 $ 0-$39,000 11.98275% 15.0% 25.19% 2.67% 4.01% 5.35% 6.68% 8.02%
23,351-56,550 39,001-94,250 11.99415 28.0 36.64 3.16 4.73 6.31 7.89 9.47
56,551-117,950 94,251-143,600 12.05115 31.0 39.32 3.30 4.94 6.59 8.24 9.89
117,951-256,500 143,601-256,500 12.05115 35.0 43.71 3.55 5.33 7.11 8.88 10.66
256,501 and more 256,501 and more 12.05115 39.6 46.88 3.76 5.65 7.59 9.41 11.29
</TABLE>
<TABLE>
<CAPTION>
NEW YORK TAX-EXEMPT EQUIVALENT YIELDS***
NEW YORK,
COMBINED 1995 STATE, CITY
STATE FEDERAL AND FEDERAL
AND CITY MARGINAL EFFECTIVE
TAXABLE INCOME* RATES**** RATE RATE** 7.00% 8.00% 9.00% 10.00%
SINGLE JOINT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-23,350 $ 0-$39,000 11.98275% 15.0% 25.19% 9.36% 10.69% 12.03% 13.37%
23,351-56,550 39,001-94,250 11.99415 28.0 36.64 11.05 12.63 14.20 15.78
56,551-117,950 94,251-143,600 12.05115 31.0 39.32 11.54 13.18 14.83 16.48
117,951-256,500 143,601-256,500 12.05115 35.0 43.71 12.44 14.21 15.99 17.77
256,501 and more 256,501 and more 12.05115 39.6 46.88 13.18 15.06 16.94 18.82
<FN>
* This amount represents taxable income as defined in the Code. It is
assumed that taxable income as defined in the Code is the same as
under the New York State or City personal income tax law; however,
New York state or city taxable income may differ due to differences
in exemptions,
itemized deductions, and other items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates for 1995, including indexing for inflation. These
rates include the effect of deducting state and city taxes on your
Federal return. For New York purposes, these combined rates reflect
the expected New York State and New York City tax and surcharge rates
for 1995.
*** These represent New York State, City and Federal Tax Equivalent
Yields.
**** These rates represent the highest New York State and City personal
income tax rates within the applicable Federal income tax brackets
for 1995.
</TABLE>
The Federal tax rates and New York State and New York City tax rates shown
are those in effect for 1995 and are subject to change. The calculations
reflected in the table assume that no income will be subject to the Fed-
eral alternative minimum taxes.
PURCHASE OF SHARES
GENERAL
The Fund offers three Classes of shares. Class A shares are sold to inves-
tors with an initial sales charge and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain re-
demptions. Class Y shares are sold without an initial sales charge or a
CDSC and are available only to investors investing a minimum of
$5,000,000. See "Prospectus Summary -- Alternative Purchase Arrangements"
for a discussion of factors to consider in selecting which Class of shares
to purchase.
Purchases of Fund shares must by made through a brokerage account main-
tained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Fund. Inves-
tors in Class Y shares may open an account by making an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For participants in the Fund's Systematic Investment Plan, the
minimum initial investment requirement for Class A and Class C shares and
the subsequent investment requirement for all Classes is $100. There are
no minimum investment requirements in Class A shares for employees of
Travelers and its subsidiaries, including Smith Barney, Trustees of the
Trust and their spouses and children and unitholders who invest distribu-
tions from a UIT sponsored by Smith Barney. The Fund reserves the right to
waive or change minimums, to decline any order to purchase its shares and
to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by the Fund's transfer agent, The
Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data Cor-
poration. Share certificates are issued only upon a shareholder's written
request to TSSG.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day, pro-
vided the order is received by Smith Barney prior to Smith Barney's close
of business (the "trade date"). Currently, payment for Fund shares is due
on the fifth business day after the trade date (the "settlement date").
The Fund anticipates that, in accordance with regulatory changes, begin-
ning on or about June 1, 1995, the settlement date will be the third busi-
ness day after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchas-
ing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or TSSG is authorized
through preauthorized transfers of $100 or more to charge the regular bank
account or other financial institution indicated by the shareholder on a
monthly or quarterly basis to provide systematic additions to the share-
holder's Fund account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or
TSSG. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make addi-
tions to the account. Additional information is available from the Fund or
a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
AMOUNT OF INVESTMENT % OF OFFERING PRICE % OF AMOUNT INVESTED % OF OFFERING PRICE
<S> <C> <C> <C>
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
<FN>
* Purchases of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge equal or exceed $500,000
in the aggregate, will be made at net asset value without any initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The CDSC on Class A shares is payable to
Smith Barney, which compensates Smith Barney Financial Consultants and
other dealers whose clients make purchases of $500,000 or more. The CDSC
is waived in the same circumstances in which the CDSC applicable to
Class C shares is waived. See "Deferred Sales Charge Alternatives" and
"Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities
Act of 1933, as amended.
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an in-
dividual, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. It may also be met
by aggregating the purchase with the net asset value of all Class A shares
offered with a sales charge held in funds sponsored by Smith Barney listed
under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without
a sales charge in the following circumstances: (a) sales of Class A shares
to Trustees of the Trust and employees of Travelers and its subsidiaries,
or to the spouses and children of such persons (including the surviving
spouse of a deceased Trustee or employee, and retired Trustees or employ-
ees); (b) offers of Class A shares to any other investment company in con-
nection with the combination of such company with the Fund by merger, ac-
quisition of assets or otherwise; (c) purchases of Class A shares by any
client of a newly employed Smith Barney Financial Consultant (for a period
up to 90 days from the commencement of the Financial Consultant's employ-
ment with Smith Barney), on the condition the purchase of Class A shares
is made with the proceeds of the redemption of shares of a mutual fund
which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject
to a sales charge; (d) shareholders who have redeemed Class A shares in
the Fund (or Class A shares of another fund of the Smith Barney Mutual
Funds that are offered with a sales charge equal to or greater than the
maximum sales charge of the Fund) and who wish to reinvest their redemp-
tion proceeds in the Fund, provided the reinvestment is made within 60
calendar days of the redemption; (e) accounts managed by registered in-
vestment advisory subsidiaries of Travelers; and (f) investments of dis-
tributions from a UIT sponsored by Smith Barney. In order to obtain such
discounts, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at net asset value determined by aggregating the dollar amount of
the new purchase and the total net asset value of all Class A shares of
the Fund and of funds sponsored by Smith Barney which are offered with a
sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at
the time of purchase to permit verification that the purchase qualifies
for purchase at net asset value. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, purchases at net asset value
will also be available to employees (and partners) of the same employer
purchasing as a group, provided each participant makes the minimum initial
investment required. The sales charge, if any, applicable to purchases by
each member of such a group will be determined by the table set forth
above under "Initial Sales Charge Alternative -- Class A Shares" and will
be based upon the aggregate sales of Class A shares of the Smith Barney
Mutual Funds offered with a sales charge to, and share holdings of, all
members of the group. To be eligible for such purchase at net asset value,
all purchases must be pursuant to an employer- or partnership-sanctioned
plan meeting certain requirements. One such requirement is that the plan
must be open to specified partners or employees of the employer and its
subsidiaries, if any. Such plan may, but is not required to, provide for
payroll deductions. Smith Barney also may offer net asset value purchase
for aggregating related fiduciary accounts under such conditions that
Smith Barney will realize economies of sales efforts and sales related ex-
penses. An individual who is a member of a qualified group may also pur-
chase Class A shares at the sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of Class
A shares offered with a sales charge that have been previously purchased
and are still owned by the group, plus the amount of the current purchase.
A "qualified group" is one which (a) has been in existence for more than
six months, (b) has a purpose other than acquiring Fund shares at a dis-
count and (c) satisfies uniform criteria which enable Smith Barney to re-
alize economies of scale in its costs of distributing shares. A qualified
group must have more than 10 members, must be available to arrange for
group meetings between representatives of the Fund and the members, and
must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order
to purchase at net asset value, the purchaser must provide sufficient in-
formation at the time of purchase to permit verification that the purchase
qualifies for purchase at net asset value. Approval of group purchases at
net asset value is subject to the discretion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $500,000 or more provides an opportunity
for an investor to purchase shares at net asset value by aggregating the
investments over a 13 month period, provided that the investor refers to
such Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of
the Smith Barney Mutual Funds offered with a sales charge over a 13 month
period based on the total amount of intended purchases plus the value of
all Class A shares previously purchased and still owned. An alternative is
to compute the 13 month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period
receives the sales charge applicable to the total amount of the investment
goal. If the goal is not achieved within the period, the investor must pay
the difference between the sales charges applicable to the purchases made
and the charges previously paid, or an appropriate number of escrowed
shares will be redeemed. Please contact a Smith Barney Financial Consult-
ant or TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase pay-
ment may be immediately invested in the Fund. A CDSC, however, may be im-
posed on certain redemptions of these shares. "CDSC Shares" are: (a) Class
C shares; and (b) Class A shares, which when combined with Class A shares
offered with a sales charge currently held by an investor, equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appre-
ciation of Fund assets; (b) reinvestment of dividends or capital gain dis-
tributions; or (c) shares redeemed more than 12 months after their pur-
chase. CDSC Shares are subject to a 1.00% CDSC if redeemed within 12
months of purchase.
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next
of shares representing the reinvestment of dividends and capital gain dis-
tributions and finally of other shares held by the shareholder for the
longest period of time. The length of time that CDSC Shares acquired
through an exchange have been held will be calculated from the date that
the shares exchanged were initially acquired in one of the other Smith
Barney Mutual Funds, and Fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital
gain distribution reinvestments in such other funds. For Federal income
tax purposes, the amount of the CDSC will reduce the gain or increase the
loss, as the case may be, on the amount realized on redemption. The amount
of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class C shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the tenth month
after the purchase, the investor decided to redeem $500 of his or her in-
vestment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the
amount which represents appreciation ($200) and the value of the rein-
vested dividend shares ($60). Therefore, $240 of the $500 redemption pro-
ceeds ($500 minus $260) would be charged at a rate of 1.00% (the applica-
ble rate for Class C shares) for a total deferred sales charge of $2.40.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per
month of the value of the shareholder's shares at the time the withdrawal
plan commences (see below) (provided, however, that automatic cash with-
drawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within
12 months following the death or disability of the shareholder; (d) invol-
untary redemptions; and (e) redemptions of shares in connection with a
combination of the Fund with any investment company by merger, acquisition
of assets or otherwise. In addition, a shareholder who has redeemed shares
from other funds of the Smith Barney Mutual Funds may, under certain cir-
cumstances, reinvest all or part of the redemption proceeds within 60 days
and receive pro rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in
the case of all other shareholders) of the shareholder's status or hold-
ings, as the case may be.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's
state of residence. Exchanges of Class A and Class C shares are subject to
minimum investment requirements and all shares are subject to other re-
quirements of the fund into which exchanges are made and a sales charge
differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
*Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
*Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
**Smith Barney Exchange Reserve Fund
*Smith Barney Money Funds, Inc. -- Cash Portfolio
*Smith Barney Money Funds, Inc. -- Government Portfolio
***Smith Barney Money Funds, Inc. -- Retirement Portfolio
*Smith Barney Municipal Money Market Fund, Inc.
*Smith Barney Muni Funds -- California Money Market Portfolio
*Smith Barney Muni Funds -- New York Money Market Portfolio
*Available for exchange with Class A and Class Y shares of the Fund.
**Available for exchange with Class C shares of the Fund.
***Available for exchange with Class A shares of the Fund.
Class A Exchanges. Class A shares of the Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the
maximum charged by other Smith Barney Mutual Funds will be subject to the
appropriate "sales charge differential" upon the exchange of such shares
for Class A shares of a fund 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 privi-
lege, shares obtained through automatic reinvestment of dividends and cap-
ital gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were
paid; however, 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. Class A shares held
in the Fund prior to November 7, 1994, will be deemed to have paid a maxi-
mum sales charge of 2.00% for exchange purposes.
Class C Exchanges. Upon an exchange, the new Class C shares will be
deemed to have been purchased on the same date as the Class C shares of
the Fund that have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the
funds identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the ex-
change privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. SBMFM
may determine that a pattern of frequent exchanges is excessive and con-
trary to the best interests of the Fund's other shareholders. In this
event, SBMFM will notify Smith Barney, and Smith Barney may, at its dis-
cretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, Smith Barney 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 share-
holder 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 of the Smith
Barney Mutual 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 pat-
tern of exchanges.
Exchanges will be processed at the net asset value next determined, plus
any applicable sales charge differential. Redemption procedures discussed
below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the ac-
count registration of the shares of the fund being acquired is identical
to the registration of the shares of the fund exchanged, no signature
guarantee is required. A capital gain or loss for tax purposes will be re-
alized upon the exchange, depending upon the cost or other basis of shares
redeemed. Before exchanging shares, investors should read the current pro-
spectus describing the shares to be acquired. The Fund reserves the right
to modify or discontinue exchange privileges upon 60 days' prior notice to
shareholders.
REDEMPTION OF SHARES
REDEMPTIONS IN GENERAL
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at
no charge other than any applicable CDSC. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined.
If a shareholder holds shares in more than one Class, any request for re-
demption must specify the Class being redeemed. In the event of a failure
to specify which Class, or if the investor owns fewer shares of the Class
than specified, the redemption request will be delayed until the Fund's
transfer agent receives further instructions from Smith Barney, or if the
shareholder's account is not with Smith Barney, from the shareholder di-
rectly. The redemption proceeds will be remitted on or before the seventh
day following receipt of proper tender, except on a day on which the NYSE
is closed or as permitted under the 1940 Act in extraordinary circum-
stances. The Fund anticipates that, in accordance with regulatory changes,
beginning on or about June 1, 1995, payment will be made on the third
business day after receipt of proper tender. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific in-
struction and Smith Barney will benefit from the use of temporarily unin-
vested funds. Redemption proceeds for shares purchased by check, other
than a certified or official bank check, will be remitted upon clearance
of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an inves-
tor's Financial Consultant, Introducing Broker or dealer in the selling
group or by submitting a written request for redemption to:
Smith Barney Intermediate Maturity New York Municipals Fund
Class A, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account
number and (c) be signed by each registered owner exactly as the shares
are registered. If the shares to be redeemed were issued in certificate
form, the certificates must be endorsed for transfer (or be accompanied by
an endorsed stock power) and must be submitted to TSSG together with the
redemption request. Any signature appearing on a redemption request, share
certificate or stock power must be guaranteed by an eligible guarantor in-
stitution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or 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.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may
elect to receive periodic cash payments of at least $100 monthly or quar-
terly. The withdrawal plan will be carried over on exchanges between funds
or Classes of the Fund. Any applicable CDSC will not be waived on amounts
withdrawn by a shareholder that exceed 1.00% per month of the value of the
shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November
7, 1994, any applicable CDSC will be waived on amounts withdrawn that do
not exceed 2.00% per month of the value of a shareholder's shares subject
to the CDSC.) For further information regarding the automatic cash with-
drawal plan, shareholders should contact a Smith Barney Financial Consult-
ant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in
the Fund account is less than $500. (If a shareholder has more than one
account in this Fund, each account must satisfy the minimum account size.)
The Fund, however, will not redeem shares based solely on market reduc-
tions in net asset value. Before the Fund exercises such right, sharehold-
ers will receive written notice and will be permitted 60 days to bring ac-
counts up to the minimum to avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30 day "yield" and "equiva-
lent taxable yield" for each Class of shares. The yield refers to the in-
come generated by an investment in those shares over the 30 day period
identified in the advertisement and is computed by dividing the net in-
vestment income per share earned by the Class during the period by the
maximum public offering price per share on the last day of the period.
This income is "annualized" by assuming the amount of income is generated
each month over a one-year period and is compounded semi-annually. The an-
nualized income is then shown as a percentage of the net asset value.
The equivalent taxable yield demonstrates the yield on a taxable in-
vestment necessary to produce an after-tax yield equal to the Fund's tax-
exempt yield for each Class. It is calculated by increasing the yield
shown for the Fund calculated as described above, to the extent necessary
to reflect the payment of taxes at specified tax rates. Thus, the equiva-
lent taxable yield always will exceed the Fund's yield. For more informa-
tion on equivalent taxable yields, refer to the table under "Dividends,
Distributions and Taxes."
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class
A, Class C and Class Y shares of the Fund. These figures are based on his-
torical earnings and are not intended to indicate future performance.
Total return is computed for a specific period of time assuming deduction
of the maximum sales charge, if any, from the initial amount invested and
reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calcu-
lated by the initial amount invested and subtracting 100%. The standard
average annual total return, as prescribed by the SEC, is derived from
this total return, which provides the ending redeemable value. Such stan-
dard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner
but without annualizing the total return or taking sales charges into ac-
count. The Fund calculates current dividend return for each Class by annu-
alizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the
last day of the period for which current dividend return is presented. The
current dividend return for each Class may vary from time to time depend-
ing on market conditions, the composition of its investment portfolio and
operating expenses. These factors and possible differences in the methods
used in calculating current dividend return should be considered when com-
paring a Class' current return to yields published for other investment
companies and other investment vehicles. The Fund may also include compar-
ative performance information in advertising or marketing its shares. Such
performance information may include data from Lipper Analytical Services,
Inc. or similar independent services that monitor the performance of mu-
tual funds or other industry publications. The Fund will include perfor-
mance data for each Class in any advertisement or information including
performance data of the Fund.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and 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, sub-administrator, distributor, custo-
dian and transfer agent. The day-to-day operations of the Fund have been
delegated to the Fund's investment adviser, administrator and sub-
administrator. The Statement of Additional Information contains background
information regarding each Trustee of the Trust and the executive officers
of the Fund.
INVESTMENT ADVISER -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as the Fund's investment adviser pursuant to a transfer of the investment
advisory agreement, effective November 7, 1994, from its affiliate, Mutual
Management Corp. (Mutual Management Corp. and SBMFM are both wholly owned
subsidiaries of Holdings.) Investment advisory services continue to be
provided to the Fund by the same portfolio managers who had provided ser-
vices under the agreement with Mutual Management Corp. SBMFM (through pre-
decessor entities) has been in the investment counseling business since
1934 and is a registered investment adviser. SBMFM renders investment ad-
vice to investment companies that had aggregate assets under management as
of December 31, 1994, in excess of $50.4 billion.
Subject to the supervision and direction of the Trust's Board of Trustees
SBMFM manages the Fund's portfolio in accordance with the Fund's invest-
ment 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 investment advisory services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.35% of the value of the
Fund's average daily net assets. For the fiscal year ended November 30,
1994, the Fund paid investment advisory fees to SBMFM (and its predeces-
sor) in an amount equal to 0.14% of the Fund's average daily net assets.
During the same period, the Fund's investment adviser waived investment
advisory fees in an amount equal to 0.21% of the value of the Fund's aver-
age daily net assets.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, Portfolio Manager of SBMFM, has served as Vice
President and Investment Officer 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.
Management's discussion and analysis, and additional performance informa-
tion regarding the Fund during the fiscal year ended November 30, 1994, is
included in the Annual Report dated November 30, 1994. A copy of the An-
nual Report may be obtained upon request without charge from a Smith Bar-
ney Financial Consultant or by writing or calling the Fund at the address
or phone number listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered to the
Fund, the Fund pays SBMFM a fee at the annual rate of 0.20% of the value
of the Fund's average daily net assets. For the fiscal year ended November
30, 1994, the Fund paid an administration fee of 0.08% of the value of its
average daily net assets and the administrator voluntarily waived 0.12%.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides invest-
ment management, investment advisory, administrative and/or sub- adminis-
trative services to investment companies which had aggregate assets under
management as of December 31, 1994, in excess of $69.2 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated July 20, 1994, Bos-
ton Advisors is paid a portion of the administration fee paid by the Fund
to SBMFM at a rate agreed upon from time to time between Boston Advisors
and SBMFM. Prior to July 20, 1994, Boston Advisors served as the Fund's
administrator.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" ar-
rangement requiring Smith Barney to take and pay for only such securities
as may be sold to the public. Pursuant to a plan of distribution adopted
by the Fund under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney
is paid a service fee with respect to Class A and Class C shares of the
Fund at the annual rate of 0.15% of the average daily net assets of the
respective Class. Smith Barney is also paid a distribution fee with re-
spect to Class C shares at the annual rate of 0.20% of the average daily
net assets attributable to that Class. The fees are used by Smith Barney
to pay its Financial Consultants for servicing shareholder accounts and,
in the case of Class C shares, to cover expenses primarily intended to re-
sult in the sale of those shares. These expenses include: advertising ex-
penses; the cost of printing and mailing prospectuses to potential inves-
tors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distri-
bution of shares; interest and/or carrying charges; and indirect and over-
head costs of Smith Barney associated with the sale of Fund shares, in-
cluding lease, utility, communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at
the time of sale and, with respect to Class C shares, a continuing fee for
servicing shareholder accounts for as long as a shareholder remains a
holder of that Class. Smith Barney Financial Consultants may receive dif-
ferent levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the shareholder dis-
tribution and service expenses actually incurred by Smith Barney, and the
payments may exceed expenses actually incurred by Smith Barney. The
Trust's Board of Trustees will evaluate 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 and amounts it receives under the Plan.
ADDITIONAL INFORMATION
The Trust was organized on October 17, 1991 under the laws of the Common-
wealth of Massachusetts and is a business entity commonly known as a "Mas-
sachusetts business trust."
Each Class of the Fund represents an identical interest in the Fund's in-
vestment portfolio. As a result, the Classes have the same rights, privi-
leges and preferences, except with respect to: (a) the designation of each
Class; (b) the effect of the respective sales charges for each Class; (c)
the distribution and/or service fees borne by each Class pursuant to the
Plan; (d) the expenses allocable exclusively to each Class; (e) voting
rights on matters exclusively affecting a single Class; and (f) the ex-
change privilege of each Class. The Trust's Board of Trustees does not an-
ticipate that there will be any conflicts among the interests of the hold-
ers of the different Classes. The Trustees, on an ongoing basis, will con-
sider whether any such conflict exists and, if so, take appropriate
action.
When matters are submitted for shareholder vote, shareholders of each
Class will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Generally,
shares of the Fund will be voted on a Fund-wide basis on all matters ex-
cept matters affecting only the interests of one Class, in which case only
shares of the affected Class would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will
be no meetings 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, at which time the Trustees then in of-
fice 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 pur-
pose. The Trustees will call a meeting for any purpose upon the written
request of shareholders holding at least 10% of the Trust's outstanding
shares and the Trust will assist shareholders in calling such a meeting as
required by the 1940 Act.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as custodian of
the Fund's investments.
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 re-
port, each of which includes a listing of 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 its 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 sin-
gle copy of each report. In addition, the Fund also plans to consolidate
the mailing of its Prospectus so that a shareholder having multiple ac-
counts will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their
Financial Consultants or TSSG.
PROSPECTUS
SMITH BARNEY
Limited Maturity Municipals Fund
JANUARY 29, 1995
Prospectus begins on page one
[logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Prospectus
January 29, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Limited Maturity Municipals Fund (the "Fund") seeks as high a
level of current income exempt from Federal income tax as is consistent with
preservation of principal by investing in investment grade obligations issued
by the state and local governments. The Fund is one of a number of funds,
each having distinct investment objectives and policies making up the Smith
Barney Income Trust (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and 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
a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated January 29, 1995, 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 set
forth above or by contacting a Smith Barney 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 Inc.
Distributor
Smith Barney Mutual Funds Management Inc.
Investment Adviser and 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>
Table of Contents
Prospectus Summary 3
Financial Highlights 11
Investment Objective and Management Policies 13
Valuation of Shares 26
Dividends, Distributions and Taxes 26
Purchase of Shares 29
Exchange Privilege 35
Redemption of Shares 39
Minimum Account Size 41
Performance 41
Management of the Trust and the Fund 42
Distributor 44
Additional Information 45
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained
in this Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund
or the distributor. This Prospectus does not constitute an offer by the Fund
or the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
2
<PAGE>
Prospectus Summary
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the
Prospectus. See "Table of Contents."
Investment Objective
The Fund is a diversified intermediate-term municipal bond fund that seeks as
high a level of current income exempt from Federal income tax as is consistent
with preservation of principal by investing in investment-grade obligations
issued by state and local governments. 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. See "Investment
Objective and Management Policies."
Alternative Purchase Arrangements
The Fund offers three classes of shares ("Classes") to investors designed to
provide them with the flexibility of selecting an investment best suited to
their needs. The general public is offered two Classes of shares: Class A
shares and Class C shares, which differ principally in terms of sales charges
and rates of expenses to which they are subject. A third Class of shares,
Class Y shares, is offered only to investors meeting an initial investment
minimum of $5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See "Prospectus Summary -- No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.20% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses
3
<PAGE>
Prospectus Summary (continued)
and pay lower dividends than Class A shares. Purchases of Class C shares, which
when combined with current holdings of Class C shares of the Fund equal or
exceed $500,000 in the aggregate, should be made in Class A shares at net asset
value with no sales charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any
service or distribution fees.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify to purchase shares without an initial sales charge and
the shares are subject to lower ongoing expenses over the term of the
investment. As an alternative, Class C shares are sold without any initial
sales charge so the entire purchase price is immediately invested in the Fund.
Any investment return on these additional invested amounts may partially or
wholly offset the higher annual expenses of this Class. Because the Fund's
future return cannot be predicted, however, there can be no assurance that
this would be the case. Finally, investors should consider the effect of the
CDSC period in the context of their own investment time frame.
Investors investing a minimum of $5,000,000 must purchase Class Y shares, which
are not subject to an initial sales charge, CDSC or service or distribution
fees. The maximum purchase amount for Class A shares is $4,999,999 and
Class C shares is $499,999. There is no maximum purchase amount for Class Y
shares.
No Initial Sales Charge. The initial sales charge on Class A shares may be
waived for certain eligible purchasers, and the entire purchase price would be
immediately invested in the Fund. In addition, Class A share purchases, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a CDSC of
4
<PAGE>
Prospectus Summary (continued)
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares offered with a sales charge held in funds sponsored by
Smith Barney Inc. ("Smith Barney") listed under "Exchange Privilege."
See "Purchase of Shares." Because the ongoing expenses of Class A shares may
be lower than those for Class C shares, purchasers eligible to purchase
Class A shares at net asset value should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class C shares is the same as that of the initial sales
charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for each Class of shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences between the Classes
of shares.
Purchase of Shares
Shares may be purchased through the Fund's distributor, Smith Barney, a broker
that clears securities transactions through Smith Barney on a fully disclosed
basis (an "Introducing Broker") or an investment dealer in the selling group.
See "Purchase of Shares."
Investment Minimums
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account. Investors in Class Y
shares may open an account for an initial investment of $5,000,000.
Subsequent investments of at least $50 may be made for all Classes.
The minimum initial investment requirement for Class A and Class C shares
and the subsequent investment requirement for all Classes through the
Systematic Investment Plan described below is $100. There is no minimum
investment requirement in Class A for unitholders who invest distributions
from a unit investment trust ("UIT") sponsored by Smith Barney.
See "Purchase of Shares."
Systematic Investment Plan
The Fund offers shareholders a Systematic Investment Plan under which they may
authorize the automatic placement of a purchase order each month or quarter for
Fund shares in an amount of at least $100. See "Purchase of Shares."
5
<PAGE>
Prospectus Summary (continued)
Redemption of Shares
Shares may be redeemed on each day the New York Stock Exchange, Inc.
("NYSE") is
open for business. See "Purchase of Shares" and "Redemption of Shares."
Management of the Trust and the Fund
Smith Barney Mutual Funds Management Inc. ("SBMFM") serves as the Fund's
investment adviser. SBMFM (formerly known as Smith, Barney Advisers, Inc.) is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a wholly owned subsidiary of The Travelers Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries,
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
SBMFM also serves as the Fund's administrator. The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator.
Boston Advisors is a wholly owned subsidiary of The Boston Company, Inc.
("TBC"), 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 a Class may be exchanged for shares of the same Class of certain
other funds of the Smith Barney Mutual Funds at the respective net asset
values next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
Valuation of Shares
Net asset value of the Fund for the prior day generally is quoted daily in the
financial section of most newspapers and also is available from a Smith Barney
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. Distributions of net realized capital
gains, if any, are paid annually. See "Dividends, Distributions and Taxes."
Reinvestment of Dividends
Dividends and distributions paid on shares of any Class will be reinvested
automatically, unless otherwise specified by an investor, in additional shares
of the same Class at current net asset value. Shares acquired by
reinvestments will not be subject to any sales charge or CDSC. See "Dividends,
Distributions and Taxes."
6
<PAGE>
Prospectus Summary (continued)
Risk Factors and Special Considerations
No assurance can be given that the Fund will achieve its investment objective.
Shares of the Fund, unlike certain bank deposit accounts, are not guaranteed or
insured by any Federal or state authority. Changes in interest rates generally
will result in increases or decreases in the market value of the obligations
held by the Fund. The yield of the Fund 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 tax-exempt money market fund and therefore its investment
portfolio can be expected to experience greater volatility than that of a
tax-exempt money market fund. The net asset value of the Fund will be subject
to greater fluctuation to the extent that the Fund invests in zero coupon
securities. The Fund's net asset value per share will fluctuate depending on
a combination of factors such as current market interest rates and the
creditworthiness of the issuers in whose securities the Fund invests.
The Fund will not invest in obligations that are rated lower than Baa by
Moody's Investors Service, Inc. ("Moody's"), BBB by Standard & Poor's
Corporation ("S&P") or BBB by Fitch Investors Service, Inc. ("Fitch"), at the
time of purchase. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the obligations that they undertake to rate;
the ratings are relative and subjective and are not absolute standards
of quality.
The Fund may invest up to 20% of its total assets in unrated securities that
SBMFM determines to be of comparable quality to the securities rated investment
grade in which the Fund may invest. Dealers may not maintain daily markets in
unrated securities and retail secondary markets for many of them may not exist;
lack of markets may affect the Fund's ability to sell these securities when
SBMFM deems it appropriate. The Fund has the right to invest without
limitation in state and local obligations that are "private activity
bonds," the income from which may be taxable as a specific preference item
for purposes of the Federal alternative minimum tax. Thus, the Fund may not
be a suitable investment for investors who are subject to the alternative
minimum tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks.
The instruments presenting the Fund with risks are municipal leases, zero
coupon securities, custodial receipts, municipal obligation components,
floating and variable rate demand notes and bonds, and participation
interests. Entering into securities transactions on a when-issued or delayed-
7
<PAGE>
Prospectus Summary (continued)
delivery basis are investment techniques involving risks to the Fund. See
"Investment Objective and Management Policies--Investment Techniques-- Risk
Factors and Special Considerations" and "Dividends, Distributions and Taxes."
The Fund's Expenses
The following expense table lists the costs and expenses an investor will
incur,
either directly or indirectly, as a shareholder of the Fund, based upon the
maximum sales charge or maximum CDSC that may be incurred at the time of
purchase or redemption and, unless otherwise noted, the Fund's operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
Class A* Class C Class Y
================================================== ========== ========= ===========
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a
percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) 1.00% 1.00% None
================================================== ======== ======= =========
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees (net of waivers) 0.41% 0.41% 0.41%
12b-1 fees** 0.15% 0.35% None
Other expenses*** 0.24% 0.24% 0.24%
================================================== ======== ======= =========
TOTAL OPERATING EXPENSES
(after waivers) 0.80% 1.00% 0.65%
- -------------------------------------------------- -------- ------- ---------
</TABLE>
*Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but may be
subject to a CDSC of 1.00% on redemptions made within 12 months.
**Class C shares are subject to an ongoing distribution fee and, as a
result, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
***For Class Y shares, "Other expenses" have been estimated based on
expenses incurred by Class A shares because prior to November 30, 1994
no Class Y shares were sold.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors
actually may pay lower or no charges, depending on the amount purchased and
the length of time the shares are held. See "Purchase of Shares" and
"Redemption of Shares." Smith Barney receives an annual 12b-1 service fee
8
<PAGE>
Prospectus Summary (continued)
of 0.15% of the value of average daily net assets of Class A shares. Smith
Barney also receives with respect to Class C shares an annual 12b-1 fee of
0.35% of the value of average daily net assets of that Class, consisting of a
0.20% distribution fee and a 0.15% service fee. The nature of the services
for which the Fund pays management fees is described under "Management of the
Trust and the Fund." "Other expenses" in the above table includes fees for
shareholder services not provided by Smith Barney, 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.
During the fiscal year ended November 30, 1994, the Fund's investment adviser
and administrator voluntarily waived portions of their respective fees in the
aggregate amount equal to 0.14% of the value of the Fund's average daily net
assets. This had the effect of lowering the Fund's overall expenses and
increasing the returns available to investors. If these fees had not been
waived the Fund's total operating expenses for Class A and Class C shares for
the fiscal year ended November 30, 1994, would have been 0.94% and 1.14%,
respectively, as a percentage of the value of the Fund's average daily net
assets.
9
<PAGE>
Prospectus Summary (continued)
Example
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set forth in the table above. See "Purchase of Shares," "Redemption of Shares"
and "Management of the Trust and the Fund."
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
====================================================== ======== ========= ========= ==========
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual return
and (2) redemption at the end of each time period:
Class A $38 $45 $64 $117
Class C 20 32 55 122
Class Y 7 21 36 81
An investor would pay the following expenses on the
same investment, assuming the same annual return and
no redemption:
Class A $28 $45 $64 $117
Class C 10 32 55 122
Class Y 7 21 36 81
====================================================== ====== ======= ======= ========
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater
or less than those shown.
10
<PAGE>
Financial Highlights
The following information has been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report thereon appears in the Fund's Annual
Report dated November 30, 1994. 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 Class A share outstanding throughout each year:
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
11/30/94* 11/30/93 11/30/92*
<S> <C> <C> <C>
Net asset value, beginning of year $8.26 $8.07 $7.90
- ----------------------------------------------------- --------- -------- -----------
Income from investment operations:
Net investment income+ 0.34 0.36 0.36
Net realized and unrealized gain/loss on investments (0.32) 0.19 0.17
- ----------------------------------------------------- --------- -------- -----------
Total from investment operations 0.02 0.55 0.53
Less distributions:
Dividends from net investment income (0.34) (0.36) (0.36)
Distributions from net realized capital gains (0.00)** (0.00)** --
- ----------------------------------------------------- --------- -------- -----------
Total distributions (0.34) (0.36) (0.36)
- ----------------------------------------------------- --------- -------- -----------
Net asset value, end of year $7.94 $8.26 $8.07
- ----------------------------------------------------- --------- -------- -----------
Total return++ 0.23% 6.98% 6.88%
- ----------------------------------------------------- --------- -------- -----------
Ratios/Supplemental data:
Net assets, end of year (in 000's) $76,237 $96,421 $36,379
Ratio of operating expenses to average net
assets+++ 0.80% 0.75% 0.65%**
Ratio of net investment income to average net assets 4.15% 4.24% 4.74%**
Portfolio turnover rate 28% 4% 22%
===================================================== ========= ======== ===========
</TABLE>
*The Fund commenced operations on December 31, 1991. Those shares in
existence prior to November 7, 1994 were designated Class A shares.
**Amount represents less than $0.01 per share
***Annualized.
+Net investment income before waiver of fees by investment adviser and
administrator for the years ended November 30, 1994 and 1993 and waiver of
fees by investment adviser, sub- investment adviser and administrator, and/or
custodian and distributor for the period ended November 30, 1992 were $0.33,
$0.33 and $0.31, 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 years ended November 30, 1994 and 1993 and
waiver of fees by investment adviser, sub-investment adviser and
administrator, and/or custodian and distributor for the period ended November
30, 1992 were 0.94%, 1.07% and 1.28%, respectively.
11
<PAGE>
Financial Highlights (continued)
For a Class C share outstanding throughout
the period:
<TABLE>
<CAPTION>
Period
Ended
11/30/94*
<S> <C>
Net asset value, beginning of period $7.92
- ------------------------------------------------------ -----------
Income from Investment Operations:
Net investment income+ 0.00**
Net realized and unrealized gain on investments 0.02#
- ------------------------------------------------------ -----------
Total from investment operations 0.02
Less Distributions:
Distributions from net investment income 0.00**
Total distributions 0.00
- ------------------------------------------------------ -----------
Net asset value, end of period $7.94
- ------------------------------------------------------ -----------
Total return++ 0.31%
- ------------------------------------------------------ -----------
Ratios/Supplemental Data:
Net assets, end of period (in 000's) $106
Ratio of operating expenses to average net assets+++ 1.00%***
Ratio of net investment income to average net assets 3.94%***
Portfolio turnover rate 28%
====================================================== ===========
</TABLE>
*The Fund commenced selling Class C shares on November 17, 1994.
**Amount represents less than $0.01 per share.
***Annualized.
+Net investment income per share before waiver of fees by investment
adviser and administrator for the period ended November 30, 1994 was less
than $0.01.
++Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charges.
+++Annualized operating expense ratio before waiver of fees by investment
adviser and administrator for the period ended November 30, 1994 was 1.14%.
#The amount in this caption for each share outstanding throughout the period
may not accord with the change in aggregate gains and losses in portfolio
securities for the period because of the timing of purchases and withdrawals
of shares in relation to the fluctuating market values of the portfolio.
As of November 30, 1994, the Fund had not sold any Class Y shares, and
accordingly, no comparable financial information is available at this time
for that Class.
12
<PAGE>
Investment Objective and Management Policies
Set out below is a description of the investment objective and principal
investment policies of the Fund. 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 a majority of the Fund's outstanding shares.
The investment objective of the Fund is to seek as high a level of current
income exempt from Federal income taxes as is consistent with preservation of
principal. In seeking its objective, the Fund will invest in a diversified
portfolio of investment-grade 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"). The Fund will
operate subject to a fundamental investment policy providing that, under
normal conditions, the Fund will invest at least 80% of its net assets in
Municipal Obligations.
The Fund will invest at least 80% of its total assets in Municipal
Obligations rated investment-grade, that is, rated no lower than Baa, MIG 3
or Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to
20% of the Fund's total assets may be invested in unrated securities that are
deemed by SBMFM to be of a quality comparable to investment grade. The Fund
will not invest in Municipal Obligations that are rated lower than Baa by
Moody's, BBB by S&P or BBB by Fitch, at the time of purchase. Although
Municipal Obligations rated Baa by Moody's, BBB by S&P or BBB by Fitch are
considered to be investment grade, they may be viewed as being subject to
greater risks than other investment grade securities. Municipal Obligations
rated Baa by Moody's, for example, are considered medium grade obligations
that lack outstanding investment characteristics and have speculative
characteristics as well. Municipal Obligations rated BBB by S&P are regarded
as having an adequate capacity to pay principal and interest. Municipal
Obligations rated BBB by Fitch are deemed to be subject to a higher
likelihood that their rating will fall below investment grade than higher
rated bonds.
The ratings of Moody's, S&P and Fitch represent their opinions as to the quality
of the Municipal Obligations that they undertake to rate; the ratings are
relative and subjective and are not absolute standards of quality. SBMFM's
judgment as to credit quality of a Municipal Obligation, thus, may differ
13
<PAGE>
Investment Objective and Management Policies (continued)
from that suggested by the ratings published by a rating service. A
description of Moody's, S&P and Fitch ratings relevant to the Fund's
investments is included as an appendix to the Statement of Additional
Information. The policies of the Fund described above as to ratings of
portfolio investments will apply only at the time of the purchase of a
security, and the Fund will not be required to dispose of a security in the
event Moody's, S&P or Fitch downgrades its assessment of the credit
characteristics of the security's issuer.
Municipal Obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from
the general taxing power. Notes are short-term obligations of issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal Obligations bear
fixed, floating and variable rates of interest, and variations exist in the
security of Municipal Obligations, both within a particular classification
and between classifications.
The yields on, and values of, Municipal Obligations are dependent on a
variety of factors, including general economic and monetary conditions,
conditions in the Municipal Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields or values, whereas obligations of the same maturity and
coupon with different ratings may have the same yield or value. See "Risk
Factors and Special Considerations--Municipal Obligations."
Issuers of Municipal Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment
of principal and/or interest, or imposing other constraints upon enforcement
of the obligations or upon the ability of municipalities to levy taxes. The
possibility also exists that, as a result of litigation or other conditions,
the power or ability of any issuer to pay, when due, the principal of, and
interest on, its obligations may be materially affected.
14
<PAGE>
Investment Objective and Management Policies (continued)
Maturity of Obligations Held by the Fund
SBMFM believes that the Fund may offer an attractive investment opportunity
for investors seeking a higher effective tax yield than a tax-exempt money
market fund or a tax-exempt short-term bond fund and less fluctuation in net
asset value than a longer term tax-exempt bond fund. Under normal
circumstances, the Fund will invest exclusively in limited maturity
securities; the weighted average maturity of the Fund's portfolio securities
will normally be not 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.
Private Activity Bonds
The Fund may invest without limit in Municipal Obligations that are tax-
exempt "private activity bonds," as defined in the Internal Revenue Code of
1986, as amended (the "Code"), which are in most cases revenue bonds. Private
activity bonds generally do not carry the pledge of the credit of the issuing
municipality, but are guaranteed by the corporate entity on whose behalf they
are issued. Interest income on certain types of private activity bonds issued
after August 7, 1986 to finance nongovernmental activities is a specific tax
preference item for purposes of the Federal individual and corporate
alternative minimum taxes. Individual and corporate shareholders may be
subject to a Federal alternative minimum tax to the extent the Fund's
dividends are derived from interest on these bonds. Dividends derived from
interest income on Municipal Obligations are a "current earnings" adjustment
item for purposes of the Federal corporate alternative minimum tax. See
"Dividends, Distributions and Taxes." Private activity bonds held by the Fund
will be included in the term Municipal Obligations for purposes of
determining compliance with the Fund's policy of investing at least 80% of
its total assets in Municipal Obligations.
Related Instruments
The Fund may invest without limit in Municipal Obligations that are repayable
out of revenues generated from economically related projects or facilities or
debt obligations whose issuers are located in the same state. Sizeable
investments in these obligations could involve an increased risk to the Fund
should any of the related projects or facilities experience financial
difficulties.
15
<PAGE>
Investment Objective and Management Policies (continued)
Other Miscellaneous Policies
The 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. In addition, up to 5% of the value of the Fund's assets
may be invested in securities of entities that have been in continuous
operation for fewer than three years.
Types of Municipal Obligations Held by the Fund
Municipal Leases. The Fund may invest without limit in "municipal leases."
Municipal leases may take the form of a lease or an installment purchase
contract 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. Interest
payments on qualifying municipal leases are exempt from Federal income taxes
and state income taxes within the state of issuance. Although lease
obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a yearly
basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non- appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. The Fund may invest in municipal leases without non-appropriation
clauses only when the municipality is required to continue the lease under
all circumstances except bankruptcy. There is no limitation on the percentage
of the Fund's assets that may be invested in municipal lease obligations. In
evaluating municipal lease obligations, SBMFM will consider such factors as
it deems appropriate, which may include: (a) whether the lease can be
canceled; (b) the ability of the lease obligee to direct the sale of the
underlying assets; (c) the general creditworthiness of the lease obligor; (d)
the likelihood that the municipality will discontinue appropriating funding
for the leased property in the event such property is no longer considered
essential by the
16
<PAGE>
Investment Objective and Management Policies (continued)
municipality; (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding; (f) whether the security is backed by
a credit enhancement such as insurance; and (g) any limitations which are
imposed on the lease obligor's ability to utilize substitute property or
services other than those covered by the lease obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of investment
or those issued by issuers whose senior debt is rated investment grade at the
time of investment. The Fund may acquire unrated issues that SBMFM deems to
be comparable in quality to rated issues in which the Fund is authorized to
invest. A determination that an unrated lease obligation is comparable in
quality to a rated lease obligation will be subject to oversight and approval
by the Trust's Board of Trustees.
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that the
leases are readily marketable. An unrated municipal lease with a
non-appropriation risk that is backed by an irrevocable bank letter of credit
or an insurance policy issued by a bank or insurer deemed by SBMFM to be of
high quality and minimal credit risk, will not be deemed to be illiquid
solely because the underlying municipal lease is unrated, if SBMFM determines
that the lease is readily marketable because it is backed by the letter of
credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in zero
coupon Municipal Obligations. Zero coupon Municipal Obligations are generally
divided into two categories: pure zero obligations, which are those that pay
no interest for their entire life and zero/fixed obligations, which pay no
interest for some initial period and thereafter pay interest currently. In
the case of a pure zero obligation, the failure to pay interest currently may
result from the obligation's having no stated interest rate, in which case
the obligation pays only principal at maturity and is issued at a discount
from its stated principal amount. A pure zero obligation may, in the
alternative, provide for a stated interest rate, but provide that no interest
is payable until maturity, in which case accrued, unpaid interest on the
obligation may be capitalized as incremental principal. The value to the
investor of a zero coupon Municipal Obligation consists of the economic
accretion either of the difference between the purchase price and the nominal
principal amount (if
17
<PAGE>
Investment Objective and Management Policies (continued)
no interest is stated to accrue) or of accrued, unpaid interest during the
Municipal Obligation's life or payment deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on certain Municipal
Obligations. The underwriter of these certificates or receipts typically
purchases Municipal Obligations and deposits the obligations in an
irrevocable trust or custodial account with a custodian bank, which then
issues receipts or certificates that evidence ownership of the periodic
unmatured coupon payments and the final principal payment on the obligations.
Custodial receipts evidencing specific coupon or principal payments have the
same general attributes as zero coupon Municipal Obligations described above.
Although under the terms of a custodial receipt, the Fund would be typically
authorized to assert its rights directly against the issuer of the underlying
obligation, the Fund could be required to assert through the custodian bank
those rights as may exist against the underlying issuer. Thus, in the event
the underlying issuer fails to pay principal and/or interest when due, the
Fund may be subject to delays, expenses and risks that are greater than those
that would have been involved if the Fund had purchased a direct obligation
of the issuer. In addition, in the event that the trust or custodial account
in which the underlying security has been deposited is determined to be an
association taxable as a corporation, instead of a non-taxable entity, the
yield on the underlying security would be reduced in recognition of any taxes
paid.
Municipal Obligation Components. The Fund may invest in Municipal
Obligations, the interest rate on which has been divided by the issuer into
two different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction
Component") pays an interest rate that is reset periodically through an
auction process, whereas the second of the components (the "Residual
Component") pays a residual interest rate based on the difference between the
total interest paid by the issuer on the Municipal Obligation and the auction
rate paid on the Auction Component. The Fund may purchase both Auction and
Residual Components.
Because the interest rate paid to holders of Residual Components is generally
determined by subtracting the interest rate paid to the holders of Auction
Components from a fixed amount, the interest rate paid to Residual
18
<PAGE>
Investment Objective and Management Policies (continued)
Component holders will decrease as the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the magnitude
of the increases and decreases in market value of Residual Components may be
larger than comparable changes in the market value of an equal principal
amount of a fixed rate Municipal Obligation having similar credit quality,
redemption provisions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating and
variable rate demand notes and bonds, which are Municipal Obligations
normally having a stated maturity in excess of one year, but which permit
their holder to demand payment of principal at any time, or at specified
intervals. The maturity of a floating or variable rate demand note or bond
will not be deemed shortened by virtue of a demand feature for purposes of
calculating the Fund's net asset value or determining its weighted average
maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of these obligations. The
interest rate on a floating rate demand obligation is based on a known
lending rate, such as a bank's prime rate, and is adjusted automatically each
time that rate is adjusted. The interest rate on a variable rate demand
obligation is adjusted automatically at specified intervals. Frequently,
floating and variable rate obligations are secured by letters of credit or
other credit support arrangements provided by banks. Use of letters of credit
or other credit support arrangements will not adversely affect the tax-exempt
status of these obligations. Because they are direct lending arrangements
between the lender and borrower, floating and variable rate obligations will
generally not be traded. In addition, no secondary market generally exists
for these obligations, although their holders may demand their payment at
face value. For these reasons, when floating and variable rate obligations
held by the Fund are not secured by letters of credit or other credit support
arrangements, the Fund's right to demand payment is dependent on the ability
of the borrower to pay principal and interest on demand. SBMFM, on behalf of
the Fund, will consider the creditworthiness of the issuers of floating and
variable rate demand obligations in the Fund's portfolio on an ongoing basis.
Participation Interests. The Fund may purchase from financial institutions
tax-exempt participation interests in Municipal Obligations. A participation
19
<PAGE>
Investment Objective and Management Policies (continued)
interest gives the Fund an undivided interest in the Municipal Obligation in
the proportion that the Fund's participation interest bears to the total
amount of the Municipal Obligation. These instruments may have floating or
variable rates of interest. If the participation interest is unrated, it will
be backed by an irrevocable letter of credit or guarantee of a bank that the
Trust's Board of Trustees has determined meets certain quality standards or
the payment obligation otherwise will be collateralized by obligations of the
United States government and its agencies and instrumentalities ("U.S.
government securities"). The Fund will have the right, with respect to
certain participation interests, to demand payment, on a specified number of
days' notice, for all or any part of the Fund's interest in the Municipal
Obligation, plus accrued interest. The Fund intends to exercise its right
with respect to these instruments to demand payment only upon a default under
the terms of the Municipal Obligation or to maintain or improve the quality
of its investment portfolio.
Taxable Investments
Under normal conditions, the Fund may hold up to 20% of its total assets in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, when SBMFM believes that
market conditions warrant, the Fund may take a temporary defensive posture
and invest without limitation in short-term Municipal Obligations and Taxable
Investments. To the extent the Fund holds Taxable Investments and, under
certain market conditions, certain floating and variable rate demand
obligations or Auction Components, the Fund may not achieve its investment
objective.
Money market instruments in which the Fund may invest include: U.S.
government securities; tax-exempt notes of municipal issuers rated, at the
time of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch
or, if not rated, by issuers having outstanding, unsecured debt then rated
within the three highest rating categories; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic
banks, domestic savings and loan associations and similar institutions);
commercial paper rated no lower than P-1 by Moody's, A-1 by S&P or F-1 by
Fitch or the equivalent from another major rating service or, if unrated, of
an issuer having an outstanding, unsecured debt issue then rated within the
20
<PAGE>
Investment Objective and Management Policies (continued)
three highest rating categories; and repurchase agreements. At no time will
the Fund's investments in bank obligations, including time deposits, exceed
25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct
obligations of the United States and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the
United States are Treasury Bills, Treasury Notes and Treasury Bonds, which
differ principally in terms of their maturities. Included among the
securities issued by U.S. government agencies and instrumentalities are:
securities that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association certificates);
securities that are supported by the right of the issuer to borrow from the
United States Treasury (such as securities of Federal Home Loan Banks); and
securities that are supported by the credit of the instrumentality (such as
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation bonds).
Investment Techniques
The Fund may employ, among others, the investment techniques described below,
which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase securities
on a when-issued basis, or may purchase or sell securities for delayed
delivery. In when-issued or delayed-delivery transactions, delivery of the
securities occurs beyond normal settlement periods, but no payment or
delivery will be 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 Fund will establish with Boston Safe Deposit and Trust
Company ("Boston Safe"), the Trust's custodian, a segregated account
consisting of cash or U.S. government securities in an amount equal to the
amount of the when-issued and delayed-delivery purchase commitments. Placing
securities rather than cash in a segregated account may have a leveraging
effect on the Fund's net assets.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a broker, dealer or bank is obligated to repurchase at the Fund's
option specified securities at a specified price and, in this way, stand-by
commitments are comparable to put options. Each exercise of a
21
<PAGE>
Investment Objective and Management Policies (continued)
stand-by commitment, therefore, is subject to the ability of the seller to
make payment on demand. The Fund will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise the rights
afforded by the commitments for trading purposes. The Fund anticipates that
stand-by commitments will be available from brokers, dealers and banks
without the payment of any direct or indirect consideration. The Fund may pay
for stand-by commitments if payment is deemed necessary, thus increasing to a
degree the cost of the underlying Municipal Obligation and similarly
decreasing the security's yield to investors.
Investment Restrictions
The Trust has 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. Included among those fundamental restrictions
are the following:
1. The Fund will not purchase securities other than Municipal Obligations and
Taxable Investments as those terms are defined in this Prospectus or the
Statement of Additional Information.
2. The Fund will not 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. The Fund will not purchase more than 10% of the voting securities of any
one issuer, except that this limitation is not applicable to the Fund's
investments in U.S. government securities.
4. The Fund will 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 will not make any
additional investments.
22
<PAGE>
Investment Objective and Management Policies (continued)
5. The Fund will not lend money to other persons, except through purchasing
Municipal Obligations or Taxable Investments and entering into repurchase
agreements in a manner consistent with the Fund's investment objective.
6. The Fund will not 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 the Fund's investments in U.S. government securities.
7. The Fund will 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.
Risk Factors and Special Considerations
Investment in the Fund involves risk factors and special considerations, such
as those described below:
Municipal Obligations. Even though Municipal Obligations are interest-
bearing investments that promise a stable stream of income, their prices are
inversely affected by changes in interest rates and, therefore, are subject
to the risk of market price fluctuations. The values of Municipal Obligations
with longer remaining maturities typically fluctuate more than those of
similarly rated Municipal Obligations with shorter remaining maturities such
as the Fund intends to hold. The values of fixed income securities also may
be affected by changes in the credit rating or financial condition of the
issuing entities.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal income taxes are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund
nor SBMFM will review the proceedings relating to the issuance of Municipal
Obligations or the basis for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax
exemption on various types of Municipal Obligations and may enact other
similar laws in the future. If any such laws are enacted that would reduce
the availability of Municipal Obligations for investment by the Fund so as to
affect the Fund's shareholders adversely, the Trust's Trustees will
reevaluate
23
<PAGE>
Investment Objective and Management Policies (continued)
the Fund's investment objective and policies and might submit possible
changes in the Fund's structure to shareholders for their consideration. If
legislation were enacted that would treat a type of Municipal Obligation as
taxable for Federal income tax purposes, the Fund would treat the security as
a permissible Taxable Investment within the applicable limits set forth in
this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that SBMFM
determines to be of comparable quality to the rated securities in which the
Fund may invest. Dealers may not maintain daily markets in unrated securities
and retail secondary markets for many of them may not exist. As a result, the
Fund's ability to sell these securities when SBMFM deems it appropriate may
be diminished.
Municipal Leases. Municipal leases in which the Fund may invest have special
risks not normally associated with Municipal Obligations. These obligations
frequently contain nonappropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under the
lease or contract unless money is appropriated for that purpose by a
legislative body annually or on another periodic basis. Municipal leases have
additional risks because they represent a type of financing that has not yet
developed the depth of marketability generally associated with other
Municipal Obligations. Moreover, although a municipal lease will be secured
by financed equipment or facilities, the disposition of the equipment or
facilities in the event of foreclosure might prove difficult. In addition, in
certain instances the tax-exempt status of the municipal lease will not be
subject to the legal opinion of a nationally recognized bond counsel,
although in all cases the Fund will require that a municipal lease purchased
by the Fund be covered by a legal opinion to the effect that, as of each
effective date of the municipal lease, the lease is the valid and binding
obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability of
issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost
burdens are allocated and reallocated among Federal, state and local
governmental units. Such non-payment would result in a reduction of income to
the Fund, and could result in a reduction in the value of the municipal lease
experiencing non-payment and a potential decrease in the net asset value of
the Fund. Issuers of municipal securities might seek protection under the
bankruptcy laws. In the event of bankruptcy of such an issuer, the
24
<PAGE>
Investment Objective and Management Policies (continued)
Fund could experience delays and limitations with respect to the collection
of principal and interest on such municipal leases and the Fund may not, in
all circumstances, be able to collect all principal and interest to which it
is entitled. To enforce its rights in the event of a default in lease
payments, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's
operating expenses and adversely affect the net asset value of the Fund. Any
income derived from the Fund's ownership or operation of such assets may not
be tax- exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Code may limit the extent to which the Fund may
exercise its rights by taking possession of such assets, because as a
regulated investment company the Fund is subject to certain limitations on
its investments and on the nature of its income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from time
to time, invest a portion of its assets in non-publicly traded Municipal
Obligations. Non-publicly traded securities may be less liquid than publicly
traded securities. Although non-publicly traded securities may be resold in
privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund.
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.
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 the annual turnover will not exceed 100%. An annual turnover
25
<PAGE>
Investment Objective and Management Policies (continued)
rate of 100% would occur when all of the securities held by the Fund are
replaced once during a period of one year. SBMFM will not consider turnover
rate a limiting factor in making investment decisions consistent with the
investment objective and policies of the Fund.
Valuation of Shares
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value
of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, 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 at amortized cost.
Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.
Dividends, Distributions and Taxes
Dividends and Distributions
It is the Fund's policy to declare daily and distribute monthly, generally on
the 10th day of each calendar month, substantially all of the Fund's 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.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. 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 of each year of any
26
<PAGE>
Dividends, Distributions and Taxes (continued)
undistributed ordinary income or capital gains and expects to pay any other
distributions as are necessary to avoid the application of this tax.
The per share dividends on Class C shares of the Fund may be lower than the per
share dividends on Class A and Class Y shares principally as a result of the
distribution fee applicable with respect to Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per share
dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be in
the same amount for Class A, Class C and Class Y shares.
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 (other than dividends derived from interest earned on
qualifying tax-exempt obligations as described below) and distributions of
the Fund's net realized short-term capital gains are taxable to shareholders
as ordinary income, regardless of how long shareholders in the Fund have held
their shares and whether the dividends or distributions are received in cash
or reinvested in additional shares of the Fund. 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
shares of the Fund 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 shares of the Fund 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.
Dividends paid by the Fund that are derived from interest earned on qualifying
tax-exempt obligations are expected to be "exempt-interest" dividends that
shareholders may exclude from their gross incomes for Federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of the Fund derived from interest on Municipal
Obligations, the interest on which is a specific tax preference item for Federal
income tax purposes, will be a specific tax preference item for purposes of the
Federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alterna-
27
<PAGE>
Dividends, Distributions and Taxes (continued)
tive minimum income tax and corporate shareholders may incur a larger Federal
environmental tax liability through the receipt of Fund dividends and
distributions from the Fund. Distributions of exempt-interest dividends will
be taken into consideration in computing the portion, if any, of social
security and railroad retirement benefits subject to Federal and, in some
cases, state taxes.
Statements as to the tax status of the dividends and distributions received
by shareholders of the Fund are mailed annually. These statements set forth
the dollar amount of income excluded from Federal income taxes and the dollar
amount, if any, subject to Federal income taxes. The Fund notifies its
shareholders annually as to the interest excluded from Federal income taxes
earned by the Fund with respect to those states and possessions in which the
Fund has or had investments.
Shareholders of the Fund should consult their tax advisors with specific
reference to their own tax situations. Shareholders of the Fund should in
particular 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 are exempt from
any otherwise applicable state or local income taxes.
Tax-Exempt Income vs. Taxable Income
The table below shows individual taxpayers how to translate the tax savings
from investments such as the Fund into an equivalent return from a taxable
investment. The yields used below are for illustration only and are not
intended to represent current or future yields for the Fund, which may be
higher or lower than those shown.
28
<PAGE>
Dividends, Distributions and Taxes (continued)
<TABLE>
<CAPTION>
1995
Taxable Income Federal
Marginal
- -------------------------------------- Rate* ----- ----- ----- ----- ----- ----- ----- ----- -------
Single Joint 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
------------------------ --------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-23,350 $0-39,000 15.00% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
23,351-56,550 39,001-94,250 28.00% 2.78% 4.17% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
56,551-117,950 94,251-143,600 31.00% 2.90% 4.35% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
117,951-256,500 143,601-256,500 36.00% 3.13% 4.69% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
256,501 and more 256,501
and more 39.60% 3.31% 4.97% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
------------------------ -------- --- --- --- --- --- --- --- --- --- -----
</TABLE>
*The Federal tax rates shown are those currently in effect for 1995.
The calculations assume that no income will be subject to the Federal
alternative minimum tax.
Purchase of Shares
General
The Fund offers three Classes of shares. Class A shares are sold to investors
with an initial sales charge and Class C shares are sold without an initial
sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or a CDSC and are
available only to investors investing a minimum of $5,000,000. See
"Prospectus Summary -- Alternative Purchase Arrangements" for a discussion of
factors to consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the
selling group. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Fund. Investors
in Class Y shares may open an account by making an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A and Class C shares and the subsequent
investment requirement for all Classes is $100. There are no minimum
investment requirements in Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Trustees of the Trust and their spouses
and children and unitholders who invest distributions from a UIT sponsored by
Smith Barney. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of
29
<PAGE>
Purchase of Shares (continued)
shares from time to time. Shares purchased will be held in the shareholder's
account by the Fund's transfer agent, The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation. Share certificates are
issued only upon a shareholder's written request to TSSG.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, on any day the Fund calculates its net asset value, are
priced according to the net asset value determined on that day. Orders
received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the Fund calculates its net asset value, are
priced according to the net asset value determined on that day, provided the
order is received by Smith Barney prior to Smith Barney's close of business
(the "trade date"). Currently, payment for Fund shares is due on the fifth
business day after the trade date (the "settlement date"). The Fund
anticipates that, in accordance with regulatory changes, beginning on or
about June 1, 1995, the settlement date will be the third business day after
the trade date.
Systematic Investment Plan
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide systematic additions to the shareholder's Fund
account. A shareholder who has insufficient funds to complete the transfer
will be charged a fee of up to $25 by Smith Barney or TSSG. The Systematic
Investment Plan also authorizes Smith Barney to apply cash held in the
shareholder's Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
Initial Sales Charge Alternative--Class A Shares
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
30
<PAGE>
Purchase of Shares (continued)
<TABLE>
<CAPTION>
Sales Charge Sales Charge
as as Dealer's
% of % of Amount Reallowance as
Amount of Investment Offering Price Invested % of Offering Price
- ---------------------- -------------- -------------- ---------------------
<S> <C> <C> <C>
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
====================== ============ ============ ===================
</TABLE>
*Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales
charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The CDSC on Class A shares is payable to Smith Barney,
which compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class C shares is waived.
See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an
individual, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. It may also be met by
aggregating the purchase with the net asset value of all Class A shares
offered with a sales charge held in funds sponsored by Smith Barney listed
under "Exchange Privilege."
Initial Sales Charge Waivers
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to
Trustees of the Trust and employees of Travelers and its subsidiaries, or to
the spouses and children of such persons (including the surviving spouse of a
deceased Trustee or employee, and retired Trustees or employees); (b) offers
of Class A shares to any other investment company in connection with the
combination of such company with the Fund by merger, acquisition of assets or
otherwise; (c) purchases of Class A shares by any client of a newly employed
Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on
the condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was
31
<PAGE>
Purchase of Shares (continued)
sponsored by the Financial Consultant's prior employer, (ii) was sold to the
client by the Financial Consultant and (iii) was subject to a sales charge;
(d) shareholders who have redeemed Class A shares in the Fund (or Class A
shares of another fund of the Smith Barney Mutual Funds that are offered with
a sales charge equal to or greater than the maximum sales charge of the Fund)
and who wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) accounts
managed by registered investment advisory subsidiaries of Travelers; and (f)
investments of distributions from a UIT sponsored by Smith Barney. In order
to obtain such discounts, the purchaser must provide sufficient information
at the time of purchase to permit verification that the purchase would
qualify for the elimination of the sales charge.
Right of Accumulation
Class A shares of the Fund may be purchased by "any person" (as defined
above) at net asset value determined by aggregating the dollar amount of the
new purchase and the total net asset value of all Class A shares of the Fund
and of funds sponsored by Smith Barney, which are offered with a sales charge
listed under "Exchange Privilege" then held by such person and applying the
sales charge applicable to such aggregate. In order to obtain such discount,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for purchase at net asset
value. The right of accumulation is subject to modification or discontinuance
at any time with respect to all shares purchased thereafter.
Group Purchases
Upon completion of certain automated systems, purchases at net asset value
will also be available to employees (and partners) of the same employer
purchasing as a group, provided each participant makes the minimum initial
investment required. The sales charge, if any, applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of the Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the
group. To be eligible for such purchase at net asset value, all purchases
must be pursuant to an employer- or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan
32
<PAGE>
Purchase of Shares (continued)
may, but is not required to, provide for payroll deductions. Smith Barney
also may offer net asset value purchase for aggregating related fiduciary
accounts under such conditions that Smith Barney will realize economies of
sales efforts and sales related expenses. An individual who is a member of a
qualified group may also purchase Class A shares at the sales charge
applicable to the group as a whole. The sales charge is based upon the
aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the
amount of the current purchase. A "qualified group" is one which (a) has been
in existence for more than six months, (b) has a purpose other than acquiring
Fund shares at a discount and (c) satisfies uniform criteria which enable
Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available
to arrange for group meetings between representatives of the Fund and the
members, and must agree to include sales and other materials related to the
Fund in its publications and mailings to members at no cost to Smith Barney.
In order to purchase at net asset value, the purchaser must provide
sufficient information at the time of purchase to permit verification that
the purchase qualifies for purchase at net asset value. Approval of group
purchases at net asset value is subject to the discretion of Smith Barney.
Letter of Intent
A Letter of Intent for amounts of $500,000 or more provides an opportunity
for an investor to purchase shares at net asset value by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount
of Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Fund and other funds of the Smith
Barney Mutual Funds offered with a sales charge over a 13 month period based
on the total amount of intended purchases plus the value of all Class A
shares previously purchased and still owned. An alternative is to compute the
13 month period starting up to 90 days before the date of execution of a
Letter of Intent. Each investment made during the period receives the sales
charge applicable to the total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
33
<PAGE>
Purchase of Shares (continued)
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact a Smith Barney Financial Consultant or TSSG to obtain a Letter of
Intent application.
Deferred Sales Charge Alternatives
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and (b)
Class A shares, which when combined with Class A shares offered with a sales
charge currently held by an investor, equal or exceed $500,000 in the
aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
or (c) shares redeemed more than 12 months after their purchase. CDSC Shares
are subject to a 1.00% CDSC if redeemed within 12 months of purchase.
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain
distributions and finally of other shares held by the shareholder for the
longest period of time. The length of time that CDSC Shares acquired through
an exchange have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney Mutual
Funds, and Fund shares being redeemed will be considered to represent, as
applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the
amount of the CDSC will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption. The amount of any CDSC will be paid
to Smith Barney.
To provide an example, assume an investor purchased 100 Class C shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the tenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appre-
34
<PAGE>
Purchase of Shares (continued)
ciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount
which represents appreciation ($200) and the value of the reinvested dividend
shares ($60). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 1.00% (the applicable rate for Class C
shares) for a total deferred sales charge of $2.40.
Waivers of CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month
of the value of the shareholder's shares at the time the withdrawal plan
commences (see below) (provided, however, that automatic cash withdrawals in
amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares in connection with a combination
of the Fund with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other
funds of the Smith Barney Mutual Funds may, under certain circumstances,
reinvest all or part of the redemption proceeds within 60 days and receive
pro rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case
of all other shareholders) of the shareholder's status or holdings, as the
case may be.
Exchange Privilege
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state
of residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to other requirements of
the fund into which exchanges are made and a sales charge differential may
apply.
35
<PAGE>
Exchange Privilege (continued)
Fund Name
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
*Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
36
<PAGE>
Exchange Privilege (continued)
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
*Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
**Smith Barney Exchange Reserve Fund
*Smith Barney Money Funds, Inc. -- Cash Portfolio
*Smith Barney Money Funds, Inc. -- Government Portfolio
***Smith Barney Money Funds, Inc. -- Retirement Portfolio
*Smith Barney Municipal Money Market Fund, Inc.
*Smith Barney Muni Funds -- California Money Market Portfolio
*Smith Barney Muni Funds -- New York Money Market Portfolio
*Available for exchange with Class A and Class Y shares of the Fund.
**Available for exchange with Class C shares of the Fund.
***Available for exchange with Class A shares of the Fund.
Class A Exchanges. Class A shares of the Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the
maximum charged by other Smith Barney Mutual Funds will be subject to
37
<PAGE>
Exchange Privilege (continued)
the appropriate "sales charge differential" upon the exchange of such shares
for Class A shares of a fund 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 and capital gain
distributions, are treated as having paid the same sales charges applicable
to the shares on which the dividends or distributions were paid; however, 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. Class A shares held in the Fund prior to
November 7, 1994, will be deemed to have paid a maximum sales charge of 2.00%
for exchange purposes.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. SBMFM 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, SBMFM
will notify Smith Barney, and Smith Barney may, at its discretion, decide to
limit additional purchases and/or exchanges by the shareholder. Upon such a
determination, Smith Barney 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 of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
38
<PAGE>
Exchange Privilege (continued)
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below
are also applicable for exchanging shares, and exchanges will be made upon
receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing
the shares to be acquired. The Fund reserves the right to modify or
discontinue exchange privileges upon 60 days' prior notice to shareholders.
Redemption of Shares
Redemptions in General
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.
Redemption of SharesIf a shareholder holds shares in more than one Class, any
request for redemption must specify the Class being redeemed. In the event of
a failure to specify which Class, or if the investor owns fewer shares of the
Class than specified, the redemption request will be delayed until the Fund's
transfer agent receives further instructions from Smith Barney, or if the
shareholder's account is not with Smith Barney, from the shareholder
directly. The redemption proceeds will be remitted on or before the seventh
day following receipt of proper tender, except on a day on which the NYSE is
closed or as permitted under the 1940 Act in extraordinary circumstances. The
Fund anticipates that, in accordance with regulatory changes, beginning on or
about June 1, 1995, payment will be made on the third business day after
receipt of proper tender. Generally, if the redemption proceeds are remitted
to a Smith Barney brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney will
benefit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check,
will be remitted upon clearance of the check, which may take up to ten days
or more.
39
<PAGE>
Redemption of Shares (continued)
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Limited Maturity Municipals Fund
Class A, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account
number and (c) be signed by each registered owner exactly as the shares are
registered. If the shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or be accompanied by an endorsed
stock power) and must be submitted to TSSG together with the redemption
request. Any signature appearing on a redemption request, share certificate
or stock power must be guaranteed by an eligible guarantor institution such
as a domestic bank, savings and loan institution, domestic credit union,
member bank of the Federal Reserve System or 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.
Automatic Cash Withdrawal Plan
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $100 monthly or quarterly. The
withdrawal plan will be carried over on exchanges between funds or Classes of
the Fund. Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan commences. (With
respect to withdrawal plans in effect prior to November 7, 1994, any
applicable CDSC will be waived on amounts withdrawn that do not exceed 2.00%
per month of the value of a shareholder's shares subject to the CDSC.) For
further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
40
<PAGE>
Minimum Account Size
The Fund reserves the right to involuntarily liquidate
any shareholder's account in the Fund if the aggregate net asset value of the
shares held in the Fund account is less than $500. (If a shareholder has more
than one account in this Fund, each account must satisfy the minimum account
size.) The Fund, however, will not redeem shares based solely on market
reductions in net asset value. Before the Fund exercises such right,
shareholders will receive written notice and will be permitted 60 days to
bring accounts up to the minimum to avoid automatic redemption.
Performance
Yield
From time to time, the Fund may advertise the 30 day "yield" and "equivalent
taxable yield" for each Class of shares. The yield refers to the income
generated by an investment in those shares over the 30 day period identified
in the advertisement and is computed by dividing the net investment income
per share earned by the Class during the period by the maximum public
offering price per share on the last day of the period. This income is
"annualized" by assuming 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.
The equivalent taxable yield demonstrates the yield on a taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-exempt yield
for each Class. It is calculated by increasing the yield shown for the Class
to the extent necessary to reflect the payment of taxes at specified tax
rates. Thus, the equivalent taxable yield always will exceed the Fund's
yield. For more information on equivalent taxable yields, refer to the table
under "Dividends, Distributions and Taxes."
Total Return
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of sales literature. These figures are computed separately for Class A, Class
C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specific period of time assuming deduction of the maximum
sales charge, if any, from the initial amount invested and reinvestment of
all
41
<PAGE>
Performance (continued)
income dividends and capital gain distributions on the reinvestment dates at
prices calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. or similar independent services that
monitor the performance of mutual funds or other industry publications. The Fund
will include performance data for each Class in any advertisement or information
including performance data of the Fund.
Management of the Trust and the Fund
Board of Trustees
Overall responsibility for management and supervision of the Trust and 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, sub-administrator, distributor, custodian and
transfer agent. The day-to-day operations of the Fund have been delegated to
the Fund's investment adviser, administrator and sub-administrator. The
Statement of Additional Information contains background information regarding
each Trustee of the Trust and the executive officers of the Fund.
42
<PAGE>
Management of the Trust and the Fund (continued)
Investment Adviser
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the investment
advisory agreement, effective November 7, 1994, from its affiliate, Mutual
Management Corp. (Mutual Management Corp. and SBMFM are both wholly owned
subsidiaries of Holdings.) Investment advisory services continue to be
provided to the Fund by the same portfolio managers who had provided services
under the agreement with Mutual Management Corp. SBMFM (through predecessor
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of December 31, 1994,
in excess of $50.4 billion.
Subject to the supervision and direction of the Trust's Board of Trustees, SBMFM
manages the Fund's portfolio in accordance with 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 investment
advisory services rendered to the Fund, the Fund pays SBMFM a fee at the annual
rate of 0.35% of the value of the Fund's average daily net assets. For the
fiscal year ended November 30, 1994, the Fund paid investment advisory fees to
SBMFM (and its predecessor) in an amount equal to 0.26% of the value of the
Fund's average daily net assets. During the same period, the Fund's investment
adviser waived investment advisory fees in an amount equal to 0.09% of the value
of the Fund's average daily net assets.
Portfolio Management
Lawrence T. McDermott, Portfolio Manager of SBMFM, has served as Vice
President and Investment Officer 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.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended November 30, 1994, is
included in the Annual Report dated November 30, 1994. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or
phone number listed on page one of this Prospectus.
43
<PAGE>
Management of the Trust and the Fund (continued)
Administrator
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1994, the
Fund paid an administration fee of 0.15% of the value of its average daily
net assets and the administrator voluntarily waived 0.05%.
Sub-Administrator--Boston Advisors
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory, administrative and/or sub- administrative
services to investment companies which had aggregate assets under management
as of December 31, 1994, in excess of $69.2 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated July 20, 1994, Boston
Advisors is paid a portion of the administration fee paid by the Fund to SBMFM
at a rate agreed upon from time to time between Boston Advisors and SBMFM. Prior
to July 20, 1994, Boston Advisors served as the Fund's administrator.
Distributor
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be
sold to the public. Pursuant to a plan of distribution adopted by the Fund
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a
service fee with respect to Class A and Class C shares of the Fund at the
annual rate of 0.15% of the average daily net assets of the respective Class.
Smith Barney is also paid a distribution fee with respect to Class C shares
at the annual rate of 0.20% of the average daily net assets attributable to
that Class. The fees are used by Smith Barney to pay its Financial
Consultants for servicing shareholder accounts and, in the case of Class C
shares, to cover expenses primarily intended to result in the sale of those
44
<PAGE>
Distributor (continued)
shares. These expenses include: advertising expenses; the cost of printing
and mailing prospectuses to potential investors; payments to and expenses of
Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
The payments to Smith Barney Financial Consultants for
selling shares of a Class include a commission or fee paid by the investor or
Smith Barney at the time of sale and, with respect to Class C shares, a
continuing fee for servicing shareholder accounts for as long as a
shareholder remains a holder of that Class. Smith Barney Financial
Consultants may receive different levels of compensation for selling
different Classes of shares.
Payments under the Plan are not tied exclusively to the shareholder
distribution and service expenses actually incurred by Smith Barney, and the
payments may exceed expenses actually incurred by Smith Barney. The Trust's
Board of Trustees will evaluate 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
and amounts it receives under the Plan.
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."
Each Class of the Fund represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights,
privileges and preferences, except with respect to: (a) the designation of
each Class; (b) the effect of the respective sales charges for each Class;
(c) the distribution and/or service fees borne by each Class pursuant to the
Plan; (d) the expenses allocable exclusively to each Class; (e) voting rights
on matters exclusively affecting a single Class; and (f) the exchange
privilege of each Class. The Trust's Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes. The Trustees, on an ongoing basis, will consider whether
any such conflict exists and, if so, take appropriate action.
45
<PAGE>
Additional Information (continued)
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the
Fund will be voted on a Fund-wide basis on all matters except matters
affecting only the interests of one Class, in which case only shares of the
affected Class would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will be no
meetings 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, 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. The Trustees will call a
meeting for any purpose upon the written request of holders of 10% of the
Trust's outstanding shares and the Trust will assist shareholders in calling
such a meeting as required by the 1940 Act.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments.
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 listing of 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 its 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 its Prospectus so that a
shareholder having multiple accounts will receive a single Prospectus annually.
Shareholders who do not want this consolidation to apply to their accounts
should contact their Financial Consultants or TSSG.
46
<PAGE>
SMITH BARNEY
A Member of TravelersGroup [umbrella graphic]
Smith Barney
Limited Maturity
Municipals Fund
388 Greenwich Street
New York, New York 10013
Fund 163, 482, 498
FD 0246 A5
[recycled logo]
Recycled
Recyclable
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 29, 1995
SMITH BARNEY
INCOME TRUST [LOGO]
388 GREENWICH STREET NEW YORK, NEW YORK 10013__(212) 723-9218
This Statement of Additional Information supplements the
information contained in the current Prospectuses of Smith Barney
Limited Maturity Municipals Fund (the "Municipal Fund"), Smith
Barney Intermediate Maturity California Municipals Fund (the
"California Fund") and Smith Barney Intermediate Maturity New York
Municipals Fund (the "New York Fund") dated January 29, 1995, as
amended or supplemented from time to time and should be read in
conjunction with the Prospectuses. The Prospectuses may be
obtained by contacting a Smith Barney Financial Consultant, or by
writing or calling Smith Barney Income Trust (the "Trust"), of
which each of the 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 Inc.
("Smith Barney")....................................... Distributor
Smith Barney Mutual Funds
Management Inc. ("SBMFM").............................. Investment Adviser and Administrator
The Boston Company Advisors, Inc.
("Boston Advisors").................................... Sub-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.................... 5
Purchase of Shares............................................... 30
Redemption of Shares............................................. 31
Distributor...................................................... 32
Valuation of Shares.............................................. 33
Exchange Privilege............................................... 33
Performance Data................................................. 34
(See in the Prospectuses "Performance")
Taxes............................................................ 36
(See in the Prospectuses "Dividends, Distributions and Taxes")
Additional Information........................................... 38
Financial Statements............................................. 38
Appendix......................................................... A-1
</TABLE>
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUNDS
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 (age 64). Managing Partner of Dorsett McCabe
Management,
Inc., an investment counselling firm; Director of Research Corporation
Technologies, Inc., a non-profit patent-clearing and licensing firm. His address
is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee (age 68). Chairman of the Board and President of
The Dress
Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New York 10901.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Managing
Director of SBMFM; Executive Vice President and Chairman of Smith Barney
Strategy Advisers Inc.; prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"); Vice Chairman of
Shearson Asset Management; a Director of PanAgora Asset Management, Inc. and
PanAgora Asset Management Limited. His address is 388 Greenwich Street, New
York, New York 10013.
Cornelius C. Rose, Jr., Trustee (age 61). President, Cornelius C. Rose
Associates,
Inc., Financial Consultants, and Chairman and Director of Performance Learning
Systems, an educational consultant. His address is P.O. Box 355, Fair Oaks,
Enfield, New Hampshire 03748.
Stephen J. Treadway, President. Managing Director of Smith Barney; Director
and President of Mutual Management Corp. and SBMFM; and Trustee of Corporate
Income Realty Trust I. His address is 388 Greenwich Street, New York, New York
10013.
____Joseph P. Deane, Vice President and Investment Officer. Investment Officer
of SBMFM; prior to November 7, 1994, Managing Director of Greenwich Street
Advisors; prior to July 1993, Managing Director of Shearson Lehman Advisors. His
address is 388 Greenwich Street, New York, New York 10013.
____Lawrence T. McDermott, Vice President and Investment Officer. Investment
Officer of SBMFM; prior to November 7, 1994, Managing Director of Greenwich
Street Advisors; prior to July 1993, Managing Director of Shearson Lehman
Advisors, the predecessor to Greenwich Street Advisors. His address is 388
Greenwich Street, New York, New York 10013.
____Lewis E. Daidone, Senior Vice President and Treasurer. Managing Director and
Chief Financial Officer of Smith Barney; Director and Senior Vice President of
SBMFM. His address is 388 Greenwich Street, New York, New York 10013.
____Christina T. Sydor, Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich Street, New York,
New York 10013.
____Each of the Trust's Trustees serves as a trustee, general partner and/or
director of other mutual funds for which Smith Barney serves as distributor. As
of January 1, 1995, the Trustees and Officers owned less than 1.00% of each
Fund's outstanding shares.
____No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as an officer or Trustee of
the Trust. The Trust pays each Trustee who is not an officer, director or
employee of Smith Barney or any of its affiliates, a fee of $4,000 per annum
plus $500 per meeting attended, and reimburses them for travel and
2
<PAGE>
out-of-pocket expenses. For the calendar year ended December 31, 1994, the
Trustees of the Trust were paid the following compensation:
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE COMPENSATION
COMPENSATION FROM THE
FROM THE SMITH BARNEY
TRUSTEE TRUST MUTUAL FUNDS
----------------------------------- --------- ------------
<S> <C> <C>
Burt N. Dorsett................... $ 6,500 $ 34,300
Elliot S. Jaffe....................... 6,500 33,300
Cornelius C. Rose, Jr........... 6,500 33,300
</TABLE>
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to the Trust pursuant to a transfer of the
investment advisory agreement effective November 7, 1994 from its affiliate,
Mutual Management Corp. (Mutual Management Corp. and SBMFM are both wholly owned
subsidiaries of Smith Barney Holdings Inc. ("Holdings").) Holdings is a wholly
owned subsidiary of The Travelers Inc. ("Travelers"). The investment advisory
agreement is dated July 30, 1993 (the "Advisory Agreement"), and was first
approved by the Trustees, including a majority of those Trustees who are not
"interested persons" of the Trust or Smith Barney, on April 7, 1993. The
services provided by SBMFM under the Advisory Agreement are described in the
Prospectuses under "Management of the Trust and the Fund." SBMFM pays the salary
of any officer and employee who is employed by both it and the Trust. SBMFM
bears all expenses in connection with the performance of its services.
____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>
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>
Municipal Fund..................... $ 93,010 $135,127
California Fund.................... $ 0 $ 83,727
New York Fund...................... $ 28,605 $130,230
</TABLE>
____For the fiscal year ended November 30, 1994, the Funds paid SBMFM and/or its
predecessor investment adviser, investment advisory fees and SBMFM waived fees
and reimbursed expenses as follows:
<TABLE>
<CAPTION>
FEES WAIVED
AND EXPENSES
FUND FEES PAID REIMBURSED
----------------------------------- --------- ------------
<S> <C> <C>
Municipal Fund..................... $245,303 $ 82,149
California Fund.................... $ 12,828 $ 98,519
New York Fund...................... $ 97,097 $144,592
</TABLE>
____SBMFM also serves as administrator to the Trust pursuant to a written
agreement dated April 20, 1994 (the "Administration Agreement"), which was most
recently approved by the Trustees of the Trust, including a majority of Trustees
who are not "interested persons" of the Trust or SBMFM, on July 20, 1994. The
services provided by SBMFM under the Administration Agreement are described in
the Prospectuses under "Management of the Trust and the Fund." SBMFM pays the
salary of any officer and employee who is employed by both it and the Trust and
bears all expenses in connection with the performance of its services.
____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>
Municipal Fund..................... $ 0 $ 38,437
California Fund.................... $ 0 $ 10,927
New York Fund...................... $ 0 $ 23,884
</TABLE>
3
<PAGE>
____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>
Municipal Fund..................... $ 52,571 $ 77,793
California Fund.................... $ 0 $ 39,799
New York Fund...................... $ 16,167 $ 74,596
</TABLE>
____For the fiscal year ended November 30, 1994, the Funds paid administration
fees and fees were waived as follows:
<TABLE>
<CAPTION>
FUND FEES PAID FEES WAIVED
----------------------------------- --------- ------------
<S> <C> <C>
Municipal Fund..................... $140,173 $ 46,942
California Fund.................... $ 7,330 $ 56,297
New York Fund...................... $ 55,483 $ 82,625
</TABLE>
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors serves as sub-administrator to the Trust pursuant to a written
agreement (the "Sub-Administration Agreement") dated April 20, 1994, which was
most recently approved by the Trust's Board of Trustees, including a majority of
Trustees who are not "interested persons" of the Trust or Boston Advisors, on
July 20, 1994. Under the Sub-Administration Agreement, Boston Advisors is paid a
portion of the administration fee paid by the Trust to SBMFM at a rate agreed
upon from time to time between Boston Advisors and SBMFM. Boston Advisors is a
wholly owned subsidiary of The Boston Company, Inc. ("TBC"), a financial
services holding company, which is in turn a wholly owned subsidiary of Mellon
Bank Corporation ("Mellon").
____Certain of the services provided to the Trust by Boston Advisors pursuant to
the Sub-Administration Agreement are described in the Prospectuses under
"Management of the Trust and the Fund." In addition to those services, Boston
Advisors pays the salaries of all officers and employees who are employed by
both it and the Trust, maintains office facilities for the Trust, 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 Trust's shareholders and
prepares tax returns and reports to and filings with the Securities and Exchange
Commission (the "SEC") and state Blue Sky authorities. Boston Advisors bears all
expenses in connection with the performance of its services.
____The Trust bears expenses incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees who are not
officers, directors, shareholders or employees of Smith Barney, SBMFM or Boston
Advisors; SEC fees and state Blue Sky qualification fees; charges of custodians;
transfer and dividend disbursing agent fees; certain insurance premiums; outside
auditing and legal expenses; costs of maintaining corporate existence; costs of
investor services (including allocated telephone and personnel expenses); costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports and
shareholder meetings; and meetings of the officers or Board of Trustees of the
Trust.
____SBMFM and Boston Advisors have agreed that if in any fiscal year the
aggregate expenses of the Trust (including fees pursuant to the Advisory
Agreement, Administration and Sub-Administration Agreements, but excluding
interest, taxes, brokerage fees paid pursuant to the Trust's services and
distribution plan, and, with the prior written consent of the necessary state
securities commissions, extraordinary expenses) exceed the expense limitation of
any state having jurisdiction over the Trust, SBMFM and Boston Advisors will, to
the extent required by state law, reduce their fees by the amount of such excess
expenses, such amount to be allocated between them in the proportion that their
respective fees bear to the aggregate of such fees paid by the Trust. Such fee
reductions, if any, will be reconciled on a monthly basis. The most restrictive
state limitation currently applicable to the Trust would require SBMFM and
Boston Advisors to reduce their fees in any year that such expenses exceed 2.50%
of the first $30 million of average daily net assets, 2.00% of the next $70
million of average daily net assets and 1.50% of the remaining average
4
<PAGE>
daily net assets. No fee reduction was required for the fiscal period ended
November 30, 1992, and the 1993 and 1994 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Trust. O'Melveny & Myers
acts as special California counsel for the California Fund and has reviewed
the portions of
the Prospectus and this Statement of Additional Information concerning
California taxes and the description of the special considerations relating to
investments in California municipal securities. The Trustees who are not
"interested persons" of the Trust have selected Stroock & Stroock & Lavan as
their counsel.
____KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue, New York,
New York 10154, have been selected to serve as auditors of the Trust and to
render an opinion on the Trust's financial statements for the fiscal year ended
November 30, 1995. Coopers & Lybrand L.L.P., independent auditors, served as
auditors of the Trust and rendered an opinion on the financial statements for
the fiscal year ended November 30, 1994.
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 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 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 Funds will invest in obligations
issued by an instrumentality of the United States government unless SBMFM
determines that the instrumentality's credit risk does not make its securities
unsuitable for investment by the Fund.
MUNICIPAL OBLIGATIONS
Each of the 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
5
<PAGE>
(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 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.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA
EXEMPT OBLIGATIONS
As indicated in the California Fund's Prospectus, the 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 significant financial considerations relating to the Fund's
investments in California Exempt Obligations are summarized below. This summary
information is derived principally 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 Statement of Additional
Information and does not purport to be a complete description of any of the
considerations mentioned herein. The accuracy and completeness of the
information contained in such official statements has not been independently
verified.
6
<PAGE>
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. 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, projected the State would have an accumulated deficit of about $2.75
billion by June 30, 1993 essentially unchanged from the prior year. The Governor
proposed to eliminate this deficit over an 18-month period. 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 1993-94 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 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 was extended through December 31, 1993, for allocation to counties
for public safety programs. The voters approved Proposition 172 in November
1993 and the 0.5% sales tax was extended 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.
2. The 1993-94 Budget Act projected 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. The 1993-94 Budget Act assumed receipt of 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
7
<PAGE>
State, which would reduce a like amount of general fund expenditures. About
$411 million of this amount was one-time funding. Congress ultimately
appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs, and $400
million in support for higher education (partly offset by fee increases at
all three units of higher education) and various miscellaneous cuts
(totalling approximately $150 million) in State government services in many
agencies, up to 15%.
5. A 2-year suspension of the renters' tax credit ($390 million expenditure
reduction in 1993-94).
6. 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 of the renters' tax credit. The 1993-94 Budget Act
suspended the 4% automatic budget reduction "trigger," as was done in 1992-93 so
that cuts could be focused.
Administration reports during the course of the 1993-94 Fiscal Year have
indicated that while economic recovery appears to have started in the second
half of the fiscal year, recessionary conditions continued longer than has been
anticipated when the 1993-94 Budget Act was adopted. Overall, revenues for the
1993-94 Fiscal Year were about $800 million lower than original projections, and
expenditures were about $780 million higher, primarily because of higher health
and welfare caseloads, lower property taxes which require greater State support
for K-14 education to make up the shortfall, and lower than anticipated Federal
government payments for immigration-related costs. The reports in May and June,
1994, indicated that revenues in the second half of the 1993-94 Fiscal Year have
been very close to the projections made in the Governor's Budget of January 10,
1994, which is consistent with a slow turnaround in the economy.
The Department of Finance's July 1994 Bulletin, including the final June
receipts, reported that June revenues were $114 million (2.5%) above projection,
with final end-of-year results at $377 million (about 1%) above the May Revision
projections. Part of this result was due to end-of-year adjustments and
reconciliations. Personal income tax and sales tax continued to track
projections very well. The largest factor in the higher than anticipated
revenues was from bank and corporation taxes, which were $140 million (18.4%)
above projection in June. While the higher June receipts are reflected in the
actual 1993-94 Fiscal Year cash flow results, and help the starting cash balance
for the 1994-95 Fiscal Year, the Department of Finance has not adjusted any of
its revenue projections for the 1994-95 or 1995-96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the deficit retirement
plan, which was part of the 1993-94 Budget Act, by issuing $1.2 billion of
revenue anticipation warrants in February 1994 maturing December 21, 1994. This
borrowing reduced the cash deficit at the end of the 1993-94 Fiscal Year.
Nevertheless, because of the $1.5 billion variance from the original 1993-94
Budget Act assumptions, the General Fund ended the fiscal year at June 30, 1994
carrying forward an accumulated deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced internal borrowable
cash resources, in addition to the $1.2 billion of revenue anticipation warrants
issued as part of the deficit retirement plan, the State issued an additional
$2.0 billion of revenue anticipation warrants, maturing July 26, 1994, which
were needed to fund the State's obligations and expenses through the end of the
1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties, which
were
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declared as State and Federal disaster areas by January 18. Current estimates of
total property damage (private and public) are in the range of $20 billion but
these estimates still are subject to change.
Despite such damage, on the whole, the vast majority of structures in the
areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage, validating
the cumulative effect of strict building codes and thorough preparation for such
an emergency by the State and local agencies.
State-owned facilities, including transportation corridors and facilities
such as Interstate Highways 5 and 10 and State Highways 14, 118 and 210
sustained damage. Most of the major highways (Interstate 5 and 10) have now been
repaired. The campus of California State University at Northridge (very near the
epicenter) suffered an estimated $350 million damage, resulting in temporary
closure of the campus. It has reopened using borrowed facilities elsewhere in
the area and many temporary structures. There was also some damage to the
University of California at Los Angeles and to an office building in Van Nuys
(now open after a temporary closure). Overall, except for the temporary road and
bridge closures, and CSU-Northridge, the earthquake did not and is not expected
to significantly affect State government operations.
The State in conjunction with the Federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The Federal government will provide
substantial earthquake assistance.
The President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of at least $9.5 billion of
Federal funds for earthquake relief, including assistance to homeowners and
small businesses, and costs for repair of damaged public facilities. The
Governor originally proposed that the State will have to pay about $1.9 billion
for earthquake relief costs, including a 10% match to some of the Federal funds,
and costs for some programs not covered by the Federal aid. The Governor
proposed to cover $1.05 billion of these costs from a general obligation bond
issue which was on the June 1994 ballot, but it was not approved by the voters.
The Governor subsequently announced that the State's share for transportation
projects would come from existing Department of Transportation funds (thereby
delaying other, non-earthquake related projects), that the State's share for
certain other costs (including local school building repairs) would come from
reallocating existing bond funds, and that a proposed program for homeowner and
small business aid supplemental to Federal aid would have to be abandoned. Some
other costs will be borrowed from the Federal government in a manner similar to
that used by the State of Florida after Hurricane Andrew; pursuant to Senate
Bill 2383, repayment will have to be addressed in 1995-96 or beyond.
The 1994-95 Fiscal Year will represent the fourth consecutive year the
Governor and Legislature will be faced with a very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary adjustments have
already been made in the last three years. The Governor's Budget proposal, as
updated in May and June, 1994, recognized that the accumulated deficit could not
be repaid in one year, and proposed a two-year solution. The budget proposal
sets forth revenue and expenditure forecasts and revenue and expenditure
proposals which result in operating surpluses for the budget for both 1994-95
and 1995-96, and lead to the elimination of the accumulated budget deficit,
estimated at about $2.0 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects
revenues and transfers of $41.9 billion, $2.1 billion higher than revenues in
1993-94. This reflects the Administration's forecast of an improving economy.
Also included in this figure is a projected receipt of about $360 million from
the Federal government to reimburse the State's cost of incarcerating
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undocumented immigrants. The State will not know how much the Federal government
will actually provide until the Federal fiscal year 1995 Budget is completed.
Completion of the Federal budget is expected by October 1994. The Legislature
took no action on a proposal in the January Governor's Budget to undertake an
expansion of the transfer of certain programs to counties, which would also have
transferred to counties 0.5% of the State's current sales tax.
The Budget Act projects Special Fund revenues of $12.1 billion, a decrease
of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of $40.9 billion,
an increase of $1.6 billion over 1993-94. The Budget Act also projects Special
Fund expenditures of $13.7 billion, a 5.4% increase over 1993-94 estimated
expenditures. The principal features of the Budget Act were the following:
1. Receipt of additional Federal aid in 1994-95 of about $400 million for
costs of refugee assistance and medical care for undocumented immigrants,
thereby offsetting a similar General Fund cost. The State will not know how
much of these funds it will receive until the Federal fiscal year 1995
Budget is passed.
2. Reductions of approximately $1.1 billion in health and welfare costs. A
2.3% reduction in Aid to Families with Dependent Children ("AFCD") payments
(equal to about $56 million for the entire fiscal year) has been
suspended by court order.
3. A General Fund increase of approximately $38 million in support for the
University of California and $65 million for California State University. It
is anticipated that student fees for both the U.C. and the C.S.U. will
increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by $526 million
from 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provides approximately $4,217 per student for K-12 schools, equal to
the level in the past three years.
5. Legislation enacted with the Budget clarifies laws passed in 1992 and
1993 which require counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented a method of making such transfers which provided less money for
schools if there were redevelopment agency projects. The new legislation
bans this method of transfer. If all counties had implemented this method,
General Fund aid to K-12 schools would have been $300 million higher in each
of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for anticipated growth in the
State's prison inmate population, including provisions for implementing
recent legislation (the so-called "Three Strikes" law) which requires
mandatory life prison terms for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund transfers ($255
million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation enacted
for the 1993-94 Budget, the renters' tax credit was suspended for two years
(1993 and 1994). A ballot proposition to permanently restore the renters' tax
credit after this year failed at the June, 1994 election. The Legislature
enacted a further one-year suspension of the renters' tax credit, for 1995,
saving about $390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumes that the State will use a cash flow borrowing
program in 1994-95 which combines one-year notes and two-year warrants, which
have now been issued. Issuance of warrants allows the State to defer repayment
of approximately $1.0 billion of its accumulated budget deficit into the 1995-96
Fiscal Year.
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The State's cash flow management plan for the 1994-95 fiscal year included
the issuance of $4.0 billion of revenue anticipation warrants on July 26, 1994,
to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96 Fiscal Year is
necessarily more imprecise than for the current fiscal year and entails greater
risks of variance from assumptions, and because the Governor's two-year budget
plan assumes receipt of a large amount of Federal aid in the 1995-96 Fiscal Year
for immigration-related costs which is uncertain, the Legislature enacted a
backup budget adjustment mechanism to mitigate possible deviations from
projected revenues, expenditures or internal borrowable resources which might
reduce available cash resources during the two-year plan, so as to assure
repayment of the warrants.
Pursuant to Section 12467 of the California Government Code, enacted by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the State
Controller was required to make a report by November 15, 1994 on whether the
projected cash resources for the General Fund as of June 30, 1995 will decrease
more than $430 million from the amount projected by the State in its Official
Statement in July, 1994 for the sale of $4,000,000,000 of Revenue Anticipation
Warrants. On November 15, 1994, the State Controller issued the report on the
State's cash position required by the Budget Adjustment Law. The report
indicated that the cash position of the General Fund on June 30, 1995 would be
$581 million better than was estimated in the July, 1994 cash flow projections
and therefore, no budget adjustment procedures will be invoked for the 1994-95
fiscal year. The Law would only be implemented if the
State Controller estimated that borrowable resources on June 30, 1995 would be
at least $430 million LOWER than projected.
The State Controller's report identified a number of factors which have led
to the improved cash position of the State. Estimated revenues and transfers for
the 1994-95 fiscal year other than Federal reimbursement for immigration costs
were up about $650 million. The largest portion of this was in higher bank and
corporation tax receipts, but all major tax sources were above original
projections. However, most of the Federal immigration aid revenues projected in
connection with the 1994-95 Budget Act and in the July, 1994 cash flows will not
be received, as indicated above, leaving a net increase in revenues of $322
million.
On the expenditure side, the State Controller reported that estimated
reduced caseload growth in health and welfare programs, reduced school
enrollment growth, and an accounting adjustment reducing a transfer from the
General Fund to the Special Fund for Economic Uncertainties resulted in overall
General Fund expenditure reductions (again before adjusting for Federal aid) of
$672 million. However, the July, 1994 cash flows projected that General Fund
health and welfare and education expenditures would be offset by the anticipated
receipt of $407 million in Federal aid for illegal immigrant costs. The State
Controller now estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of balances in special
funds available for internal borrowing resulted in an estimated reduction of
such borrowable resources of $6 million. The combination of these factors
results in the estimated improvement of the General Fund's cash position of $581
million. The State Controller's revised cash flow projections for 1994-95 have
allocated this improvement to two line items: an increase from $0 to $427
million in the estimated ending cash balance of the General Fund on June 30,
1995, and an increase in unused borrowable resources of $154 million.
The State Controller's report indicated that there was no anticipated cash
impact in the 1994-95 fiscal year for recent initiative on "three strikes"
criminal penalties and illegal immigration which were approved by voters on
November 8, 1994. At a hearing before a committee of the Legislature on November
15, 1994, both the Legislative Analyst and the Department of
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Finance concurred in the reasonableness of the State Controller's report. (The
Legislative Analyst had issued a preliminary analysis on November 1, 1994 which
reached a conclusion very close to that of the State Controller.) The State
Controller's report makes no projections about whether the Law may have to be
implemented in 1995-96. However, both the State Controller and the Legislative
Analyst in the November 15 hearing noted that the July, 1994 cash flows for the
1995-96 fiscal year place continued reliance on large amounts of federal
assistance for immigration costs, which did not materialize this year,
indicating significant budget pressures for next year. The Department of Finance
indicated that the budgetary issues identified in the hearing would be addressed
in the Governor's Budget proposal for the 1995-96 fiscal year, which will be
released in early January, 1995.
The Director of Finance is required to include updated cash-flow statements
for the 1994-95 and 1995-96 Fiscal Years in the May revision to the 1995-96
Fiscal Year budget proposal. By June 1, 1995, the State Controller must concur
with these updated statements or provide a revised estimate of the cash
condition of the General Fund for the 1994-95 and the 1995-96 Fiscal Years. For
the 1995-96 Fiscal Year, Chapter 135 prohibits any external borrowing as of June
30, 1996, thereby requiring the State to rely solely on internal borrowable
resources, expenditure reductions or revenue increases to eliminate any
projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in conjunction
with the Legislative Analyst's Office, review the estimated cash condition of
the General Fund for the 1995-96 Fiscal Year. The "1996 cash shortfall" shall be
the amount necessary to bring the balance of unused borrowable resources on June
30, 1996 to zero. On or before December 1, 1995, legislation must be enacted
providing for sufficient General Fund expenditure reductions, revenue increases,
or both, to offset any such 1996 cash shortfall identified by the State
Controller. If such legislation is not enacted, within five days thereafter the
Director of Finance must reduce all General Fund appropriations for the 1995-96
Fiscal Year, except the Required Appropriations, by the percentage equal to the
ratio of said 1996 cash shortfall to total remaining General Fund appropriations
for the 1995-96 Fiscal Year, excluding the Required Appropriations.
On December 6, 1994, Orange County, California and its Investment Pool (the
"Pool") filed for bankruptcy under Chapter 9 of the United States Bankruptcy
Code. Approximately 187 California public entities, substantially all of which
are public agencies within the County, are investors in the Pool. Many of the
agencies have various bonds, notes or other forms of indebtedness outstanding,
in some instances the proceeds of which have been invested in the Pool. Such
agencies also have additional funds invested in the Pool. Since the filing,
investor access to monies in the Pool has been by Court order only and severely
limited. Various representatives of the County have indicated that the Pool
expects to lose a substantial amount of its original principal invested. The
County has employed various investment advisors to restructure the Pool. Such
restructuring has resulted in the sale of a significant amount of the Pool's
portfolio resulting in losses estimated to be in excess of $2 billion. The
County has indicated that further losses could be incurred as restructuring
continues. It is anticipated that such losses may result in delays or failures
of the County as well as investors in the Pool to make scheduled debt service
payments. Further, the County expects substantial budget deficits to occur in
Fiscal Year 1995 with possibly similar effects upon operations of investors in
the Pool. The County failed to make certain deposits to a fund for repayment of
$169,000,000 aggregate principal amount of its short term indebtedness resulting
in a technical default under its note resolution. There has been no default in
payment to noteholders. Principal and interest on such notes is due on June 30,
1995. Additionally, the County has defaulted in its obligation to accept tenders
of its $110,200,000 aggregate principal amount of its Taxable Pension Obligation
Bonds, Series B used to finance
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County pension obligations. Interest at a rate set pursuant to the bond
documents has been timely paid on such Pension Bonds. Principal and interest
payments on other indebtedness of the County and the investors will come due at
various times and amounts throughout 1995. Both S&P and Moody's have suspended
or downgraded ratings on various debt securities of the County and certain of
the investors in the Pool. Such suspensions or downgradings could affect both
price and liquidity of such securities. The Fund is unable to predict when funds
may be released from the Pool to investors, the amount of such funds, if any,
whether additional technical and payment defaults by the County and/or investors
in the pool and the financial impact upon the value of securities of the County
and the investors in the Pool.
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 Statement
of Additional Information.
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 and 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.
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.
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 Article XIIIA defines
"full cash value" to mean "the County Assessor's valuation of real property as
shown on the
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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
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
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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 took effect on July 1, 1990. 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.
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In September 1988, the California Court of Appeals 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 is 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.
Certain California Exempt 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 Exempt 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
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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 Exempt 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 Exempt 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 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 Exempt 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
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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 Exempt 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 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, (I.E., California Exempt
Obligations) 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 Exempt 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 New York Fund's Prospectus, the 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 significant financial considerations relating to the Fund's
investment 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 have not been independently verified.
STATE ECONOMY. New York State (the "State") is the third 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
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services employment, and a very 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 a
large portion of 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 position. 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 1994-95 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. It stood at 7.7% in 1993. The
total employment growth rate in the State has been below the national average
since 1984. State per capita personal income remains above the national average.
State per capita income for 1993 was $24,623, which is 18.3% above the 1993
national average of $20,817. During the past ten years, total personal income in
the State rose slightly faster than the national average only in 1986 through
1989.
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 is required
to submit to the Legislature quarterly budget updates which include a revised
cash-basis State financial plan and an explanation of any changes from the
previous State financial plan.
The State's budget for the 1994-95 fiscal year was enacted by the
Legislature on June 7, 1994, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
financial plan for the 1994-95 fiscal year was formulated on June 16, 1994 and
is based upon the State's budget as enacted by the Legislature and signed into
law by the Governor (the "1994-95 State Financial Plan"). This delay in the
enactment of the State's 1994-95 fiscal year budget may reduce the effectiveness
of several of the actions proposed.
The State issued its second quarterly update to the cash basis 1994-95 State
Financial Plan on October 28, 1994. The update projects a year-end surplus of
$14 million in the General Fund, with estimated receipts reduced by $267 million
and estimated disbursements reduced by $281 million, compared to the 1994-95
State Financial Plan as initially formulated.
The 1994-95 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 1994-95 State Financial Plan, actual results may
differ and have differed materially in recent years, from projections made at
the outset of a fiscal year. There can be no assurance that the State will not
face substantial potential budget gaps in future years resulting from a
significant disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements in future
fiscal years.
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RECENT FINANCIAL RESULTS. The General Fund is the general operating fund of the
State and is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund and
receives almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1994-95 fiscal year, the General Fund is expected to
account for approximately 52% of total governmental-fund receipts and 51% of
total governmental-fund disbursements.
The General Fund is projected to be balanced on a cash basis for the 1994-95
fiscal year. Total receipts are projected to be $34.321 billion, an increase of
$2.092 billion over total receipts in the prior fiscal year. Total General Fund
disbursements are projected to be $34.248 billion, an increase of $2.351 billion
over the total amount disbursed and transferred in the prior fiscal year.
The State's financial position on a GAAP (generally accepted accounting
principles) basis as of March 31, 1993 included an 1991-92 accumulated deficit
in its combined governmental funds of $681 million. Liabilities totalled $12.864
billion and assets of $12.183 billion were available to liquidate these
liabilities.
The State's financial operations have improved during recent fiscal years.
During the period 1989-90 through 1991-92, the State incurred General Fund
operating deficits that were closed with receipts from the issuance of tax and
revenue anticipation notes. The national recession and then the lingering
economic slowdown in the New York and regional economy, resulted in repeated
shortfall in receipts and three budget deficits. For its 1992-93 and 1993-94
fiscal years, however, the State recorded balanced budgets on a cash basis, with
substantial fund balances in each year.
DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation 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 general obligation 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 December 31, 1993 was approximately $2.273
billion.
The State may undertake short-term borrowings without voter approval (a) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (b) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued bonds, by issuing general obligation 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 New
York State general obligation and New York State-guaranteed bonds and notes are
legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but are not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition of equipment,
and expect to meet their debt service requirements through the receipt of rental
or other contractual payments made by the State. Although these financing
arrangements involve a contractual agreement by the State to make payments to a
public authority, municipality or other entity, the State's obligation to make
such payments is generally expressly made subject to appropriation by the
Legislature and the actual availability of money to the State for making the
payments. The State has also entered into a contractual-
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obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating the New York Local Government Assistance Corporation ("LGAC"), a public
benefit corporation empowered to issue long-term obligations to fund certain
payments to local governments traditionally funded through New York State's
annual seasonal borrowing. The legislation empowered LGAC to issue its bonds and
notes in an amount not in excess of $4.7 billion (exclusive of certain refunding
bonds) plus certain other amounts. Over a period of years, the issuance of these
long-term obligations, which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal borrowing. 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 the need for additional borrowing and
provided 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. As of December
1994, LGAC had issued bonds to provide net proceeds of $3.856 billion and has
been authorized to issue its bonds to provide net proceeds of up to an
additional $315 million during the State's 1994-95 fiscal year. The impact of
this borrowing, together with the availability of certain cash reserves, is
that, for the first time in nearly 35 years, the 1994-95 State Financial Plan
includes no short-term seasonal borrowing.
In April 1993, legislation was enacted proposing significant constitutional
changes to the long-term financing practices of the State and the Authorities.
The Legislature passed a proposed constitutional amendment that would permit
the State, 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,
after its effective date, lease-purchase and contractual-obligation financing
mechanisms for State facilities. Public hearings were held on the proposed
constitutional amendment during 1993. Following these hearings, in February
1994, the Governor and the State Comptroller recommended a revised
constitutional amendment which would further tighten the ban on lease-purchase
and contractual-obligation financing, incorporate existing lease-purchase and
contractual-obligation debt under the proposed revenue bond cap while
simultaneously reducing the size of the cap. After considering these
recommendations, the Legislature passed a revised constitutional amendment which
tightens the ban, and provides for a phase-in to a lower cap. Before the
approved constitutional amendment or any revised amendment enacted in 1994 can
be presented to the voters for their consideration, it must be passed by a
separately elected legislature. The amendment must therefore be passed by the
newly elected Legislature in 1995 prior to presentation to the voters at the
earliest in November 1995. The amendment could not become effective before
January 1, 1996.
____On January 13, 1992, S&Preduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on
the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative rating
outlook assessment on State general obligation debt. On April
26, 1993, S&P revised the rating outlook assessment to stable. On
February 14, 1994, S&P raised its outlook to positive and, on
February 28, 1994, confirmed its A- rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-
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liability State lease purchase and contractual obligations from A to Baa1. On
February 28, 1994, Moody's reconfirmed its A rating on the State's general
obligation long-term indebtedness.
____The State anticipates that its capital programs will be financed, in part,
by State and public authorities borrowings in 1994-95. The State expects to
issue $374 million in general obligation bonds (including $140 million for
purposes of redeeming outstanding bond anticipation notes) and $140 million in
general obligation commercial paper. The Legislature has also authorized the
issuance of up to $69 million in certificates of participation during the
State's 1994-95 fiscal year for equipment purchases. The projection of the State
regarding its borrowings for the 1994-95 fiscal year may change if circumstances
require.
____Principal and interest payments on general obligation bonds and interest
payments on bond anticipation notes and on tax and revenue anticipation notes
were $782.5 million for the 1993-94 fiscal year, and are estimated to be $786.3
million for the 1994-95 fiscal year. These figures do not include interest
payable on State General Obligation Refunding Bonds issued in July 1992
("Refunding Bonds") to the extent that such interest was paid from an escrow
fund established with the proceeds of such Refunding Bonds. Principal and
interest payments on fixed rate and variable rate bonds issued by LGAC were
$239.4 million for the 1993-94 fiscal year, and are estimated to be $289.9
million for 1994-95. State lease-purchase rental and contractual obligation
payments for 1993-94, including State installment payments relating to
certificates of participation, were $1.258 billion and are estimated to be
$1.495 billion in 1994-95.
____New York 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.
LITIGATION. Certain litigation pending against the State or its officers or
employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (a)
the validity of agreements and treaties by which various Indian tribes
transferred title to the State of certain land in central and upstate New York;
(b) certain aspects of the State's Medicaid policies, including its rates,
regulations and procedures; (c) contamination in the Love Canal area of Niagara
Falls; (d) action against the State and City officials alleging inadequate
shelter allowances to maintain proper housing; (e) challenges to the practice of
reimbursing certain Office of Mental Health patient care expenses from the
client's Social Security benefits; (f) alleged responsibility of the State's
officials to assist in remedying racial segregation in the City of Yonkers; (g)
action in which the State is a third party defendant, for injunctive or other
appropriate relief, concerning liability for the maintenance of stone groins
constructed along certain areas of Long Island's shoreline; (8) challenges by
commercial insurers, employee welfare benefit plans, and health maintenance
organizations to Section 2807-c of the Public Health Law, which imposes 13%, 11%
and 9% surcharges on inpatient hospital bills and a bad debt and charity care
allowance on all hospital bills and hospital bills paid by such entities; (9)
challenge by a long distance carrier to the constitutionality of Tax Law
Section186-a(2-a) which restricted certain deduction of local access service
fees and (10) challenges to certain aspects of petroleum business taxes.
A number of cases have also been instituted against the State challenging
the constitutionality of various public authority financing programs.
In a proceeding commenced on August 6, 1991 (SCHULZ, ET AL. V. STATE OF NEW
YORK, ET AL., Supreme Court, Albany County), petitioners challenge the
constitutionality of two bonding programs of the New York State Thruway
Authority authorized by Chapters 166 and 410 of the Laws of 1991. In 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
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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 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. On June 30, 1994,
the Court of Appeals unanimously affirmed the rulings of the trial court and the
Appellate Division in favor of the State.
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. As a result, the State's Comptroller has
developed a plan to restore the State's retirement systems to prior funding
levels. Such funding is expected to exceed prior levels by $30 million in fiscal
1994-95, $63 million in fiscal 1995-96, $116 million in fiscal 1996-97, $193
million in fiscal 1997-98, peaking at $241 million in fiscal 1998-99. Beginning
in fiscal 2001-02, State contributions required under the Comptroller's plan are
projected to be less than that required under the prior funding method. As a
result of the United States Supreme Court decision in the case of STATE OF
DELAWARE v. STATE OF NEW YORK, on January 21, 1994, the State entered into a
settlement agreement with Delaware. The State made an immediate $35 million
payment to Delaware and agreed to make annual payments of $33 million in each of
the next five fiscal years. In return, Delaware has agreed to withdraw its
claims and its request for summary judgment. The State and Massachusetts have
also executed a settlement agreement which provides for aggregate payments by
New York State of $23 million, payable over five consecutive years. Litigation
continues with respect to other parties and the State may be required to make
additional payments during the State's 1994-95 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 1994-95
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 Revised 1994-95 State Financial Plan. An adverse decision in any of
these proceedings could exceed the amount of the Revised 1994-95 State Financial
Plan reserve for the payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced Revised 1994-95 State Financial
Plan. In its audited financial statements for the fiscal year ended March 31,
1994, the State reported its estimated liability for awarded and anticipated
unfavorable judgments to be $675 million.
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Although other litigation is pending against the State, except as described
above, no current litigation involves the State's authority, as a matter of law,
to contract indebtedness, issue its obligations, or pay such indebtedness when
it matures, or affects the State's power or 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, in part, 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. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations, particularly with respect to debt that are
State-supported or State-related. As of September 30, 1993, date of the latest
data available, there were 18 Authorities that had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $63.5 billion. As of March 31, 1994, aggregate public
authority debt outstanding as State-supported debt was $21.1 billion and as
State-related debt was $29.4 billion.
Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, the State has
provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for 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. 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 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. 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 the State. In that year the City lost access to
public credit markets. The City was not able to sell short-term notes to the
public again until 1979.
In 1975, S&P suspended its A rating of City bonds. This
suspension remained in effect until March 1981, at which time the City received
an investment grade rating of BBB from S&P. On July 2, 1985,
S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 2, 1993, S&P reconfirmed its A-
rating of City bonds, continued its negative rating outlook assessment and
stated that maintenance of such rating depended upon the City's making further
progress towards reducing budget gaps in the outlying years. Moody's ratings of
City bonds were revised in November 1981 from B (in effect since 1977) to Ba1,
in November 1983 to Baa, in December 1985 to Baa1, in May 1988 to A and again in
February 1991 to Baa1. On January 17, 1995, S&P placed
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the City's general obligation bonds on its CreditWatch list which may portend a
rating downgrade from the agency in the upcoming months.
The City is heavily dependent on 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 December
31, 1993, MAC had outstanding an aggregate of approximately $5.204 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.
The staffs of OSDC and the Control Board issued periodic reports on the
City's financial plans, as modified, analyzing forecasts of revenues and
expenditures, cash flow, and debt service requirements, as well as compliance
with the financial plan, as modified, by the City and its Covered Organizations
(I.E., those which receive or may receive monies from the City directly,
indirectly or contingently). OSDC staff reports issued during the mid-1980's
noted that the City's budgets benefited from a rapid rise in the City's economy,
which boosted the City's collection of property, business and income taxes.
These resources were used to increase the City's workforce and the scope of
discretionary and mandated City services. Subsequent OSDC staff reports examined
the 1987 stock market crash and the 1989-92 recession, which affected the City's
region more severely than the nation, and attributed an erosion of City revenues
and increasing strain on City expenditures to that recession. According to a
recent OSDC staff report, the City's economy is now slowly recovering, but the
scope of that recovery is uncertain and unlikely, in the foreseeable future, to
match the expansion of the mid-1980's. Also, staff reports of OSDC and the
Control Board have indicated that the City's recent balanced budgets have been
accomplished, in part, through the use of non-recurring resources, tax increases
and additional State assistance; that the City has not yet brought its long-term
expenditures in line with recurring revenues; and that the City is therefore
likely to continue to face
25
<PAGE>
future projected budget gaps requiring the City to increase revenues and/or
reduce expenditures. According to the most recent staff reports of OSDC and the
Control Board, during the four-year period covered by the current financial
plan, the City is relying on obtaining substantial resources from initiatives
needing approval and cooperation of its municipal labor unions, Covered
Organizations and City Council, as well as the state and Federal governments,
among others.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, 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 New York State.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The City has issued $1.75 billion of notes for seasonal
financing purposes during fiscal year 1994. The City's capital financing program
projects long-term financing requirements of approximately $17 billion for the
City's fiscal years 1995 through 1998. The major capital requirements include
expenditures for the City's water supply and sewage disposal systems, roads,
bridges, mass transit, schools, hospitals and housing. In addition to financing
for new purposes, the City and the New York City Municipal Water Finance
Authority have issued refunding bonds totalling $1.8 billion in fiscal year
1994.
Certain localities, in addition to the City, could have financial problems
leading to requests for additional New York State assistance during the State's
1994-95 fiscal year and thereafter. The potential impact on the State of such
requests by localities is not included in the projections of the State's
receipts and disbursements in the State's 1994-95 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 New York 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 New York
State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. In 1992, the total indebtedness of all localities in
New York State was approximately $35.2 billion, of which $19.5 billion was debt
of New York City (excluding $5.9 billion in MAC debt); a small portion
(approximately $71.6 million) of the $35.2 billion of indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling New
York State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Seventeen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1992.
From time to time, Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
New York State, New York 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 New
York State could be adversely affected. Localities also face anticipated and
26
<PAGE>
potential problems resulting from certain pending litigation, judicial decisions
and long-range economic trends. The longer-range problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing New York 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 Funds as initial criteria
for the selection of portfolio securities; the Funds will also rely upon the
independent advice of SBMFM to evaluate potential investments. Among the factors
that will be considered by SBMFM 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 Fund,
cease to be rated or its ratings may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt obligation
by a Fund, but SBMFM will consider the event in its determination of whether the
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,
SBMFM will attempt to use comparable ratings as standards for each 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 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. 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 SBMFM 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. SBMFM 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.
27
<PAGE>
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 Fund
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (b) more than 50% of 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 Fund will purchase securities other than Municipal Obligations and
Taxable Investments as those terms are defined in the Prospectuses or this
Statement of Additional Information.
2. The Municipal Fund will not 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. The Municipal Fund will not 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 the
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.
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 through purchasing
Municipal Obligations or Taxable Investments and entering into repurchase
agreements, each in a manner consistent with the 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.
28
<PAGE>
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.
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 SBMFM 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 SBMFM, 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 SBMFM, 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
SBMFM are prepared to invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be allocated in a manner
believed by SBMFM to be equitable to each. In some cases, this procedure may
adversely affect the price paid or received by 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 SBMFM in its best judgment and in
a manner deemed fair and reasonable to the Funds' shareholders. The primary
considerations of SBMFM 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 SBMFM 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 SBMFM,
and the fees of SBMFM are not reduced as a consequence of their receipt of the
supplemental information. The information may be useful to SBMFM 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 SBMFM in carrying
out their obligations to a Fund.
29
<PAGE>
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 SBMFM 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
While 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) is
generally not expected to exceed 100%, it has in the past exceeded 100% with
respect to certain funds. The rate of turnover will not be a limiting factor,
however, when a Fund deems it desirable to sell or purchase securities. This
policy should not result in higher brokerage commissions to a Fund, as purchases
and sales of portfolio securities are usually effected as principal
transactions. Securities may be sold in anticipation of a rise in interest rates
(market decline) or purchased in anticipation of a decline in interest rates
(market rise) and later sold. In addition, a security may be sold and another
security of comparable quality purchased at approximately the same time 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, or supply of, various types of tax-exempt securities.
The portfolio turnover rates are as follows:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
FUND 11/30/94 11/30/93
- ----------------------------------------- ---------- ----------
<S> <C> <C>
Municipal Fund........................... 28% 4%
California Fund.......................... 39% 16%
New York Fund............................ 68% 22%
</TABLE>
This higher level of turnover for the Funds was due to significant changes
in the portfolio in response to the unusual volatility experienced in municipal
bond markets during this period.
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's spouse and his
or her children purchasing shares for his or her own account; (c) a trustee or
other fiduciary purchasing shares for a single trust estate or single fiduciary
account; (d) a pension, profit-sharing or other employee benefit plan qualified
under Section 401(a) of the Code and qualified employee benefit plans of
employers who are "affiliated persons" of each other within the meaning of the
1940 Act; (e) tax-exempt organizations enumerated in Section 501(c)(3) or (13)
of the Code; or (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 a Smith Barney Financial Consultant.
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 written
notice to shareholders. For further information regarding the right of
accumulation, shareholders should contact a Smith Barney Financial Consultant.
30
<PAGE>
DETERMINATION OF PUBLIC OFFERING PRICE
The Funds offer their shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of a Fund is equal to the net
asset value per share at the time of purchase, plus for Class A shares an
initial sales charge based on the aggregate amount of the investment. The public
offering price for a Class C share (and Class A share purchases, including
applicable rights of accumulation, equalling or exceeding $500,000) is equal to
the net asset value per share at the time of purchase and no sales charge is
imposed at the time of purchase. A contingent deferred sales charge ("CDSC"),
however, is imposed on certain redemptions of Class C shares, and Class A shares
when purchased in amounts exceeding $500,000. The method of computation of the
public offering price is shown in each Fund's financial statements, incorporated
by reference in their entirety into this Statement of Additional Information.
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 exists, as determined by the SEC, so
that disposal of the Fund's investments or determination of its net asset value
is not reasonably practicable or (c) for any other periods as the SEC by order
may permit for the protection of the Fund's shareholders.
DISTRIBUTION IN KIND
If the Board of Trustees of the Trust determines that it would be detrimental to
the best interests of the remaining shareholders to make a redemption payment
wholly in cash, a Fund may pay, in accordance with SEC rules, any portion of a
redemption in excess of the lesser of $250,000 or 1.00% of the Fund's net assets
by a distribution in kind of portfolio securities in lieu of cash. Securities
issued as a distribution in kind may incur brokerage commissions when
shareholders subsequently sell those securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders of any Fund who own shares of the Fund with a value of at least
$10,000 and who wish to receive specific amounts of cash monthly or quarterly.
Withdrawals of at least $100 may be made under the Withdrawal Plan by redeeming
as many shares of the Fund as may be necessary to cover the stipulated
withdrawal payment. Any applicable CDSC will not be waived on amounts withdrawn
by shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences. (With respect to Withdrawal
Plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of a
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, continued withdrawal payments will reduce
the shareholder's investment, and may ultimately exhaust it. Withdrawal payments
should not be considered as income from investment in a Fund. Furthermore, as it
generally would not be advantageous to a shareholder to make additional
investments in the Fund at the same time he or she is participating in the
Withdrawal Plan, purchases by such shareholders in amounts of less than $5,000
ordinarily will not be permitted.
Shareholders of a Fund who wish to participate in the Withdrawal Plan and
who hold their shares of the Fund in certificate form must deposit their share
certificates with TSSG as agent for Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the Fund involved. Effective November 7,
1994, Withdrawal Plans should be set up with a Smith Barney Financial
Consultant. A shareholder
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<PAGE>
who purchases shares directly through TSSG may continue to do so and
applications for participation in the Withdrawal Plan must be received by TSSG
no later than the eighth day of the month to be eligibile for participation
beginning with that month's withdrawal. For additional information, shareholders
should contact a Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trust's distributor on a best efforts basis pursuant
to a written agreement dated July 30, 1993 (the "Distribution Agreement"), which
was most recently approved by the Trust's Board of Trustees on July 20, 1994.
For the fiscal period ending November 30, 1992 and the 1993 and 1994 fiscal
years, Smith Barney or its predecessor Shearson Lehman Brothers received the
following in sales charges for the sale of each Fund's Class A shares, and did
not reallow any portion thereof to dealers:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
FUND 11/30/94 11/30/93 11/30/92
- ---------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Municipal Fund.............. $ 576,872 $ 576,872 $ 343,579
California Fund............. $ 179,329 $ 179,329 $ 242,773
New York Fund............... $ 412,346 $ 412,346 $ 98,334
</TABLE>
For the fiscal period ending November 30, 1992 and the 1993 and 1994 fiscal
years, Smith Barney or Shearson Lehman Brothers received the following
representing CDSC on redemption of each Fund's Class A shares:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
FUND 11/30/94 11/30/93 11/30/92
- ---------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Municipal Fund.............. $ 81,916 $ 41,260 $ 4,082
California Fund............. $ 18,705 $ 5,932 $ 3,863
New York Fund............... $ 22,791 $ 26,433 $ 783
</TABLE>
When payment is made by the investor before the settlement date, unless
otherwise noted by the investor, the funds will be held as a free credit balance
in the investor's brokerage account and Smith Barney may benefit from the
temporary use of the funds. The investor may designate another use for the funds
prior to settlement date, such as an investment in a money market fund (other
than Smith Barney Exchange Reserve Fund) of the Smith Barney Mutual Funds. If
the investor instructs Smith Barney to invest the funds in a Smith Barney money
market fund, the amount of the investment will be included as part of the
average daily net assets of both the Fund and the money market fund, and
affiliates of Smith Barney that serve the funds in an investment advisory or
administrative 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 resulting from these settlement
procedures and will take such benefits into consideration when reviewing the
Advisory, Administration and Distribution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney 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 a service fee, accrued daily and paid
monthly, calculated at the annual rate of 0.15% of the value of the Fund's
32
<PAGE>
average daily net assets attributable to the Fund's shares. In addition, each
Fund pays Smith Barney a distribution fee with respect to the Class C shares
primarily intended to compensate Smith Barney for its initial expense of paying
its Financial Consultants a commission upon sales of those shares. The Class C
distribution fee is calculated at the annual rate of 0.20% of the value of the
Funds' average net assets attributable to the shares of the Class.
For the period from December 31, 1991 through November 30, 1992, Shearson
Lehman Brothers, the Trust's distributor prior to Smith Barney, received $90,238
in the aggregate from the Trust under the Plan. For the fiscal years ended
November 30, 1993 and 1994, Smith Barney and/or its predecessor, Shearson Lehman
Brothers, received $269,091 and $291,639, respectively, in the aggregate
from the
Plan.
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 or in
the Distribution Agreement (the "Independent Trustees"). The Plan may not be
amended to increase the amount of the service and distribution fees without
shareholder approval, and all amendments of the Plan also must be approved by
the Trustees including all of the Independent Trustees in the manner described
above. The Plan may be terminated with respect to a Class at any time, without
penalty, by vote of a majority of the 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 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
The net asset value per share of each Fund's Classes is calculated on each day,
Monday through Friday, except days on which the NYSE is closed. The NYSE
currently is scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Because of the differences in
distribution fees and Class-specific expenses, the per share net asset value of
each Class may differ. The following is a description of the procedures used by
the Trust in valuing its assets.
In carrying out valuation policies adopted by the Trust's Board of Trustees,
Boston Advisors, as sub-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 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
Except as noted below, shareholders of any fund of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same Class of
other funds in the Smith Barney Mutual 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
33
<PAGE>
for shares of the funds that are offered without a sales charge. Class A
shares of any fund purchased without a sales charge may be exchanged for
shares sold with a sales charge, and the appropriate sales charge
differential will be applied.
B. Class A shares of any fund acquired by a
previous exchange of shares purchased with a sales charge may be exchanged
for Class A shares of any of the other funds, and the sales charge
differential, if any, will be applied.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the account
number in order to accomplish an exchange of shares of Smith Barney High Income
Fund under paragraph B above.
The exchange privilege enables shareholders in any fund of the Smith Barney
Mutual Funds to acquire shares of the same Class 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 residing in any
state in which the fund shares being acquired may legally be sold. Prior to any
exchange, the shareholder should obtain and review a copy of the current
prospectus of each fund into which an exchange is being considered. Prospectuses
may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and, subject to any applicable CDSC, the proceeds are immediately invested, at a
price as described above, in shares of the fund being acquired. Smith Barney
reserves the right to reject any exchange request. The exchange privilege may be
modified or terminated at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Trust may quote a Fund's yield or total return in
advertisements or in reports and other communications to shareholders. The Trust
may include comparative performance information in advertising or marketing each
Fund's shares. Such performance information may include the following industry
and financial publications: BARRON'S, BUSINESS WEEK, CDA INVESTMENT
TECHNOLOGIES, INC., CHANGING TIMES, FORBES, FORTUNE, INSTITUTIONAL INVESTOR,
INVESTORS DAILY, MONEY, MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA
TODAY and THE WALL STREET JOURNAL. To the extent any advertisement or sales
literature of a Fund describes the expenses or performance of any Class it will
also disclose such information for the other Classes.
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>
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 Fund's "equivalent taxable 30-day yield" for a Class is computed by
dividing that portion of the Class' 30-day yield which is tax-exempt by one
minus a stated income tax rate and adding the product to that portion, if any of
the Class' yield that is not tax-exempt.
34
<PAGE>
The yield on municipal securities is dependent upon a variety of factors,
including general economic and monetary conditions, conditions of the municipal
securities market, size of a particular offering, maturity of the obligation
offered and rating of the issue. Investors should recognize that, in periods of
declining interest rates, a Fund's yield for each Class of shares will tend to
be somewhat higher than prevailing market rates, and in periods of rising
interest rates a Fund's yield for each Class of shares will tend to be somewhat
lower. In addition, when interest rates are falling, the inflow of net new money
to a Fund from the continuous sale of its shares will likely be invested in
portfolio instruments producing lower yields than the balance of the Fund's
portfolio, thereby reducing the current yield of the Fund. In periods of rising
interest rates, the opposite can be expected to occur.
The yields for the 30-day period ended November 30, 1994 were as follows:
Municipal Fund -- (0.39)%, California Fund -- (1.33)%, and New York Fund --
(1.60)%.
The equivalent taxable yields for the 30-day period ended November 30, 1994
assuming payment of Federal income taxes at the rate of 31.0%; 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 12.0% for the New York Fund would have been as
follows: Municipal Fund -- (0.57)%; California Fund -- (2.13)%, and New York
Fund -- (2.64)%.
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" figures, as described below, are computed
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 + T)n = ERV
<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 following total return figures assume that the maximum Class A 2.00%
sales charge has been deducted from the investment at the time of purchase and
have been restated to show the change in the maximum sales charge. The Funds'
average annual total return figures for Class A shares were as follows:
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1994
-------------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- -------------- --------------
<S> <C> <C>
Municipal Fund.............. (1.78)% (1.92)%
California Fund............. (5.57)% (6.06)%
New York Fund............... (5.89)% (6.22)%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31, 1991)
THROUGH NOVEMBER 30, 1994
-------------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
WAIVERS) WAIVERS)
-------------- --------------
<S> <C> <C>
Municipal Fund.............. 4.06% 3.65%
California Fund............. 3.69% 2.68%
New York Fund............... 4.02% 3.43%
</TABLE>
35
<PAGE>
AGGREGATE TOTAL RETURN
A Fund's "aggregate total return" figures, as described below, 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 Funds' aggregate total return figures for Class A shares were as
follows:
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1994
-------------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- -------------- --------------
<S> <C> <C>
Municipal Fund.............. 0.23% (0.09)%
California Fund............. (3.65)% (4.15)%
New York Fund............... (3.97)% (4.31)%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31,
1991)
THROUGH NOVEMBER 30, 1994
----------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
WAIVERS) WAIVERS)
------------ -------------
<S> <C> <C>
Municipal Fund.............. 14.59% 13.27%
California Fund............. 13.42% 10.21%
New York Fund............... 14.46% 12.59%
</TABLE>
These aggregate total return figures for Class A do not assume that the
maximum 2.00% sales charge has been deducted from the investment at the time of
purchase. If the sales charge had been deducted at the time of purchase, the
aggregate total return for Class A shares for those same periods would have been
as follows in the tables set forth below. The total return figures have been
restated to show the change in the maximum sales charge.
<TABLE>
<CAPTION>
ONE YEAR PERIOD
ENDED
NOVEMBER 30, 1994
-------------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
FUND NAME WAIVERS) WAIVERS)
---------------------------- -------------- --------------
<S> <C> <C>
Municipal Fund.............. (1.78)% (1.92)%
California Fund............. (5.57)% (6.06)%
New York Fund............... (5.89)% (6.22)%
</TABLE>
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD OF
COMMENCEMENT OF
OPERATIONS (DECEMBER 31, 1991)
THROUGH NOVEMBER 30, 1994
------------------------------
TOTAL RETURN TOTAL RETURN
(WITH FEE (WITHOUT FEE
WAIVERS) WAIVERS)
------------- --------------
<S> <C> <C>
Municipal Fund.............. 12.30% 11.01%
California Fund............. 11.15% 8.00%
New York Fund............... 12.17% 10.34%
</TABLE>
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance. Each Class' net investment income changes in response to
fluctuation in interest rates and the expenses of the Fund. Performance will
vary from time to time depending upon market conditions, the composition of the
Fund's portfolio and operating expenses and the expenses exclusively
attributable to the Class. Consequently, any given performance quotation should
not be considered representative of the Class' performance for any specified
period in the future. Because performance will vary, it may not provide a basis
for comparing an investment in the Class with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities.
TAXES
The following is a summary of selected Federal income tax considerations that
may affect the Trust and its
36
<PAGE>
shareholders. The summary is not intended as a substitute for individual tax
advice and investors are urged to consult their own tax advisors as to the tax
consequences of an investment in the Trust.
As described above and in the Prospectuses, each Fund is designed to provide
investors with current income which 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 personal income taxes. The Trust is not intended to be a balanced
investment program and is not designed for investors seeking capital gains or
maximum tax-exempt income irrespective of fluctuations in principal. Investment
in the Trust 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 has qualified and intends that each Fund continue to qualify each
year as a "regulated investment company" under the Code. Provided that 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), the Fund 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. Any such taxes paid by a Fund would reduce the amount of income
and gains available for distribution to shareholders.
Because the Fund may distribute exempt-interest dividends, interest on
indebtedness incurred by a shareholder to purchase or carry shares of a Fund is
not deductible for Federal income tax purposes. In addition, the indebtedness is
not deductible by a shareholder of the California Fund for California State
personal 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 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 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 Prospectuses (a) some or all of a
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 Fund's dividends
and distributions may affect a corporate shareholder's Federal "environmental"
tax liability. In addition, the receipt of a 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
37
<PAGE>
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 Fund that is excluded from Federal
income taxation and the dollar amount of dividends paid by a 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 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.
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.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust on October 17, 1991
under the name Shearson Lehman Brothers Intermediate-Term Trust. On November 20,
1991, July 30, 1993, and October 14, 1994, the Fund's name was changed to
Shearson Lehman Brothers Income Trust, Smith Barney Shearson Income Trust and
Smith Barney Income Trust, respectively.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as the custodian for
the Trust. Under the custody agreement, Boston Safe holds the Trust's portfolio
securities and keeps all necessary accounts and records. For its services,
Boston Safe receives a monthly fee based upon the month-end market value of
securities held in custody and also receives securities transaction charges. The
assets of the Trust are held under bank custodianship in compliance with the
1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent. Under its 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 the Trust. For these services, TSSG receives a monthly
fee computed on the basis of the number of shareholder accounts it maintains for
the Trust during the month, and is reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended November 30, 1994, accompany
this Statement of Additional Information and are incorporated herein by
reference in their entirety.
38
<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 such 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 which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium-grade obligations, I.E.,
that is they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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 is
in recognition of the differences between short-term credit risk and long-term
risk. Loans bearing the designation MIG 1 or VMIG 1 are of the best quality,
enjoying strong protection by established cash flows of funds for their
servicing, superior liquidity support or from established and broad-based access
to the market for refinancing or both. Loans bearing the designation MIG 2 or
VMIG 2 are of high quality, with ample margins of protection, although not as
large as the preceding group. Loans bearing the designation MIG 3 or VMIG 3 are
of favorable quality, with all security elements accounted for, but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow may be
narrow and market access for refinancing, 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
SMITH BARNEY INCOME TRUST
PART C*
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Funds' Annual Reports for the fiscal year ended November 30, 1994
and the Reports of Independent Accountants dated January 6, 1995 are
incorporated by reference to the Rule 30(b)2-1 filing made on January 27,
1995 as Accession Number 0000053798-95-000061 .
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
Unless otherwise noted, all references are to the Registrant's
Registration Statement on Form N-1A (the "Registration Statement") as
filed with the SEC on October 21, 1991 (File Nos. 33-43446 and 811-
6444).
(1) (a) Registrant's Master Trust Agreement dated October 17,
1991 and Amendments to the Master Trust Agreement dated November 21, 1991
and July 30, 1993, respectively, are incorporated by reference to Post-
Effective Amendment No. 4.
(b) Amendments to the Master Trust Agreement dated
October 14, 1994 and November 7, 1994, respectively, are incorporated by
reference to a Registration Statement filed on Form N-14 on January 6, 1995
(the "N-14").
(2) Registrant's By-Laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) Registrant's form of stock certificate is incorporated by
reference to Pre-Effective Amendment No. 1.
* Part C, the Financial Statements, for Smith Barney Limited Maturity
Treasury Fund are incorporated by reference to the Fund's Annual Report
dated November 30, 1994, filed with the Commission on
January 27, 1995 as Accession #0000053798-94-0000061.
(5) (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").
(b) Transfer of Investment Advisory Agreement dated November
7, 1994 between the Registrant on behalf of Smith Barney Intermediate
Maturity California Municipals Fund, Greenwich Street Advisors and Smith
Barney Mutual Funds Management Inc. is incorporated by reference to the N-
14.
(c) Form of Transfer of Investment Advisory Agreement for
Smith Barney Limited Maturity Municipals Fund, Smith Barney Intermediate
Maturity New York Municipals Fund and Smith Barney Limited Maturity
Treasury Fund is filed herein.
(6) Distribution Agreement between Registrant and Smith Barney
Shearson Inc.
dated July 30, 1993 is incorporated by reference to Post-
Effective Amendment No. 3.
(7) Not Applicable.
(8) Custody Agreement with Boston Safe Deposit and Trust Company is
incorporated by reference to Pre-Effective Amendment No. 1.
(9) (a) Administration Agreement between the Registrant on
behalf of Smith Barney Intermediate Maturity California Municipals Fund and
Smith, Barney Advisers, Inc. ("SBA") is incorporated by reference to the N-
14.
(b) Sub-Administration Agreement between the Registrant
on behalf of Smith Barney Intermediate Maturity California Municipals Fund,
SBA and The Boston Company Advisors, Inc. ("Boston Advisors") is
incorporated by reference to the N-14.
(c) Form of Administration Agreement between the Registrant
on behalf of Smith Barney Limited Maturity Municipals Fund, Smith Barney
Intermediate Maturity New York Municipals Fund and Smith Barney Limited
Maturity Treasury Fund and SBA is filed herein.
(d) Form of Sub-Administration Agreement between the
Registrant on behalf of Smith Barney Limited Maturity Municipals Fund,
Smith Barney Intermediate Maturity New York Municipals Fund and Smith
Barney Limited Maturity Treasury Fund, SBA and Boston Advisors is filed
herein.
(e) Transfer Agency Agreement with The Shareholder Services
Group, Inc. is incorporated by reference to Post-Effective Amendment No. 3.
(10) Opinion of California State Counsel is filed herein.
(11) Consent of Independent Accountants is filed herewith.
(12) Not Applicable.
(13) Purchase Agreement between the Registrant and Shearson Lehman
Brothers Inc. is incorporated by reference to Pre-Effective Amendment No.
1.
(14) Not Applicable.
(15) (a) Amended Service and Distribution Plan pursuant to
Rule 12b-1 between the Registrant on behalf of Smith Barney Intermediate
Maturity California Municipals Fund and Smith Barney Inc. is incorporated
by reference to the N-14.
(b) Form of Amended Service and Distribution Plan pursuant to
Rule 12b-1 between the Registrant on behalf of Smith Barney Limited
Maturity Municipals Fund, Smith Barney Intermediate Maturity New York
Municipals Fund and Smith Barney Limited Maturity Treasury Fund and Smith
Barney Inc. is filed herein.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement as filed on
April 1, 1993.
Item 25. Persons Controlled by or Under common Control with Registrant
None.
Item 26. Number of Holders of Securities
(2)
(1) Number of Record
Title of Class Holders as of December 16,
1994
Beneficial Interest
par value $.001 per share
Limited Maturity Municipals Fund 2,418
Intermediate Maturity California 722
Municipals Fund
Intermediate Maturity New York 1,719
Municipals Fund
Limited Maturity Treasury Fund 4,414
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-
Effective
Amendment No. 1.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Mutual Funds Management Inc., formerly
known as Smith, Barney Advisers, Inc. ("SBMFM")
SBMFM was incorporated in December 1968 under the laws of the State of
Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.,
formerly known as Smith Barney Shearson Holdings Inc. ("Holdings"), which
in turn is a wholly owned subsidiary of The Travelers Inc., formerly known
as Primerica Corporation, ("Travelers"). SBMFM is registered as an
investment adviser under the Investment Advisers Act of 1940 (the "Advisers
Act").
The list required by this Item 28 of officers and directors of SBMFM
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to
Schedules A and D of FORM ADV filed by SBMFM pursuant to the Advisers Act
(SEC File No. 801-8314).
Prior to the close of business on November 7, 1994, Greenwich Street
Advisors served as investment adviser. Greenwich Street Advisors, through
its predecessors, has been in the investment counseling business since 1934
and was a division of Mutual Management Corp. ("MMC") prior to November 7,
1994. MMC was incorporated in 1978 and is a wholly owned subsidiary of
Holdings. The list required by this Item 28 of officers and directors of
MMC and Greenwich Street Advisors, together with information as to any
other business, profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two fiscal years,
is incorporated by reference to Schedules A and D of FORM ADV filed by MMC
on behalf of Greenwich Street Advisors prior to November 7, 1994, pursuant
to the Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney Inc.
(formerly known as Smith Barney Shearson Inc.) acquired the domestic retail
brokerage and asset management business of Shearson Lehman Brothers, which
included the business of the Registrant's prior investment adviser.
Shearson Lehman Brothers was a wholly owned subsidiary of Shearson Lehman
Brothers Holdings Inc. ("Shearson Holdings"). All of the issued and
outstanding common stock of Shearson Holdings (representing 92% of the
voting stock) was held by American Express Company. Information as to any
past business vocation or employment of a substantial nature engaged in by
officers and directors of Shearson Lehman Advisors can be located in
Schedules A and D of FORM ADV filed by Shearson Lehman Brothers on behalf
of Shearson Lehman Advisors prior to July 30, 1993. (SEC FILE NO. 801-
3701)
11/3/94
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney New York Municipals Fund
Inc., Smith Barney California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Global Opportunities Fund,
Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Principal Return Fund, Smith Barney Managed Governments
Fund Inc., Smith Barney Income Funds, Smith Barney Equity Funds, Smith
Barney Investment Funds Inc., Smith Barney Precious Metals and Minerals
Fund Inc., Smith Barney Telecommunications Trust, Smith Barney Arizona
Municipals Fund Inc., Smith Barney New Jersey Municipals Fund Inc., The USA
High Yield Fund N.V., Smith Barney Fundamental Value Fund Inc., Smith
Barney Series Fund, Consulting Group Capital Markets Funds, Smith Barney
Income Trust, Smith Barney Adjustable Rate Government Income Fund, Smith
Barney Florida Municipals Fund, Smith Barney Oregon Municipals Fund, Smith
Barney Funds, Inc., Smith Barney Muni Funds, Smith Barney World Funds,
Inc., Smith Barney Money Funds, Inc., Smith Barney Tax Free Money Fund,
Inc., Smith Barney Variable Account Funds, Smith Barney U.S. Dollar Reserve
Fund (Cayman), Worldwide Special Fund, N.V., Worldwide Securities Limited,
(Bermuda), Smith Barney International Fund (Luxembourg) and various series
of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings
Inc. (formerly known as Smith Barney Shearson Holdings Inc.), which in turn
is a wholly owned subsidiary of The Travelers Inc. (formerly known as
Primerica Corporation) ("Travelers"). On June 1, 1994, Smith Barney
changed its name from Smith Barney Inc. to its current name. The
information required by this Item 29 with respect to each director, officer
and partner of Smith Barney is incorporated by reference to Schedule A of
FORM BD filed by Smith Barney pursuant to the Securities Exchange Act of
1934 (SEC File No. 812-8510).
11/4/94
Item 30. Location of Accounts and Records
(1) Smith Barney Income Trust
388 Greenwich Street
New York, New York 10013
(2) Smith Barney
Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) The Boston Company Advisors, Inc.
One Boston Place
Boston Massachusetts 02108
(4) Boston Safe Deposit and Trust Company
One Cabot Road
Medford, Massachusetts 02155
(5) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of its shareholders of the
Series for the purpose of voting upon the question of removal of a trustee
or trustees of Registrant when requested in writing to do so by the holders
of at least 10% of Registrant's outstanding shares. Registrant undertakes
further, in connection with the meeting, to comply with the provisions of
Section 16(c) of the Investment Company Act of 1940, as amended, relating
to communications with the shareholders of certain common-law trusts.
485(b) Certification
The Registrant hereby certifies that it meets all of the requirements
for effectiveness pursuant to Rule 485(b) under the Securities Act of 1933,
as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and
the Investment Company Act of 1940, the Registrant, Smith Barney Income
Trust, has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York, State of New York on the 27th day of January, 1995.
Smith Barney Income Trust
By: /s/ Heath B. McLendon
Heath B. McLendon
Chief Executive
Officer
We, the undersigned, hereby severally constitute and appoint
Heath B. McLendon, Christina T. Sydor and Lee D. Augsburger and
each of them singly, our true and lawful attorneys, with full power
to them and each of them to sign for us, and in our hands and in
the capacities indicated below, any and all Amendments to this
Registration Statement and to file the same, with all exhibits
thereto, and other documents therewith, with the Securities and
Exchange Commission, granting unto said attorneys, and each of
them, acting alone, full authority and power to do and perform each
and every act and thing requisite or necessary to be done in the
premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said
attorneys or any of them may lawfully do or cause to be done by
virtue thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement and the above
Power of Attorney has been signed below by the following persons in
the capacities and on the dates indicated.
Signature
Title
Date
/s/ Heath B. McLendon
Chairman of the Board
1/27/95
Heath B. McLendon
Chief Executive Officer
/s/Lewis E. Daidone
Vincent Nave
Senior Vice President and
Treasurer
(Chief Financial and
Accounting Officer)
1/27/95
/s/ Burt N. Dorsett*
Burt N. Dorsett
Trustee
1/27/95
/s/ Elliot S. Jaffe*
Elliot S. Jaffe
Trustee
1/27/95
/s/ Cornelius C. Rose*
Cornelius C. Rose
Trustee
1/27/95
*Signed by Lee D. Augsburger as their authorized attorney-in-fact
pursuant to a power of attorney dated January 27,1995.
/s/ Lee D. Augsburger
Lee D. Augsburger
s:\domestic\clients\shearson\funds\slit\pea6.doc
EXHIBIT 5(C)
FORM OF TRANSFER AND ASSUMPTION OF
INVESTMENT ADVISORY AGREEMENT
for
SMITH BARNEY (NAME OF FUND), A SERIES OF SMITH BARNEY INCOME TRUST
TRANSFER AND ASSUMPTION OF INVESTMENT ADVISORY AGREEMENT, made as of
the 7th day of November, 1994, by and among Smith Barney (NAME OF FUND), a
Massachusetts business trust (the "Trust"), Mutual Management Corp., a New
York corporation ("MMC"), and Smith Barney Mutual Funds Management Inc.
("SBMFM") a Delaware corporation.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Trust consists of several distinct investment portfolios
or series (collectively, the "Funds"); and
WHEREAS, the Trust, on behalf of the Funds, and MMC entered into an
Investment Advisory Agreement on July 30, 1993, under which MMC serves as
the investment adviser (the "Investment Adviser") for the Funds of the
Trust; and
WHEREAS, MMC desires that its interest, rights, responsibilities and
obligations in and under the Investment Advisory Agreement be transferred
to SBMFM and SBMFM desires to assume MMC's interest, rights,
responsibilities and obligations in and under the Investment Advisory
Agreement; and
WHEREAS, this Agreement does not result in a change of actual control
or management of the Investment Adviser to the Trust and, therefore, is not
an "assignment" as defined in Section 2(a)(4) of the Act nor an
"assignment" for the purposes of Section 15(a)(4) of the Act.
NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Assignment. Effective as of November 7, 1994 (the "Effective
Date"), MMC hereby transfers to SBMFM all of MMC's interest, rights,
responsibilities and obligations in and under the Investment Advisory
Agreement dated July 30, 1993, to which MMC is a party with the Trust.
2. Assumption and Performance of Duties. As of the Effective
Date, SBMFM hereby accepts all of MMC's interest and rights, and assumes
and agrees to perform all of MMC's responsibilities and obligations in, and
under the Investment Advisory Agreement; SBMFM agrees to subject to all of
the terms and conditions of said Agreement; and SBMFM shall indemnify and
hold harmless MMC from any claim or demand made thereunder arising or
incurred after the Effective Date.
3. Representation of SBMFM. SBMFM represents and warrants that:
(1) it is registered as an investment adviser under the Investment Advisers
Act of 1940, as amended; and (2) Smith Barney Holdings Inc. is its sole
shareholder.
4. Consent. The Trust hereby consents to this transfer by MMC to
SBMFM of MMC's interest, rights, responsibilities and obligations in and
under the Investment Advisory Agreement and to the acceptance and
assumption by SBMFM of the same. The Trust agrees, subject to the terms
and conditions of said Agreement, to look solely to SBMFM for the
performance of the Investment Adviser's responsibilities and obligations
under said Agreement from and after the Effective Date, and to recognize as
inuring solely to SBMFM the interest and rights heretofore held by MMC
thereunder.
5. Limitation of Liability of Trustees, Officers and Shareholders.
It is expressly agreed that the obligations of the Trust hereunder shall
not be binding upon any of the Trustees, shareholders, nominees, officers,
agents, or employees of the Trust, personally, but shall bind only the
trust property of the Trust, as provided in the Declaration of Trust of the
Trust. The execution and delivery of this Agreement have been authorized
by the Trustees of the Trust and signed by the President of the Trust,
acting as such, and neither such authorization by such Trustees nor such
execution and delivery by such officer shall be deemed to have been made by
any of them individually of to impose any liability on any of them,
personally, but shall bond only the trust property of the Trust as provided
in its Declaration of Trust.
6. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers hereunto duly attested.
Attest:
By:
Secretary Smith Barney (NAME OF FUND)
Attest:
By:
Secretary Mutual Management Corp.
Attest:
By:
Secretary Smith Barney Mutual Funds
Management Inc.
shared/domestic/clients/shearosn/fund/slit/imca
EXHIBIT 9(C)
SMITH BARNEY SHEARSON INCOME TRUST
SMITH BARNEY SHEARSON (NAME OF FUND)
FORM OF ADMINISTRATION AGREEMENT
April 20, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
Smith Barney Shearson Income Trust, a business trust organized under
the laws of the Commonwealth of Massachusetts, confirms its agreement with
Smith, Barney Advisers, Inc. ("SBA") and its sub-trust Smith Barney
Shearson (NAME OF FUND) (the "Fund") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 27, 1991 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information as
from time to time in effect and in such manner and to such extent as may
from time to time be approved by the Board of Trustees of the Fund (the
"Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
SBA. Greenwich Street Advisors, a division of Mutual Management Corp.
("Greenwich Street Advisors") serves as the Fund's investment adviser, and
the Fund desires to employ and hereby appoints SBA to act as its
administrator. SBA accepts this appointment and agrees to furnish the
services to the Fund for the compensation set forth below. SBA is hereby
authorized to retain third parties and is hereby authorized to delegate
some or all of its duties and obligations hereunder to such persons
provided that such persons shall remain under the general supervision of
SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations except
those performed by the Fund's investment adviser under its investment
advisory agreement; (b) supply the Fund with office facilities (which may
be in SBA's own offices), statistical and research data, data processing
services, clerical, accounting and bookkeeping services, including, but not
limited to, the calculation of (i) the net
asset value of shares of the Fund, (ii) applicable contingent deferred
sales charges and similar fees and charges and (iii) distribution fees,
internal auditing and legal services, internal executive and administrative
services, and stationary and office supplies; and (c) prepare reports to
shareholders of the Fund, tax returns and reports to and filings with the
Securities and Exchange Commission (the "SEC") and state blue sky
authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month a
fee for the previous month at an annual rate of .20 of 1.00% of the Fund's
average daily net assets. The fee for the period from the date the Fund's
initial registration statement is declared effective by the SEC to the end
of the month during which the initial registration statement is declared
effective shall be prorated according to the proportion that such period
bears to the full monthly period. Upon any termination of this Agreement
before the end of any month, the fee for such part of a month shall be
prorated according to the proportion which such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to SBA, the value
of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus and Statement of Additional Information
as from time to time in effect.
4. Expenses
SBA will bear all expenses in connection with the performance
of its services under this Agreement. The Fund will bear certain other
expenses to be incurred in its operation, including: taxes, interest,
brokerage fees and commissions, if any; fees of the members of the Board of
the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc. or its affiliates or any person who is an affiliate of any
person to whom duties may be delegated hereunder; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest, taxes,
brokerage and, if permitted by state securities commissions, extraordinary
expenses) exceed the expense limitations of any state having jurisdiction
over the Fund, SBA will reimburse the Fund for that excess expense to the
extent required by state law in the same
proportion as its respective fees bear to the combined fees for investment
advice and administration. The expense reimbursement obligation of SBA
will be limited to the amount of its fees hereunder. Such expense
reimbursement, if any, will be estimated, reconciled and paid on a monthly
basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the services
listed in paragraph 2 above, and SBA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, provided that
nothing herein shall be deemed to protect or purport to protect SBA against
liability to the Fund or to its shareholders to which SBA would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of SBA's reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other investment
companies, and the Fund has no objection to SBA so acting. In addition,
the Fund understands that the persons employed by SBA or its affiliates to
assist in the performance of its duties hereunder will not devote their
full time to such service and nothing contained herein shall be deemed to
limit or restrict the right of SBA or its affiliates to engage in and
devote time and attention to other businesses or to render services of
whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers, directors,
employees, affiliates, controlling persons, agents (including persons to
whom responsibilities are delegated hereunder) ("indemnitees") against any
loss, claim, expense or cost of any kind (including reasonable attorney's
fees) resulting or arising in connection with this Agreement or from the
performance or failure to perform any act hereunder, provided that no such
indemnification shall be available if the indemnitee violated the standard
of care in paragraph 6 above. This indemnification shall be limited by the
1940 Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the 1940
Act and the rules, regulations and interpretations thereof as in effect
from time to time.
10. Limitation of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Fund individually, but are binding only
upon the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund, SBA and Boston Advisors, and signed by an
authorized officer of each, acting as such. Neither the authorization by
the Board members of the Fund, nor the execution and delivery by the
officer of the Fund 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 assets and property of the Fund as provided in the
Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed
copy hereof.
Very truly yours,
Smith Barney Shearson
Income Trust
Smith Barney Shearson
(NAME OF FUND)
By:
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
Smith, Barney Advisers, Inc.
By: __________________________
Name: Christina Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
Form 8613
Form 1120-RIC
Board Members' and Shareholders' 1099s
Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Master Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SHARED DOMESTIC CLIENTS SHEARSON FUNDS SLIT IMCA ADMN2.DOC
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SHARED DOMESTIC CLIENTS SHEARSON FUNDS SLIT IMCA ADMN2.DOC
EXHIBIT 9(D)
SMITH BARNEY SHEARSON INCOME TRUST
SMITH BARNEY (NAME OF FUND)
FORM OF SUB-ADMINISTRATION AGREEMENT
April 20, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02109
Dear Sirs:
Smith Barney Shearson Income Trust, a business trust organized
under the laws of the Commonwealth of Massachusetts and Smith, Barney
Advisers, Inc. ("SBA") confirm their agreement with The Boston Company
Advisors, Inc. ("Boston Advisors") and its sub-trust (NAME OF FUND) (the
"Fund") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 27, 1991 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information as
from time to time in effect, and in such manner and to such extent as may
from time to time be approved by the Board of Trustees of the Fund (the
"Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and SBA,
Boston Advisors will: (a) assist in supervising all aspects of the Fund's
operations except those performed by the Fund's investment adviser under
the Fund's investment advisory agreement; (b) supply the Fund with office
facilities (which may be in Boston Advisor's own offices), statistical and
research data, data processing services, clerical, accounting and
bookkeeping services, including, but not limited to, the calculation of (i)
the net asset value of shares of the Fund, (ii) applicable contingent
deferred sales charges and similar fees and changes and (iii) distribution
fees, internal auditing and legal services, internal executive and
administrative services, and stationery and office supplies; and (c)
prepare reports to shareholders of the Fund, tax returns and reports to and
filings with the Securities and Exchange Commission (the "SEC") and state
blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of each
month a fee for the previous month calculated in accordance with the terms
set forth in Appendix B, and as agreed to from time to time by the Fund,
SBA and Boston Advisors. Upon any termination of this Agreement before the
end of any month, the fee for such part of a month shall be prorated
according to the proportion which such period bears to the full monthly
period and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to Boston Advisors, the value
of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus and Statement of Additional Information
as from time to time in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of the Board members
of the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc., Boston Advisors of their affiliates; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and its Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston Advisory
will reimburse the Fund for that excess expense to the extent required by
state law in the same proportion as its respective fees bear to the
combined fees for investment advice and administration. The expense
reimbursement obligation of Boston Advisors will be limited to the amount
of its fees hereunder. Such expense reimbursement, if any, will be
estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in rendering
the services listed in paragraph 2 above. Boston Advisors shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport
to protect Boston Advisors against liability to the Fund or to its
shareholders to which Boston Advisors would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of Boston Advisor's reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without the
written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or more
other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and nothing
contained herein shall be deemed to limit or restrict the right of Boston
Advisors or its affiliates to engage in and devote time and attention to
other businesses or to render services of whatever kind of nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including reasonable
attorney's fees) resulting or arising in connection with this Agreement or
from the performance or failure to perform any act hereunder, provided that
not such indemnification shall be available if the indemnitee violated the
standard of care in paragraph 6 above. This indemnification shall be
limited by the 1940 Act, and relevant state law. Each indemnitee shall be
entitled to advancement of its expenses in accordance with the requirements
of the 1940 Act and the rules, regulations and interpretations thereof as
in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Fund individually, but are binding only
upon the assets and property of the Fund, as provided in the Master Trust
Agreement and Bylaws.
The execution and delivery of this Agreement has been duly authorized by
the Fund, SBA and Boston Advisors, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board Members of
the Fund, nor the execution and delivery by the officer of the Fund 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 assets and
property of the Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson
Income Trust
Smith Barney Shearson (NAME OF FUND)
By: ____________________
Name: Heath B. McLendon
Title: Chairman of the Board
Smith, Barney Advisers, Inc.
By: _____________________
Name: Christina Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _________________________
Name: Francis J. McNamara, III
Title: Senior Vice President and General Counsel
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act" ), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide an Assistant Treasurer for the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
Monitor mark-to-market comparisons for money market funds;
Recommend valuations to be used for securities which are not
readily saleable;
Function as a liaison with the Fund's outside auditors and
arrange for audits;
Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
Prepare and file forms with the Internal Revenue Service
Form 8613
Form 1120-RIC
Board Members' and Shareholders' 1099s
Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
Prepare and file proxy statements;
Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
Provide an Assistant Secretary for the Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder meetings;
Maintain Master Trust Agreement and By-Laws of the Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
SHARED DOMESTIC CLIENTS SHEARSON FUNDS SLIT IMCA SUBADMN.DOC
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SHARED DOMESTIC CLIENTS SHEARSON FUNDS SLIT IMCA SUBADMN.DOC
SHARED DOMESTIC CLIENTS SHEARSON FUNDS SLIT IMCA SUBADMN.DOC
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
Firm under the caption "Counsel and Auditors" in the Statement of
Additional Information included in Post-Effective Amendment No. 6 to the
Registration Statement (No. 33-43446 on Form N-1A under the Securities Act
of 1933, as amended, of Smith Barney Intermediate Maturity California
Municipals Fund.)
/s/ O'MELVENY & MYERS
O'MELVENY & MYERS
Los Angeles, California
January 26, 1995
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Smith Barney Income Trust:
We hereby consent to the following with respect to
Post-Effective Amendment No. 6 to the Registration Statement on
Form N-1A (File No. 33-43446) under the Securities Act of 1933,
as amended, of Limited Maturity Treasury Fund, Limited Maturity
Municipals Fund, Intermediate Maturity California Municipals
Fund, Intermediate Maturity New York Municipals Fund of Smith
Barney Income Trust:
1. The incorporation by reference of our report dated January
18, 1995 accompanying the Annual Reports of Limited Maturity
Treasury Fund, Limited Maturity Municipals Fund, Intermediate
Maturity New York Municipals Fund, and our report dated January
25, 1995 accompanying the Annual Report of Intermediate Maturity
California Municipals Fund, for the fiscal year ended November
30, 1994 of Smith Barney Income Trust, in the Statement of
Additional Information.
2. The reference to our firm under the heading "Condensed
Financial Information" in the Prospectuses.
3. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 25, 1995
EXHIBIT 15
FORM OF AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY (NAME OF FUND)
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney (NAME OF FUND), a
business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .15% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .15% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(c) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .20% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(d) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone facilities, answering routine inquires regarding the Fund,
processing shareholder transactions and providing any other shareholder
services not otherwise provided by the Fund's Transfer agent; and (e)
accruals for interest on the amount of the foregoing expenses that exceed
the Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
(NAME OF FUND)
By:_______________________
Heath B. McLendon
Chairman of the Board
g\shared\domestic\clients\shearson\funds\slit\imca\12b1pln2.doc09:40 AM
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<NAME> SB INTERMEDIATE-MATURITY CALIFORNIA MUNI - CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 25,313,309
<INVESTMENTS-AT-VALUE> 24,098,275
<RECEIVABLES> 1,385,261
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<OTHER-ITEMS-ASSETS> 59,388
<TOTAL-ASSETS> 25,542,924
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<TOTAL-LIABILITIES> 138,845
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,374,495
<SHARES-COMMON-STOCK> 3,253,075
<SHARES-COMMON-PRIOR> 3,827,066
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 25,404,079
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<REALIZED-GAINS-CURRENT> (731,956)
<APPREC-INCREASE-CURRENT> (1,997,496)
<NET-CHANGE-FROM-OPS> (1,223,960)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,505,401
<DISTRIBUTIONS-OF-GAINS> 44,755
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,242,342
<NUMBER-OF-SHARES-REDEEMED> 1,962,629
<SHARES-REINVESTED> 146,296
<NET-CHANGE-IN-ASSETS> (7,109,803)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 21,329
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 111,347
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 393,430
<AVERAGE-NET-ASSETS> 31,813,552
<PER-SHARE-NAV-BEGIN> 8.50
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> (0.69)
<PER-SHARE-DIVIDEND> 0.39
<PER-SHARE-DISTRIBUTIONS> 0.01
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<PER-SHARE-NAV-END> 7.80
<EXPENSE-RATIO> 0.75
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> SB INTERMEDIATE-MATURITY CALIFORNIA MUNI - CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 25,313,309
<INVESTMENTS-AT-VALUE> 24,098,275
<RECEIVABLES> 1,385,261
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 59,388
<TOTAL-ASSETS> 25,542,924
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 138,845
<TOTAL-LIABILITIES> 138,845
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,374,495
<SHARES-COMMON-STOCK> 5,799
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (755,382)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,215,034)
<NET-ASSETS> 25,404,079
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,744,106
<OTHER-INCOME> 0
<EXPENSES-NET> 238,614
<NET-INVESTMENT-INCOME> 1,505,492
<REALIZED-GAINS-CURRENT> (731,956)
<APPREC-INCREASE-CURRENT> (1,997,496)
<NET-CHANGE-FROM-OPS> (1,223,960)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 91
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,799
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (7,109,803)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 21,329
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 111,347
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 393,430
<AVERAGE-NET-ASSETS> 31,813,552
<PER-SHARE-NAV-BEGIN> 7.76
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.05
<PER-SHARE-DIVIDEND> 0.02
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<PER-SHARE-NAV-END> 7.80
<EXPENSE-RATIO> 0.95
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 0
<NAME> SMITH BARNEY INT NEW YORK MUNI FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 64,352,893
<INVESTMENTS-AT-VALUE> 61,420,456
<RECEIVABLES> 911,491
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<TOTAL-ASSETS> 62,357,035
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<OTHER-ITEMS-LIABILITIES> 267,023
<TOTAL-LIABILITIES> 267,023
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 66,578,270
<SHARES-COMMON-STOCK> 7,956,800
<SHARES-COMMON-PRIOR> 7,871,998
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,555,821)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,932,437)
<NET-ASSETS> 62,090,012
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,740,874
<OTHER-INCOME> 0
<EXPENSES-NET> 448,972
<NET-INVESTMENT-INCOME> 3,291,902
<REALIZED-GAINS-CURRENT> (1,555,501)
<APPREC-INCREASE-CURRENT> (4,498,322)
<NET-CHANGE-FROM-OPS> (2,761,921)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,291,902
<DISTRIBUTIONS-OF-GAINS> 164,958
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,019,093
<NUMBER-OF-SHARES-REDEEMED> 2,224,208
<SHARES-REINVESTED> 289,917
<NET-CHANGE-IN-ASSETS> (5,139,788)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 164,638
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 676,189
<AVERAGE-NET-ASSETS> 69,053,896
<PER-SHARE-NAV-BEGIN> 8.54
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.72)
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 0.02
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.80
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> SB LIMITED-MATURITY MUNICIPALS - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 76,741,684
<INVESTMENTS-AT-VALUE> 75,138,206
<RECEIVABLES> 2,756,258
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 25,088
<TOTAL-ASSETS> 77,919,552
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,576,602
<TOTAL-LIABILITIES> 1,576,602
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,599,946
<SHARES-COMMON-STOCK> 9,605,017
<SHARES-COMMON-PRIOR> 11,679,643
<ACCUMULATED-NII-CURRENT> 8,275
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (661,793)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,603,478)
<NET-ASSETS> 76,342,950
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,631,334
<OTHER-INCOME> 0
<EXPENSES-NET> 748,671
<NET-INVESTMENT-INCOME> 3,882,663
<REALIZED-GAINS-CURRENT> (616,478)
<APPREC-INCREASE-CURRENT> (3,140,215)
<NET-CHANGE-FROM-OPS> 125,970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,882,660
<DISTRIBUTIONS-OF-GAINS> 8,764
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,175,899
<NUMBER-OF-SHARES-REDEEMED> 5,604,134
<SHARES-REINVESTED> 353,609
<NET-CHANGE-IN-ASSETS> (20,077,693)
<ACCUMULATED-NII-PRIOR> 8,275
<ACCUMULATED-GAINS-PRIOR> (36,551)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 327,452
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 877,762
<AVERAGE-NET-ASSETS> 93,664,539
<PER-SHARE-NAV-BEGIN> 8.26
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> (0.32)
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<PER-SHARE-NAV-END> 7.94
<EXPENSE-RATIO> 0.80
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> SB LIMITED-MATURITY MUNICIPALS - CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 76,741,684
<INVESTMENTS-AT-VALUE> 75,138,206
<RECEIVABLES> 2,756,258
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 25,088
<TOTAL-ASSETS> 77,919,552
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,576,602
<TOTAL-LIABILITIES> 1,576,602
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 78,599,946
<SHARES-COMMON-STOCK> 13,354
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8,275
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (661,793)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,603,478)
<NET-ASSETS> 76,342,950
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,631,334
<OTHER-INCOME> 0
<EXPENSES-NET> 748,671
<NET-INVESTMENT-INCOME> 3,882,663
<REALIZED-GAINS-CURRENT> (616,478)
<APPREC-INCREASE-CURRENT> (3,140,215)
<NET-CHANGE-FROM-OPS> 125,970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 13,354
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (20,077,693)
<ACCUMULATED-NII-PRIOR> 8,275
<ACCUMULATED-GAINS-PRIOR> (36,551)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 327,452
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 877,762
<AVERAGE-NET-ASSETS> 93,664,539
<PER-SHARE-NAV-BEGIN> 7.92
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 0.02
<PER-SHARE-DIVIDEND> 0.00
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<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.94
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> SMITH BARNEY LIMITED MATURITY TREASURY FUND CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 77,827,819
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<OTHER-ITEMS-LIABILITIES> 607,750
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<PAID-IN-CAPITAL-COMMON> 81,003,625
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<OVERDISTRIBUTION-GAINS> (1,688,724)
<ACCUM-APPREC-OR-DEPREC> (4,807,781)
<NET-ASSETS> 74,535,782
<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 606,963
<NET-INVESTMENT-INCOME> 2,824,927
<REALIZED-GAINS-CURRENT> (1,688,724)
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<NET-CHANGE-IN-ASSETS> 22,509,801
<ACCUMULATED-NII-PRIOR> 707
<ACCUMULATED-GAINS-PRIOR> 2,172,569
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 660,976
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<PER-SHARE-NAV-BEGIN> 8.14
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> (0.73)
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> SMITH BARNEY LIMITED MATURITY TREASURY FUND CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 77,827,819
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<OTHER-ITEMS-LIABILITIES> 607,750
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<PAID-IN-CAPITAL-COMMON> 81,003,625
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<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1,688,724)
<ACCUM-APPREC-OR-DEPREC> (4,807,781)
<NET-ASSETS> 74,535,782
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<EXPENSES-NET> 606,963
<NET-INVESTMENT-INCOME> 2,824,927
<REALIZED-GAINS-CURRENT> (1,688,724)
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<DISTRIBUTIONS-OF-INCOME> 7
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 8,010
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 22,509,801
<ACCUMULATED-NII-PRIOR> 707
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 660,976
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<PER-SHARE-NAV-BEGIN> 7.09
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<PER-SHARE-GAIN-APPREC> (0.01)
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</TABLE>
