<PAGE>
P R O S P E C T U S
SMITH BARNEY
Large
Capitalization
Growth Fund
JULY 14, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
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PROSPECTUS JULY 14, 1997
Smith Barney
Large Capitalization Growth Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Smith Barney Large Capitalization Growth Fund (the "Fund") is a mutual fund
that seeks long-term growth of capital by investing, under normal market condi-
tions, 65% of its assets in equity securities of companies with large market
capitalizations. The Fund defines large capitalization companies as those com-
panies with market capitalizations of $5 billion or more at the time of the
Fund's investment. The Fund is one of a number of funds, each having distinct
investment objectives and policies, making up the Smith Barney Investment Trust
(the "Trust"). The Trust is an open-end management investment company commonly
referred to as a mutual fund.
The initial subscription period for shares is scheduled to end on August 25,
1997, (the "Subscription Period"). After the expiration of the Subscription
Period or a limited continuous offering period, the Fund will suspend the
offering of shares to the public. A continuous offering of shares is expected
to commence on or about September 30, 1997. See "Purchase of Shares."
This Prospectus sets forth concisely certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated July 14, 1997, as amended or supplemented from time to
time, that is available upon request and without charge by calling or writing
the Fund 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 Manager
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
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
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FINANCIAL HIGHLIGHTS
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 10
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VALUATION OF SHARES 12
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DIVIDENDS, DISTRIBUTIONS AND TAXES 13
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PURCHASE OF SHARES 14
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EXCHANGE PRIVILEGE 25
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REDEMPTION OF SHARES 28
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MINIMUM ACCOUNT SIZE 30
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PERFORMANCE 31
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MANAGEMENT OF THE TRUST AND THE FUND 31
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DISTRIBUTOR 32
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ADDITIONAL INFORMATION 33
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</TABLE>
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No person has been authorized to give any information or to make any repre-
sentations 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 distribu-
tor. This Prospectus does not constitute an offer by the Fund or the distribu-
tor 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.
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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 Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified, management invest-
ment company whose investment objective is to seek long-term growth of capital
by investing, under normal market conditions, 65% of its assets in equity secu-
rities of companies with large market capitalizations. See "Investment Objec-
tive and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several 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 three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rates of
expenses to which they are subject. A fourth 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 up to 5.00% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more 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--Reduced
or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain redemp-
tions. Class B shares are subject to an annual service fee of 0.25% and an
annual distribution fee of 0.75% of the average daily net assets of the Class.
The Class B shares' distribution fee may cause that Class to have higher
expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
3
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PROSPECTUS SUMMARY (CONTINUED)
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 0.25% and an annual
distribution fee of 0.75% 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 and pay
lower dividends than Class A shares. Purchases of Fund shares, which when com-
bined 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 serv-
ice 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 circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration 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 for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and 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 these Classes. 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 and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature and therefore are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The $500,000 investment may be met by adding the
purchase to the net asset value
4
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PROSPECTUS SUMMARY (CONTINUED)
of all Class A shares offered with a sales charge held in funds sponsored by
Smith Barney listed under "Exchange Privilege." Class A share purchases may
also be eligible for a reduced initial sales charge. See "Purchase of Shares."
Because the ongoing expenses of Class A shares may be lower than those for
Class B and Class C shares, purchasers eligible to purchase Class A shares at
net asset value or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and 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 Fund" for a complete descrip-
tion 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.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Other investors may be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available as investment
alternatives under both of these programs. See "Purchase of Shares--Smith Bar-
ney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney during the Initial Subscription Period. During the con-
tinuous offering period, shares may also be purchased through a brokerage
account maintained with Smith Barney, a broker that clears securities transac-
tions through Smith Barney on a fully disclosed basis (an "Introducing Broker")
or an investment dealer in the selling group. In addition, certain investors,
including qualified retirement plans and certain institutional investors, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investors Services Group, Inc. ("First Data" or "Transfer Agent") during
the continuous offering period.
The initial subscription period for shares is scheduled to end on August 25,
1997, (the "Subscription Period"). After the expiration of the Subscription
Period or a limited continuous offering period, the Fund will suspend the
offering of shares to the public. A continuous offering of shares is expected
to commence on or about September 30, 1997. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
account, or $250 for an individual retirement account ("IRA") or a Self-
Employed Retirement Plan. 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. For participants in retirement plans qualified under
Section 403(b)(7) or Section 401(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes of shares is $25. The minimum investment
requirements for purchases of Fund shares through the Systematic Investment
Plan are described below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN During the continuous offering period, 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. The minimum initial investment requirement for Class A, Class B and
Class C shares and the subsequent investment requirement for all Classes for
shareholders purchasing shares through the Systematic Investment Plan on a
monthly basis is $25 and on a quarterly basis is $50. 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 "Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment manager. SBMFM is a wholly owned subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary
of Travelers Group Inc. ("Travelers"), a diversified financial services holding
company engaged, through its subsidiaries, principally in four business seg-
ments: Investment Services, Consumer Finance Services, Life Insurance Services
and Property & Casualty Insurance Services. 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. See "Exchange Privilege."
VALUATION OF SHARES After meeting certain standards imposed by the National
Association of Securities Dealers, Inc. ("NASD") with respect to total net
assets and members of shareholder accounts, the Fund's net asset value per
share for the prior business day generally will be quoted daily in the finan-
cial section of most newspapers and, in any event, is also available from a
Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions of net realized capital gains, if any, are declared and paid annually.
See "Dividends, Distributions and Taxes."
6
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PROSPECTUS SUMMARY (CONTINUED)
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
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 dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and dis-
tribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The value of the Fund's invest-
ments, and thus the net asset value of the Fund's shares, will fluctuate in
response to changes in market and economic conditions, as well as the finan-
cial condition and prospects of issuers in which the Fund invests. The Fund
may invest in foreign securities, though management intends to limit such
investments to 10% of the Fund's assets. Foreign investments may include addi-
tional risks associated with currency exchange rates, less complete financial
information about individual companies, less market liquidity and political
instability. See "Investment Objective and Management Policies."
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 on the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and the Fund's estimated operating
expenses:
<TABLE>
<CAPTION>
SMITH BARNEY
LARGE CAPITALIZATION GROWTH FUND CLASS A CLASS B CLASS C CLASS Y
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<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) None* 5.00% 1.00% None
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ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees** 0.25 1.00 1.00 None
Other expenses*** 0.15 0.15 0.15 0.15
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TOTAL FUND OPERATING EXPENSES 1.15% 1.90% 1.90% 0.90%
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</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. 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 NASD.
*** "Other Expenses" have been estimated based on expenses the Fund expects
to incur during its fiscal year ended November 30, 1998.
7
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PROSPECTUS SUMMARY (CONTINUED)
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 may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the
value of average daily net assets of Class A shares. Smith Barney also
receives, with respect to Class B and Class C shares, an annual 12b-1 fee of
1.00% of the value of average daily net assets of each respective Class, con-
sisting of a 0.75% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
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>
SMITH BARNEY
LARGE CAPITALIZATION GROWTH FUND 1 YEAR 3 YEARS
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<S> <C> <C>
An investor would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5.00% annual return and (2) redemption at the
end of each time period:
Class A....................................................... $60 $81
Class B....................................................... 68 86
Class C....................................................... 28 56
Class Y....................................................... 8 25
An investor would pay the following expenses on the same invest-
ment, assuming the same annual return and no redemption:
Class A....................................................... $60 $81
Class B....................................................... 18 56
Class C....................................................... 18 56
Class Y....................................................... 8 25
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</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 REPRESENTA-
TION OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE
SHOWN.
8
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is long term growth of capital by investing
in equity securities of companies with large market capitalizations. This
investment objective may not be changed without the approval of the holders of
a majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund attempts to achieve its investment objective by investing primarily
in equity securities consisting of common stocks which are believed to afford
attractive opportunities for investment growth. The core holdings of the Fund
are large capitalization companies that are dominant in their industries,
global in scope and have a long term history of performance. The Fund normally
invests at least 65% of its total assets in these securities. The Fund does
have the flexibility, however, to invest the balance in companies with other
market capitalizations. The Fund defines large market capitalization companies
as those having $5 billion or more at the time of the Fund's investment. Compa-
nies whose capitalization falls below this level after purchase will continue
to be considered large capitalization companies for purposes of the 65% policy.
Companies with large market capitalizations typically have a large number of
publicly held shares and a high trading volume resulting in a high degree of
liquidity. When choosing the Fund's investments, the Fund seeks companies that
it expects will demonstrate consistent and sustainable long term growth in
earnings per share, strong cash flow, a high return on equity and a quality
balance sheet. This method of selecting stocks is based on the belief that a
company's earnings growth will eventually translate into growth in the price of
its stock. In analyzing securities for investment, SBMFM considers many differ-
ent factors, including past growth records, management capability, future earn-
ings prospects and technological innovation, as well as general market and eco-
nomic factors that can influence the price of securities. The value of the
Fund's investments, and thus the net asset value of the Fund's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers in which the Fund invests.
Under normal market conditions, the majority of the Fund's portfolio will
consist of common stocks, but it also may contain money market instruments for
cash management purposes. The Fund reserves the right, as a defensive measure,
to hold money market securities, including repurchase agreements or cash, in
such proportions as, in the opinion of management, prevailing market or eco-
nomic conditions warrant.
Further information about the Fund's investment policies, including a list of
those restrictions on its investment activities that cannot be changed without
shareholder approval, appears in the Statement of Additional Information.
9
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
INVESTMENT STRATEGIES AND TECHNIQUES
Equity Securities. The Fund will normally invest at least 65% of its assets
in equity securities, primarily common stocks and, to a lesser extent, securi-
ties convertible into common stock and rights to subscribe for common stock.
Common stocks represent an equity (ownership) interest in a corporation.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions.
Short-Term Investments. The Fund may also invest in money market instruments
such as: U.S. government securities; certificates of deposit, time deposits and
bankers' acceptances issued by domestic banks (including their branches located
outside the United States and subsidiaries located in Canada), domestic
branches of foreign banks, savings and loan associations and similar institu-
tions; high-grade commercial paper; and repurchase agreements with respect to
such instruments.
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash or
equity and debt securities of any grade provided such securities have been
determined by SBMFM to be liquid and unencumbered pursuant to guidelines estab-
lished by the Trustees in an amount equal to the amount of its when-issued and
delayed-delivery commitments. Placing securities rather than cash in the segre-
gated account may have a leveraging effect on the Fund's net assets.
Foreign Securities. The Fund may invest in securities of non-U.S. issuers in
the form of American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") or similar securities representing interests in the common stock of
foreign issuers. Management intends to limit the Fund's investment in these
types of securities, to 10% of the Fund's net assets. ADRs are receipts, typi-
cally issued by a U.S. bank or trust company, which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe which evidence a similar ownership arrangement. Generally, ADRs, in
registered form, are designed for use in the U.S. securities markets and EDRs
are designed for use in
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
European securities markets. The underlying securities are not always denomi-
nated in the same currency as the ADRs or EDRs. Although investment in the
form of ADRs or EDRs facilitates trading in foreign securities, it does not
mitigate the risks associated with investing in foreign securities.
Investments in foreign securities incur higher costs than investments in
U.S. securities, including higher costs in making securities transactions as
well as foreign government taxes which may reduce the investment return of the
Fund. In addition, foreign investments may include additional risks associated
with currency exchange rates, less complete financial information about indi-
vidual companies, less market liquidity and political instability.
Portfolio Transactions and Turnover. Portfolio securities transactions on
behalf of the Fund are placed by SBMFM with a number of brokers and dealers,
including Smith Barney Inc. ("Smith Barney"). Smith Barney has advised the
Fund that in transactions with the Fund, Smith Barney charges a commission
rate at least as favorable as the rate that Smith Barney charges its compara-
ble unaffiliated customers in similar transactions.
The Fund generally does not engage in short-term trading but intends to pur-
chase securities for long-term growth. Accordingly, the Fund's annual portfo-
lio turnover rate is not expected to exceed 100%.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regu-
lar 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 the 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.
11
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all its net investment
income (that is, its income other than its net realized capital gains) and net
realized capital gains, if any, once a year, normally at the end of the year in
which earned or at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gains
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 4.00% 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 dividends and
distributions necessary to avoid the application of this tax.
The per share dividends on Class B and 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 B and 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 serv-
ice fee applicable to Class A shares. Distributions of capital gains, if any,
will be in the same amount for Class A, Class B, Class C and Class Y shares.
TAXES
The Fund intends to qualify each year as a regulated investment company under
the Code. Dividends paid from net investment income and distributions of net
realized short-term capital gains will be taxable to shareholders as ordinary
income, regardless of how long shareholders have held their Fund shares and
whether such dividends and distributions are received in cash or reinvested in
additional Fund shares. Distributions of net realized long-term capital gains
will be taxable to shareholders as long-term capital gains, regardless of how
long shareholders have held Fund shares and whether such distributions are
received in cash or are reinvested in additional Fund shares. Furthermore, as a
general rule, a shareholder's gain or loss on a sale or redemption of Fund
shares will be a long-term capital gain or loss if the shareholder has held the
shares for more than one year and will be a short-term capital gain or loss if
the shareholder has held the shares for one year or less. Some of the Fund's
dividends declared from net investment income may qualify for the Federal divi-
dends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and distribu-
tions will be mailed annually. Each shareholder also will receive, if appropri-
ate, various written notices after the close of the Fund's prior taxable year
as to the Federal
12
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
income tax status of his or her dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Shareholders should consult
their own tax advisors about the status of the Fund's dividends and distribu-
tions for state and local tax liabilities.
PURCHASE OF SHARES
GENERAL
The Fund currently offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B 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 CDSC
and are available only to investors investing a minimum of $5,000,000 (except,
for purchases of Class Y shares by Smith Barney Concert Allocation Series, Inc.
for which there is no minimum purchase amount). See "Prospectus Summary--Alter-
native Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
INITIAL SUBSCRIPTION PERIOD
Smith Barney, the Fund's distributor, will solicit subscriptions for shares
of the Fund during the Subscription Period. Subscriptions for shares must be
made through a brokerage account maintained with Smith Barney or an Introducing
Broker. Shares of the Fund subscribed for during the Subscription Period for
which Smith Barney accepts purchase orders will be issued and sold by the Fund
on the third business day after the end of the Subscription Period (the "Pur-
chase Date"). Also on the Purchase Date, shareholders of other funds of the
Smith Barney Mutual Funds will be able to exchange shares of such funds for
shares of the Fund. On the Purchase Date, Smith Barney will notify the Fund of
the aggregate number of shares for which it has received and accepted
subscriptions, and the Fund will issue shares for such subscriptions and com-
mence operations.
The Fund is offering its Class A shares to the public at a maximum purchase
price per share of $12.50, which equals the Class A share initial net asset
value per share of $11.88 plus the maximum sales charge set forth below under
"Continuous Offerings". The Fund is offering its Class B, Class C and Class Y
shares to the public at each Class' respective initial net asset value per
share of $11.88.
The Fund and Smith Barney may in their discretion determine to withdraw the
offering without notice for any reason before the end of the Subscription Peri-
od. The Fund also reserves the right to refuse any order in whole or in part.
13
<PAGE>
PURCHASE OF SHARES (CONTINUED)
CONTINUOUS OFFERINGS
Smith Barney will suspend the offering of shares to the public immediately
after the expiration of the Subscription Period or within three weeks thereaf-
ter. During the three-week period, Smith Barney will commence a limited contin-
uous offering of shares to the public. Once Smith Barney suspends the offering
of shares to the public (the "Closing Period"), it is expected to do so for 30
days. This period may be lengthened or shortened in the absolute discretion of
Smith Barney. During the Closing Period, the Fund will invest the proceeds from
its Subscription Period and its continuous offering, if any, and existing
shareholders of the Fund may request redemptions, purchase additional shares
and exchange shares of the Fund for shares of certain other funds of the Smith
Barney Mutual Funds. See "Exchange Privilege." Immediately after the expiration
of the Closing Period, Smith Barney expects to commence a continuous offering
of shares of the Fund.
During the continuous offering, shares may be purchased through a brokerage
account maintained with Smith Barney. Shares may also be purchased through an
Introducing Broker or an investment dealer in the selling group. In addition,
certain investors, including qualified retirement plans and certain other
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class B, Class C or Class Y shares. Smith Barney
and other broker/dealers may charge their customers an annual account mainte-
nance fee in connection with a brokerage account through which an investor pur-
chases or holds shares. Accounts held directly at First Data are not subject to
a maintenance fee.
Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or a Self-Employed Retirement Plan, in the Fund. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For partici-
pants in retirement plans qualified under Section 403(b)(7) or Section 401(a)
of the Code, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes in
the Fund is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. For shareholders purchasing shares of
the Fund through the Systematic Investment Plan on a quarterly basis, the mini-
mum initial investment requirement for Class A, Class B and Class C shares and
the subsequent investment requirement for all Classes is $50. There are no min-
imum investment requirements in Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, Directors or Trustees, of any of the
Smith Barney Mutual Funds, and their imme-diate family. The Fund reserves the
right to waive or change minimums, to decline
14
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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, First Data. Share certificates are issued only upon a
shareholder's written request to First Data.
Purchase orders received by the Fund or 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 (the "trade
date"). 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 the Fund or Smith Barney prior to Smith Barney's close
of business. For shares purchased through Smith Barney or Introducing Brokers
purchasing through Smith Barney, payment for Fund shares is due on the third
business day (the "settlement date") after the trade date. In all other cases,
payments must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
During the continuous offering period, 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 First Data is authorized, through preauthorized transfers of at least $25 on
a monthly basis or at least $50 on a quarterly basis to charge the regular bank
account or other financial institution indicated by the shareholder 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 First Data. 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.
15
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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>
SALES CHARGE
------------------------------ DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $ 25,000 5.00% 5.26% 4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 and over * * *
- ---------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 B and 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 reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
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 to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees); the immediate families
of such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such per-
sons and (ii) employees of members of the NASD, provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption
or repurchase; (b) offers of Class A shares to any other investment company to
effect 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
16
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Financial Consultant's employment with Smith Barney), on the condition the pur-
chase 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) purchases by shareholders who have redeemed
Class A shares in the Fund (or Class A shares of another fund of the Smith Bar-
ney Mutual Funds that are offered with a sales charge) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) direct rollovers by
plan participants of distributions from a 401(k) plan offered to employees of
Travelers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: subsequent investments will be subject to the applicable
sales charge); (g) purchases by separate accounts used to fund certain unregis-
tered variable annuity contracts; and (h) purchases by investors participating
in a Smith Barney fee-based arrangement. 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 a reduced sales charge or at net asset value determined by aggregat-
ing 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 the
reduced sales charge. 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, a reduced sales charge or pur-
chase 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 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 reduced sales charges or to purchase at net
asset value, all purchases must be pursuant to an employer- or partnership-
sanctioned plan meeting certain require-
17
<PAGE>
PURCHASE OF SHARES (CONTINUED)
ments. 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, IRAs or investments pursu-
ant to retirement plans under Sections 401 or 408 of the Code. Smith Barney may
also offer a reduced sales charge or 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 reduced
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 pub-
lications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the pur-
chaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge 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 pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge over the 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 reduced 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 applica-
ble 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 Consultant or First Data to obtain a Letter of Intent application.
18
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $1,000,000 in Class Y shares of the Fund
and agree to purchase a total of $5,000,000 of Class Y shares of the Fund
within six (6) months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund expects
that such transfer will not be subject to Federal income taxes. Please contact
a Smith Barney Financial Consultant or First Data for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at the net asset value next determined without an ini-
tial 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 B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
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; (c)
with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
19
<PAGE>
PURCHASE OF SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------------------------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------------------------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There also will be converted at that time
such proportion of Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder. See "Prospectus Summary--Alternative Pur-
chase Arrangements--Class B Shares Conversion Feature." The length of time
that CDSC Shares acquired through an exchange have been held will be calcu-
lated from the date that the shares exchanged were initially acquired in one
of the other applicable 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 redemp-
tion. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated 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 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
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 com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic 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
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
prior to November 7, 1994); (c) redemptions of shares within 12 months follow-
ing the death or disability of the shareholder; (d) redemptions of shares made
in connection with qualified distributions from retirement plans or IRAs upon
the attainment of age 59 1/2; (e) involuntary redemptions; and (f) redemptions
of shares to effect 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 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 the Transfer
Agent in the case of all other shareholders) of the shareholder's status or
holdings, as the case may be.
SMITH BARNEY 401(K) PROGRAM AND EXECCHOICE(TM) PROGRAMS
During the continuous offering period, investors may be eligible to partici-
pate in the Smith Barney 401(k) Program or the Smith Barney ExecChoice(TM)
Program. To the extent applicable, the same terms and conditions, which are
outlined below, are offered to all plans participating ("Participating Plans")
in these programs.
Each Fund offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Pro-
grams. Class A and Class C shares acquired through the Participating Plans are
subject to the same service and/or distribution fees as the Class A and Class
C shares acquired by other investors; however, they are not subject to any
initial sales charge or contingent deferred sales charge ("CDSC"). Once a Par-
ticipating Plan has made an initial investment in a Fund, all of its subse-
quent investments in the Fund must be in the same Class of shares, except as
otherwise described below.
Class A Shares. Class A shares of a Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of a Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000
of Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. At the end
of the fifth year after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $1,000,000, it will be offered the opportunity to exchange all of its
Class C shares for Class A shares of a Fund. (For Participating Plans that
were originally estab-
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
lished through a Smith Barney retail brokerage account, the five year period
will be calculated from the date the retail brokerage account was opened.) Such
Participating Plans will be notified of the pending exchange in writing within
30 days after the fifth anniversary of the enrollment date and, unless the
exchange offer has been rejected in writing, the exchange will occur on or
about the 90th day after the fifth anniversary date. If the Participating Plan
does not qualify for the five year exchange to Class A shares, a review of the
Participating Plan's holdings will be performed each quarter until either the
Participating Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of a
Fund. Such Plans will be notified in writing within 30 days after the last
business day of the calendar year and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the last business day
of the following March.
Any Participating Plan in the Smith Barney 401(k) Program that has not previ-
ously qualified for an exchange into Class A shares will be offered the oppor-
tunity to exchange all of its Class C shares for Class A shares of a Fund,
regardless of asset size, at the end of the eighth year after the date the Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program. Such Plans will be
notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class
A shares of the Fund. Any Class C shares not converted will continue to be sub-
ject to the distribution fee.
Participating Plans wishing to acquire shares of a Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Smith Barney Mutual Funds are not available for purchase by Participating Plans
opened on or after June 21, 1996, but may continue to be purchased by any Par-
ticipating Plan in the Smith Barney 401(k) Program opened prior to such date
and originally investing in such Class. Class B shares acquired are subject to
a CDSC of 3.00% of redemption proceeds, if the Participating Plan terminates
within eight years of the date the Participating Plan first enrolled in the
Smith Barney 401(k) Program.
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Participating Plan will be notified of the pending exchange in writ-
ing approximately 60 days before the eighth anniversary of the enrollment date
and, unless the exchange has been rejected in writing, the exchange will occur
on or about the eighth anniversary date. Once the exchange has occurred, a Par-
ticipating Plan will not be eligible to acquire additional Class B shares of
the Fund but instead may acquire Class A shares of the Fund. If the Participat-
ing Plan elects not to exchange all of its Class B shares at that time, each
Class B share held by the Participating Plan will have the same conversion fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives".
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
23
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
Smith Barney Mutual Funds, to the extent shares are offered for sale in the
shareholder's state of residence. Exchanges of Class A, Class B and Class C
shares are subject to minimum investment requirements and all shares are sub-
ject to the other requirements of the fund into which exchanges are made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*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--Florida Portfolio
24
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
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, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
Fund.
***Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) and ExecChoice(TM) Programs may exchange those shares for
Class C shares of this Fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
25
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a CDSC higher
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
fund that have been exchanged.
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 A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive Class 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 deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges by a share-
holder. Upon such a determination, the Fund 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 main-
tain for a significant period of time. All relevant factors will be considered
in determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures dis-
cussed 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 reg-
istration 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.
26
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem shares 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 trad-
ing 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 redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the 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 third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under
the Investment Company Act of 1940, as amended (the "1940 Act"), in extraordi-
nary circumstances. Generally, if the redemption proceeds are remitted to a
Smith Barney brokerage account, these funds will not be invested for the share-
holder'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.
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 Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Large Capitalization Growth Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
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 regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $2,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Fed-
27
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
eral Reserve System or member firm of a national securities exchange. Written
redemption requests of $2,000 or less do not require a signature guarantee
unless more than one such redemption request is made in any 10-day period or
the redemption proceeds are to be sent to an address other than the address of
record. Unless otherwise directed, redemption proceeds will be mailed to an
investor's address of record. First Data 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 First Data receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligi-
ble to redeem and exchange Fund shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with a signature guarantee when making his/her initial investment
in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the
28
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined.
Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days prior notice to shareholders.
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 cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. 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 shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
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
the Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, 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 involuntary liquidation.
29
<PAGE>
PERFORMANCE
From time to time the Fund may advertise its total return and average annual
total return in advertisements and/or other types of sales literature. These
figures are computed separately for Class A, Class B, 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 speci-
fied 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 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 may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from Lipper
Analytical Services, Inc. and other financial publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for the management and supervision of the Trust rests
with the Trust's Board of Trustees. The Trustees approve all significant agree-
ments between the Trust and the persons and companies that furnish services to
the Fund, including agreements with the Fund's distributor, investment manager,
custodian and transfer agent. The day-to-day operations of the Fund are dele-
gated to the Fund's investment manager. The Statement of Additional Information
contains background information regarding each Trustee of the Trust and execu-
tive officers of the Fund.
INVESTMENT MANAGER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment manager pursuant to an investment management agreement
approved by the Trust's Board of Trustees on April 16, 1997. 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 March 31,
1997 in excess of $80 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 invest-
30
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities, and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
investment management services rendered, the Fund pays SBMFM a monthly fee at
the annual rate of 0.75% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Alan Blake, Investment Officer of SBMFM and Managing Director of Smith Barney
Investment Advisors, a division of Smith Barney Inc., is the portfolio manager
and manages the day-to-day operations of the Fund, including making all invest-
ment decisions.
DISTRIBUTOR
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 an annual
service fee with respect to Class A, Class B and Class C shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Smith Barney is also paid an annual distribution fee with respect to
Class B and Class C shares at the annual rate of 0.75% of the average daily net
assets attributable to those Classes. Class B shares which automatically con-
vert to Class A shares eight years after the date of original purchase will no
longer be subject to distribution fees. The fees are used by Smith Barney to
pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class B and Class C shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising; the
cost of printing and mailing prospectuses to potential investors; payments to
and expenses of Smith Barney Financial Consultants and other persons who pro-
vide support services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of Smith Barney asso-
ciated 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 A, Class B and Class C shares, a con-
tinuing 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.
31
<PAGE>
DISTRIBUTOR (CONTINUED)
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Board of Direc-
tors will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
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 "Massachu-
setts business trust." The Trust offers shares of beneficial interest of sepa-
rate funds with a par value of $.001 per share. The Fund offers shares of bene-
ficial interest currently classified into four Classes--A, B, C and Y. 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 pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges; if any, for each Class; (c) the distri-
bution 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; (f) the exchange privilege of each Class;
and (g) the conversion feature of the Class B shares. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the inter-
ests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take appro-
priate action.
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 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.
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.
32
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the reporting period. 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. Shareholders who do not want this consolidation to apply
to their accounts should contact their Smith Barney Financial Consultant or the
Fund's Transfer Agent.
33
<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
LARGE
CAPITALIZATION
GROWTH FUND INC.
388 Greenwich Street
New York, New York 10013
FD 01306 7/97
PART BSmith Barney
INVESTMENT TRUST
388 Greenwich Street
New York, New York 10013
(212) 723-9218
March 25, 1997 as amended July 14, 1997
This Statement of Additional Information supplements the information contained
in the current Prospectuses of the Smith Barney Intermediate Maturity
California Municipals Fund (the California Fund"), the Smith Barney
Intermediate Maturity New York Municipals Fund (the New York Fund") dated
March 25, 1997 and the prospectus of the Large Capitalization Growth Fund
("Large Capitalization Growth Fund") dated July 14,1997, 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 Investment Trust
(the Trust"), of which each of California Fund, New York Fund and Large
Capitalization 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.
TABLE OF CONTENTS
For ease of reference, the same section headings used in this Statement of
Additional Information are identical to those used in each Prospectus except
as noted in parentheses below:
Management of the Trust and the Funds 1
Investment Objectives and Management Policies the New York & California Fund
7
Investment Objectives & Management Policy for Large Capitalization Growth Fund
34
Purchase of Shares 38
Redemption of Shares 39
Distributor 40
Valuation of Shares 43
Exchange Privilege 44
Performance Data (See in the Prospectuses "Performance ") 44
Taxes (See in the Prospectuses Dividend, Distribution and Taxes") 50
Additional Information 52
Financial Statements 53
Appendix 54
MANAGEMENT OF THE TRUST AND THE FUNDS
The executive officers of the Funds are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
NAME SERVICE
Smith Barney Inc. (Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc.
(SBMFM") Investment Adviser and Administrator
for the New York and California Fund
SBMFM. Investment Manager for the Large
Capitalization Fund
PNC Bank, National Association (PNC") Custodian
First Data Investor Services Group, Inc.,
("First Data") Transfer Agent
These organizations and the functions they perform for the Funds are discussed
in the Prospectuses and in this Statement of Additional Information
TRUSTEES AND EXECUTIVE 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.
Herbert Barg, Trustee (Age 73). Private investor. His address is 273
Montgomery Avenue, Ball Cynwyd, Pennsylvania 19004.
Alfred J. Bianchetti, Trustee (Age 74). Retired; formerly Senior
consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 07466.
Martin Brody Trustee (Age 75). Vice Chairman of the Board of Restaurant
Associates, Corp. His address is HMK Associates, 30 Columbia Turnpike,
Florham Park, New Jersey 07932.
Dwight B. Crane, Trustee (Age 59). Professor, Graduate School of
Business Administration, Harvard University; Business Consultant. His address
is Graduate School of Business Administration, Harvard University, Boston,
Massachusetts 02163.
Burt N. Dorsett, Trustee (Age 67). Managing Partner of Dorsett, McCabe
Capital Management, Inc., an investment counseling firm; Director of Research
Corporation Technologies Inc., a non-profit patent-clearing and licensing
firm. His address is 540 Madison Avenue, New York, New York 10021.
Elliot S. Jaffe, Trustee (Age 70). Chairman of the Board and Chief
Executive of The Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern,
New York 10901.
Stephen E. Kaufman, Trustee (Age 65). Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 66). Financial Consultant. His address
is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
Heath B. McLendon, Chairman of the Board and Investment Officer (Age
63). Managing Director of Smith Barney, Chairman of Smith Barney Strategy
Advisers Inc. and President of SBMFM; prior to July 1993, Senior Executive
Vice President of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers")
and Vice Chairman of Asset Management Division of Shearson Lehman Brothers.
Mr. McLendon is Chairman of the Board of 42 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Trustee (Age 63). Chairman of the Board,
Cornelius C. Rose Associates, Inc., financial consultants, and Chairman and
Director of Performance Learning Systems, an education consultant. His
address is P.O. Box 355, Fair Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Trustee emeritus (Age 89). Attorney; formerly Justice
of the Supreme Court of the State of New York. His address is 118 East 60th
Street, New York, New York 10022.
Jessica M. Bibliowicz, President (Age 37). Executive Vice President of
Smith Barney; prior to 1994, Director of Sales and Marketing for Prudential
Mutual Funds; prior to 1990, First Vice President, Asset Management Division
of Shearson Lehman Brothers. Ms. Bibliowicz serves as President of 40 Smith
Barney Mutual Funds. Her address is 388 Greenwich Street; New York, New York
10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 39).
Managing Director of Smith Barney; and Chief Financial Officer of the Smith
Barney Mutual Funds; Director and Senior Vice President of SBMFM; Prior to
January 1990, Senior Vice President and Chief Financial Officer of Cortland
Financial Group, Inc. Mr. Daidone serves as Senior Vice President and
Treasurer of 42 Smith Barney Mutual Funds. His address is 388 Greenwich
Street, New York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer (Age 49).
Investment Officer of SBMFM; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Mr. Deane also serves as Investment Officer of 5 Smith
Barney Mutual Funds. His address is 388 Greenwich Street, New York, New York
10013.
Peter Coffey, Vice President and Investment Officer (Age 52).
Investment Officer of SBMFM; Managing Director of Greenwich Street Advisors, a
division of SBMFM; Mr. Coffey also serves as Investment Officer of 8 Smith
Barney Mutual Funds. His address is 388 Greenwich Street, New York, New York
10013.
Alan Blake (Age 48), Managing Director of Smith Barney Investment
Advisors, a division of Smith Barney. His address is 388 Greenwich Street,
New York, New York 10013.
Christina T. Sydor, Secretary (Age 46). Managing Director of Smith
Barney; General Counsel and Secretary of SBMFM. Ms. Sydor serves as Secretary
of 42 Smith Barney Mutual Funds. Her address is 388 Greenwich Street New
York, New York 10013.
As of March 6, 1997, the Trustees and officers, as a group, owned less than
1.00% of the outstanding common stock of each Fund. To the best knowledge of
the Trustees, as of March 6, 1997, no shareholder or group (as that term is
used in Section 13(d) of the Securities and Exchange Act of 1934) owned
beneficially or of record more than 5% of the shares of either Fund.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as an officer of the
Funds 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 in-person meeting and $100 per telephonic
meeting. Each Trustee emeritus who is not an officer, director or employee of
Smith Barney or its affiliates receives a fee of $2,000 per annum plus $250
per in-person meeting and $50 per telephonic meeting. All Trustees are
reimbursed for travel and out-of-pocket expenses incurred to attend such
meetings.
For the fiscal year ended November 30, 1996, the Trustees of the Trust were
paid the following compensation:
Trustee (*)
Aggregate Compensation
from the Trust
Aggregate Compensation
from all Smith Barney
Mutual Funds **
Herbert Barg (18)
$6,600
$105,175
Alfred J. Bianchetti
(13)
6,500
51,500
Martin Brody (21)
6,500
124,286
Dwight B. Crane (24)
6,500
140,375
Burt N. Dorsett (13)
6,100+
47,400+
Elliot S. Jaffe (13)
6,600
51,100
Stephen E. Kaufman
(15)
6,600
92,336
Joseph J. McCann (13)
6,600
52,700
Heath B. McLendon
(42)
--
--
Cornelius C. Rose
(13)
6,600
51,400
* Number of directorships/trusteeships held with other Smith Barney Mutual
Funds.
** Aggregate compensation for all Smith Barney Mutual Funds is for calendar
year ended December 31, 1996.
+ Pursuant to the Funds deferred compensation plan, Mr. Dorsett has elected
to defer the payment of some or all of the compensation due to him from
the Funds.
Investment Adviser and Administrator for New York and California Fund - SBMFM
SBMFM serves as investment adviser to each of the Funds pursuant to an
investment advisory agreement with the Trust which was most recently approved
by the Board of Trustees, including a majority of Trustees who are not
interested persons" of the Trust or SBMFM, on July 17, 1996. SBMFM is a
wholly owned subsidiary of Smith Barney Holdings Inc. (Holdings"), which, in
turn, is a wholly owned subsidiary of Travelers Group Inc. (Travelers"). The
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.
As compensation for investment advisory services, each Fund pays SBMFM a fee
computed daily and paid monthly at the annual rate of 0.30% of the Funds
average daily net assets.
For the fiscal year ended November 30, 1994, the Funds paid SBMFM, and/or its
predecessor investment adviser, investment advisory fees, and the investment
adviser waived fees and reimbursed expenses as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$12,828
$98,519
New York Fund
97,097
144,592
For the fiscal year ended November 30, 1995, the Funds paid SBMFM investment
advisory fees, and the investment adviser waived fees and reimbursed expenses
as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$22,385
$65,910
New York Fund
82,898
115,831
For the fiscal year ended November 30, 1996, the Funds paid SBMFM investment
advisory fees, and the investment adviser waived fees and reimbursed expenses
as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$ 0
$128,361
New York Fund
32,306
122,796
SBMFM also serves as administrator to the New York and California Funds
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 17, 1996. 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.
As compensation for administrative services rendered to each Fund, SBMFM
receives a fee computed daily and paid monthly at the annual rate of 0.20% of
the Funds average daily net assets.
Prior to June 26, 1995, and July 10, 1995, for New York Fund and California
Fund, respectively, The Boston Company Advisors, Inc. (Boston Advisors"),an
indirect wholly owned subsidiary of Mellon Bank Corporation, served as the
Funds sub-administrator.
For the fiscal year ended November 30, 1994, the Funds paid Boston Advisors
and SBMFM administration fees and Boston Advisors and SBMFM waived fees as
follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$7,330
$56,297
New York Fund
55,483
82,625
For the fiscal year ended November 30, 1995 the Funds paid SBMFM
administration fees and SBMFM waived fees as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$17,121
$37,626
New York Fund
47,695
65,864
For the fiscal year ended November 30, 1996 the Funds paid SBMFM
administration fees and SBMFM waived fees as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$ 0
$85,575
New York Fund
10,906
92,495
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 or SBMFM,
Securities and Exchange Commission (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 has agreed that if in any fiscal year the aggregate expenses of the
Trust (including fees pursuant to the Advisory Agreement and Administration
Agreement, but excluding interest, taxes, brokerage fees paid pursuant to the
Trusts 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
will, to the extent required by state law, reduce its fees by the amount of
such excess expenses. 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 to reduce its 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 daily net assets. No fee reduction was required for the
fiscal years ended November 30, 1994, 1995 and 1996.
Investment Manager For Large Capitalization Growth Fund - SBMFM
SBMFM serves as investment manager to the Large Capitalization Growth Fund
pursuant to an investment management agreement with the Trust which was
approved by the Board of Trustees, including a majority of Trustees who are
not "interested persons" of the Trust or SBMFM, on April 16, 1997. SBMFM is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which in
turn, is a wholly owned subsidiary of Travelers Group Inc. ("Travelers"). The
services provided by SBMFM under the Investment Management Agreement are
described in the prospectus 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.
As compensation for investment management services, the Large Capitalization
Growth Fund pays SBMFM a fee computed daily and paid monthly at the annual
rate of 0.75% of the Fund's average daily net assets.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Trust. The Trustees
who are not interested persons" of the Trust have selected Stroock & Stroock &
Lavan LLP as their counsel.
KPMG Peat Marwick LLP, independent auditors, 345 Park Avenue, New York, New
York 10154, have been selected to serve as auditors of the Trust and to render
opinions on the Funds financial statements for the fiscal year ended November
30, 1997.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
FOR THE NEW YORK AND CALIFORNIA FUND
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 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, neither of the Funds will invest in obligations issued by an
instrumentality of the United States government unless SBMFM determines that
the instrumentalitys 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 (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 Moodys Investor Services, Inc.
(Moodys") or Standard & Poors 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 its Prospectus, the California Fund seeks its objective by
investing principally in a portfolio of Municipal Obligations, the interest
from which is exempt from California State personal income taxes (California
Exempt Obligations").
Some of the significant financial considerations relating to the California
Funds 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 lnformation and does not purport to be a complete
description of any of the considerations mentioned herein. It is also based
on the disclosure statement filed in the County of Orange bankruptcy case.
The accuracy and completeness of the information contained in such official
statements and disclosure statement has not been independently verified.
Risk Factors
Beginning in the 1990-91 fiscal year, California faced the worst economic,
fiscal and budget conditions since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among others, were
severely affected. Job losses were the worst of any post-war recession and
have been estimated to exceed 800,000.
The recession seriously affected State tax revenues. It also caused increased
expenditures for health and welfare programs. The State has also faced a
structural imbalance in its budget with the largest programs supported by the
General Fund K-12 schools and community colleges, health, welfare and
corrections growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. (The General Fund, the State's main
operating fund, consists of revenues which are not required to be credited to
any other fund.) The State experienced recurring budget deficits. The State
Controller reported that expenditures exceeded revenues for the four of the
six fiscal years ending with 1992-93, and were essentially equal in 1993-94.
According to the Department of Finance, the State suffered a continuing budget
deficit of approximately $2.8 billion in the Special Fund for Economic
Uncertainties. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for
specified purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction
Plan to repay this deficit over two years. The original budget for 1993-94
reflected revenues which exceeded expenditures by approximately $2.8 billion.
As a result of continuing recession, the excess of revenues over expenditures
for the 1993-94 fiscal year was less than $300 million. The accumulated
budget deficit at June 30, 1994 was not able to be retired by June 30, 1995 as
planned. When the economy failed to recover sufficiently in 1993-94, a second
two-year plan was implemented in 1994-95. The accumulated budget deficits
over the past several years, together with expenditures for school funding
which have not been reflected in the budget, and the reduction of available
internal borrowable funds, have combined to significantly deplete the State's
cash resources to pay its ongoing expenses. In order to meet its cash needs,
the State has had to rely for several years on a series of external
borrowings, including borrowings past the end of a fiscal year. At the end of
its 1995-96 fiscal year, however, the State did not borrow moneys into the
subsequent fiscal year.
Since the severe recession, California's economy has been recovering.
Employment has grown by over 500,000 in 1994 and 1995, and the prerecession
level of total employment is expected to be matched by early 1996. The
strongest growth has been in export-related industries, business services,
electronics, entertainment and tourism, all of which have offset the
recession-related losses which were heaviest in aerospace and defense-related
industries (accounting for approximately two-thirds of the job losses),
finance and insurance. Residential housing construction, with new permits for
under 100,000 annual new units issued in 1994 and 1995, is weaker than in
previous recoveries, but has been growing slowly since 1993.
Sectors which are now contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services, and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. As a result of these factors, average 1994 non-farm
employment exceeded expectations and grew beyond 1993 levels.
Many California counties continue to be under severe fiscal stress. Such
stress has impacted smaller, rural counties and larger urban counties such as
Los Angeles, and Orange County which declared bankruptcy in 1994. Orange
County has implemented significant reductions in services and personnel, and
continues to face fiscal constraints in the aftermath of its bankruptcy.
The 1994-95 Fiscal Year represented the fourth consecutive year the Governor
and Legislature were 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 Governors May Revision to his budget
proposal, recognized that the accumulated deficit could not be repaid in one
year, and proposed a two-year solution. The May Revision sets forth revenue
and expenditure forecasts and revenue and expenditure proposals which would
result in operating surpluses for the budget for both 1994-95 and 1995-96, and
would 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, about $2.1 billion higher than
revenues in 1993-94. This reflected the Administrations forecast of an
improved economy. Also included in this figure was the projected receipt of
about $360 million from the Federal government to reimburse the State for the
cost of incarcerating undocumented immigrants.
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 projected 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. Reductions of approximately $1.1 billion in health and welfare costs.
2. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for California State
University. It was anticipated that student fees for both the U.C. and
the C.S.U. will increase up to 10%.
3. Proposition 98 funding for K-14 schools was increased by $526 million
from 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provided approximately $4,217 per student for K-12 schools,
equal to the level in the past three years.
4. Legislation enacted with the Budget clarified laws passed in 1992 and
1993 requiring counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented programs providing less moneys to schools if there were
redevelopment agencies projects. The legislation banned this method of
transfer. If all counties had implemented this method, General Fund aid
to K-12 schools would have increased by $300 million in each of the
1994-95 and 1995-96 Fiscal Years.
5. The Budget Act provided funding for anticipated growth in the States
prison inmate population, including provisions for implementing recent
legislation (the so-called Three Strikes" law) which requires mandatory
life sentences for certain third-time felony offenders.
6. Additional miscellaneous cuts ($500 million) and fund transfers ($255
million) totaling in the aggregate approximately $755 million.
The 1994-95 Budget Act contained no tax increases. Under legislation enacted
for the 1993-94 Budget, the renters tax credit was suspended for 1993 and
1994. A ballot proposition to permanently restore the renters credit after
this year failed at the June 1994 election. The Legislature enacted a further
one-year suspension of the renters tax credit, saving about $390 million in
the 1995-96 Fiscal Year. The 1994-95 Budget assumed that the State will use a
cash flow borrowing program in 1994-95 which would combine one-year notes and
warrants. Issuance of warrants would allow the State to defer repayment of
approximately $1 billion of its accumulated budget deficit into the 1995-96
Fiscal Year.
May 1995 reports by the Department of Finance indicated that General Fund
revenues for the 1994-95 Fiscal Year exceeded projections, and expenditures
were lower than projected due to slower than anticipated health/welfare
caseload growth and school enrollments. The overall effect was to improve the
budget by approximately $500 million, leaving an estimated deficit of about
$630 million as of June 30, 1995.
Department of Finance analysis of the 1994-95 fiscal Year budget indicated
that approximately $98 million was appropriated for the State to offset costs
of incarcerating illegal immigrants, in contrast to the $356 million assumed
for this purpose by the State's 1994-95 Budget Act. Approximately $33 million
of these funds were estimated to be received by the State during the 1994-95
Fiscal Year, with the remainder to be received the following fiscal year.
Departing from 1994-95 Fiscal Year assumptions, the federal budget contains
$400 million in additional funding for refugee assistance and health costs.
However, the Department of Finance did not expect that the State would
continue its efforts to obtain all or a portion of these federal funds.
The state began the 1995-96 Fiscal Year with strengthening revenues based on
an improving economy and the smallest nominal "budget gap" to be closed in
many years.
The 1995-96 Budget Act, signed by the Governor on August 3, 1995, projects
General Fund revenues and transfers of $44.1 billion, about $2.2 billion
higher than projected revenues in 1994-95. The Budget Act projects Special
Fund revenues of $21.7 billion, an increase from $12.1 billion projected in
1994-95. The Department of Finances released updated projections for the
1995-96 fiscal year in May, 1996, estimating that revenues and transfers to be
$46.1 billion, approximately $2 billion over the original fiscal year
estimate. Expenditures also increased, to an estimated $45.4 billion, as a
result of the requirement to expend revenues for schools under Proposition 98,
and, among other things, failure of the federal government to budget new aid
for illegal immigrant costs which had been counted on to allow reductions in
costs.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community colleges will
increase by about $1 billion (General Fund) and $1.2 billion total
above revised 1994-95 levels. Because of higher than projected
revenues in 1994-95, an additional $543 million is appropriated to the
1994-95 Proposition 98 entitlement. A significant component of this
amount is a block grant of about $54 per pupil for any one-time
purpose. Per-pupil expenditures are projected to increase by another
$126 in 1995-96 to $4,435. A full 2.7% cost of living allowance is
funded for the first time in several years. The budget compromise
anticipated a settlement of the CTA v. Gould litigation.
2. Cuts in health and welfare costs totaling about $900 million, some of
which would require federal legislative approval.
3. A 3.5% increase in funding for the University of California ($90
million General Fund) and the California State University system ($24
million General Fund), with no increases in student fees.
4. The updated Budget assumes receipt of $494 million in new federal aid
for costs of illegal immigrants, in excess of federal government
commitments.
5. General Fund support for the Department of corrections is increased
by about 8 percent over 1994-95, reflecting estimates of increased
prison population. This amount is less than was proposed in the 1995
Governor's Budget.
1996-97 Budget
The 1996-97 Budget Act was signed by the Governor on July 15, 1996, and
projected General Fund revenues and transfers of approximately $47.64 billion
and General Fund expenditures of approximately $47.25 billion. The Governor
vetoed abut $82 million of appropriations (both General Fund and Special Fund)
and the State has implemented its regular cash flow borrowing program with the
issuance of $3.0 billion of Revenue Anticipation Notes to mature on or before
June 30, 1997. The 1996-97 Budget Act appropriated a budget reserve in the
Special Fund for Economic Uncertainties of $305 million, as of June 30, 1997.
The Department of Finance projects that, on June 30, 1997, the State's
available internal borrowable (cash) resources will be approximately $2.9
billion, after payment of all obligations due by that date, so that no cross-
fiscal year borrowing will be needed.
The State Legislature rejected the Governor's proposed 15% cut in personal
income taxes (to be phased over three years), but did approve a 5% cut in bank
and corporation taxes, to be effective for income years starting on June 1,
1997. As a result, revenues for the Fiscal Year will be an estimated $550
million higher than projected in the May Revision to the 1996-97 Budget, and
are now estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. Special Fund revenues are estimated to be
$13.3 billion.
The Budget Act contains General Fund appropriations totaling $47.251 billion,
a 4.0 percent increase over the final estimated 1995-96 expenditures. Special
Fund expenditures are budgeted at $12.6 billion.
The following are the principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community colleges will
increase by about $1.6 billion. Almost half of this money was budgeted
to fund class-size reduction in kindergarten and grades 1-3. Also, for
the second year in a row, the full cost of living allowance (3.2
percent) was funded. The Proposition 98 increases have brought K-12
expenditures to almost $4,800 per pupil (also called per ADA, or
Average Daily Attendance), an almost 15% increase over the level
prevailing during the recession years. Community colleges will receive
an increase in funding of $157 million for 1996-97 out of this $1.6
billion total.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts require federal law changes (including welfare reform),
federal waivers, or federal budget appropriations in order to be
achieved. The 1996-97 Budget Act assumes approval/action by October,
1996, with the savings to be achieved beginning in November, 1996. The
1996-97 Budget Act was based on continuation of previously approved
assistance levels for Aid to Families with Dependent Children and other
health and welfare programs, which had been reduced in prior years,
including suspension of State authorized cost of living increases.
Part of the federal actions referred to above is approval to maintain
reduced assistance levels in 1996-97. The Legislature did not approve
the Governor's proposal for further cuts in these assistance levels.
The Budget Act does include some $92 million for a variety of
preventive programs in health and social services areas such as the
prevention of teenage pregnancy and domestic violence.
3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system
($101 million General Fund), with no increases in student fees,
maintaining the second year of the Governor's four-year "Compact" with
the State's higher education units.
4. The 1996-97 Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care
costs of illegal immigrants. These funds reduce appropriations in
these categories that would otherwise have to be paid from the General
Fund. (For purposes of cash flow projections, the Department of
Finance expects $540 million of this amount to be received during the
1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was increased
by about 7 percent over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new programs
included in the 1996-97 Budget Act are $100 million in grants to cities
and counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile
crime. The 1996-97 Budget Act also assumed that legislation will be
adopted to revise the Trial Court Funding program, so that future
increases in trial court costs will be funded by the State; this change
will not have a significant impact in 1996-97.
The 1996-97 Budget Act did not contain any tax increases. As noted, there was
a reduction in corporate taxes. In addition, the Legislature approved another
one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION
PROVIDED BY THE STATE OF CALIFORNIA. THE STATE HAS INDICATED THAT ITS
DISCUSSION OF BUDGETARY INFORMATION IS BASED ON ESTIMATES AND
PROJECTIONS OF
REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT; THE ESTIMATES AND PROJECTIONS ARE
BASED UPON
VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS FACTORS,
INCLUDING
FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THERE CAN BE
NO
ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
Recent Voter Initiative
"Proposition 218" or the "Right to vote on Taxes Act" (the "Proposition") was
approved by the California electorate at the November, 1996 general election.
Officially titled "Voter Approval For Local Government Taxes, Limitation on
Fees, Assessments and Charges Initiative Constitutional Amendment," the Act
was approved by a majority of the voters voting at the election and adds
Articles XIIIC and XIIID to the California Constitution.
The Proposition, among other things, requires local government to follow
certain procedures in imposing or increasing any fee or charge as defined.
"Fee" or "charge" is defined to mean "any levy other than an ad valorem tax, a
special tax or an assessment imposed by an agency upon a parcel or upon a
person as an incident of property ownership, including user fees or charges
for a property related service."
The procedure required by the Proposition to impose or increase any fee or
charge include a public hearing upon the proposed fee or charge and the
opportunity to present written protests by the owners of the parcels subject
to the proposed fee or charge. If written protests against the proposed fee
or charge are presented by a majority of owners of the identified parcels, the
local government shall not impose the fee or charge.
The Proposition further provides as follows:
"Except for fees or charges for sewer, water, and refuse collection
services, no property related fee or charge shall be imposed or increased
unless and until such fee or charge is submitted and approved by a majority
vote of the property owners of the property subject to the fee or charge
or, at the option of the agency, by a two thirds vote of the electorate
residing in the affected area."
Additionally, the Proposition provides, with respect to standby charges, as
follows:
"No fee or charge may be imposed for a service unless that service is
actually used by, or immediately available to, the owner of the property in
question. Fees or charges based on potential or future use of a service
are not permitted. Standby charges, whether characterized as charges or
assessments, shall be classified as assessments and shall not be imposed
without compliance with Section 4 of this Article."
The Proposition provides that beginning July 1, 1997, all fees and charges
shall comply with the Proposition's requirements.
The Proposition is silent with respect to future increases of pre-existing
fees or charges which are pledged to payment of indebtedness or obligations
previously incurred by the local government. Presumably, the Proposition
cannot preempt outstanding contractual obligations protected by the contract
impairment clause of the federal constitution. However, with respect to any
given situation or case, litigation may be the method which will settle any
question concerning the authority of a local government to increase fees or
charges outside of the strictures of the Proposition in order to meet
contractual obligations.
Proposition 218 also contains a new provision subjecting "matters of reducing
or repealing any local tax, assessments and charges" to the initiative power.
This means that no city or local agency revenue source is safe from reduction
or repeal pursuant to the initiative process.
Litigation concerning various elements of the Proposition may ultimately ensue
and clarifying legislation may be enacted.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"), and is
prohibited from spending "appropriations subject to limitation" in excess of
the Appropriations Limit. Article XIIIB originally adopted in 1979, was
modified substantially by Propositions 98 and 111 in 1988 and 1990,
respectively. "Appropriations subject to limitation" are authorizations to
spend "proceeds of taxes," which consist of tax revenues and certain other
funds, including proceeds from regulatory licenses, user charges or other fees
to the extent that such proceeds exceed the reasonable cost of providing the
regulation, product or service. The Appropriations Limit is based on the
limit for the prior year, adjusted annually for certain changes, and is tested
over consecutive two-year periods. Any excess of the aggregate proceeds of
taxes received over such two-year period above the combined Appropriation
Limits for those two years is divided equally between transfers to K-14
districts and refunds to taxpayers.
Exempted from the Appropriation Limit are debt service costs of certain bonds,
court or federally mandated costs, and, pursuant to Proposition 111, qualified
capital outlay projects and appropriations or revenues derived from any
increase in gasoline taxes and motor vehicle weight fees above January 1, 1990
levels. Some recent initiatives were structured to create new tax revenues
dedicated to specific uses and expressly exempted from the Article XIIIB
limits. The Appropriations Limit may also be exceeded in cases of emergency
arising from civil disturbance or natural disaster declared by the Governor
and approved by two-thirds of the Legislature. If not so declared and
approved, the Appropriations Limit for the next three years must be reduced by
the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in proposition 98. During fiscal year 1991-1992
revenues were smaller than expected, thus reducing the payment owed to schools
in 1991-92 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the 1991-
1992 and 1992-1993 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to schools
but which exceeded the reduced appropriations treated as a non-Proposition 98
short-term loan in 1991-92. As part of the 1992-93 Budget, $1.083 billion of
the amount budgeted to K-14 schools was designated to "repay" the prior year
loan, thereby reducing cash outlays in 1992-93 by that amount. To maintain
per-average daily attendance ("ADA") funding, the 1992-93 Budget included
loans of $732 million to K-12 schools and $241 million to community colleges,
to be repaid from future Proposition 98 entitlements. The 1993-94 Budget also
provided new loans to $609 million to K-12 schools and $178 million to
community colleges to maintain ADA funding. These loans have been combined
with the 1992-93 fiscal year loans into one loan of $1.760 billion, to be
repaid from future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers Association, et al.
v Gould, et al., ruled that the 1992-93 loans to K-12 schools and community
colleges violate Proposition 98. As part of the negotiations leading to the
1995-96 Budget Act, an oral agreement was reached to settle this case. The
parties reached a conditional final settlement of the case in April, 1996.
The settlement required adoption of legislation satisfactory to the parties to
implement its terms, which has occurred, and final approval by the court,
which was pending in early July, 1996.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as expenditures above the
current Proposition 98 base circulation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are to be spread over
the eight-year period beginning 1994-95 through 2002-03. Once the Director of
Finance certifies that a settlement has occurred, approximately $377 million
in appropriations from the 1995-96 fiscal year to schools will be disbursed.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Trust cannot predict the impact of this or related legislation on the bonds in
the Trust Portfolio. Other Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If any
such initiatives are adopted, the state could be pressured to provide addition
financial assistance to local governments or appropriate revenues as mandated
by such initiatives. Propositions such a Proposition 98 and others that may
be adopted in the future, may place increasing pressure on the State's budget
over future years, potentially reducing resources available for other State
programs, especially to the extent that the Article XIIIB spending limit would
restrain the State's ability to fund such other programs by raising taxes.
State Indebtedness
As of July 1, 1996, the State had over $18.20 billion aggregate amount of its
general obligation bonds outstanding. General obligation bond authorizations
in an aggregate amount of approximately $4.31 billion remained unissued as of
July 1, 1996. The State also builds and acquires capital facilities through
the use of lease purchase borrowing. As of July 1, 1996, the State had
approximately $5.85 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $20.77 billion aggregate principal amount of revenue bonds
and notes outstanding as of June 30,1996. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not payable from the General Fund, and conduit obligations payable
only from various public works and exposition projects, educational facilities
(including the California State University and University of California's
systems), housing, health facilities and pollution control facilities.
Litigation
The State is a party to numerous legal proceedings. In addition, the State is
involved in certain other legal proceedings that, if decided against the
State, might require the State to make significant future expenditures or
impair future revenue sources. Examples of such cases include challenges to
certain vehicle license fees and challenges to the State's use of Public
Employee Retirement System funds to offset future State and local pension
contributions. Other cases which could significantly impact revenue or
expenditures involve challenges of payments of wages under the Fair Labor
Standards Act, the method of determining gross insurance premiums involving
health insurance, property tax challenges, challenges of transfer of moneys
from State Treasury special fund accounts to the State's General Fund pursuant
to 1991, 1992, 1993 and 1994 Budget Acts. Because of the prospective nature
of these proceedings, it is not presently possible to predict the outcome of
such litigation or estimate the potential impact on the ability of the State
to pay debt service on its obligation.
Ratings
During 1996, the ratings of California's general obligation bonds was upgraded
by the following rating agencies. Recently Standard & Poor's Ratings Group
upgraded its rating of such debt to A+; the same rating has been assigned to
such debt by Fitch Investors Service. Moody's Investors Service has assigned
such debt an A1 rating. There is no assurance that such ratings will continue
for any given period of time or that they will not be revised downward or
withdrawn entirely if, in the judgment of the particular rating agency,
circumstances so warrant.
The Trust believes the information summarized above describes some of the more
significant aspects relating to the California Trust. The sources of such
information are Preliminary Official Statements and Official Statements
relating to the State's general obligation bonds and the States revenue
anticipation notes, or obligations of other issuers located in the State of
California, or other publicly available documents. Although the Sponsor has
not independently verified this information, it has no reason to believe that
such information is not correct in all material respects.
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 the State of California and various local agencies in
California available as of the date of the 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 States General Fund surplus are distributed to counties, cities
and their various taxing entities and the State assumes certain obligations
therefore paid out of local funds. Whether and to what extent a portion of
the States 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 waters-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 waters-edge basis pay a fee and file a
domestic disclosure spreadsheet and instead requiring an annual information
return. 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 former 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 Assessors valuation of real property as shown
on the 1975/76 tax bill under full cash value or, thereafter, the appraised
value of real property when purchased, newly constructed, or a change in
ownership has occurred after the 1975 assessment. The full cash value may be
adjusted annually to reflect inflation at a rate not to exceed 2% per year, or
reduction in the consumer price index or comparable local data, or reduced in
the event of declining property value caused by damage, destruction or other
factors. The California State Board of Equalization has adopted regulations,
binding on county assessors, interpreting the meaning of change in ownership"
and new construction" for purposes of determining full cash value of property
under Article XIIIA.
Legislation enacted by the California Legislature to implement Article XIIIA
(Statutes of 1978, Chapter 292, as amended) provides that notwithstanding any
other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation (based on the former practice of using 25%,
instead of 100%, of full cash value as the assessed value for tax purposes).
The 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's 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's and are not
allowed
to spend certain monies called appropriations subject to limitations" 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 the limit for the prior year adjusted
annually for certain changes and is tested over consecutive two year periods.
Article XXIIIB also provides that any excess of aggregate proceeds of taxes
received over such two year period above the combined appropriation limits for
those two years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (a) the California Legislature establish a prudent state reserve
fund in an amount as it shall deem reasonable and necessary and (b) revenues
in excess of amounts permitted to be spent and which would otherwise be
returned pursuant to Article XIIIB by revision of tax rates or fee schedules,
be transferred and allocated (up to a maximum of 4%) to the State School Fund
and be expended solely for purposes of instructional improvement and
accountability. No such transfer or allocation of funds will be required if
certain designated state officials determine that annual student expenditures
and class size meet certain criteria as set forth in Proposition 98. Any
funds allocated to the State School Fund shall cause the appropriation limits
established in Article XIIIB to be annually increased for any such allocation
made in the prior year.
Proposition 98 also amends Article XVI to require that the State of California
provide a minimum level of funding for public schools and community colleges.
Commencing with the 1988-89 fiscal year, state monies to support school
districts and community college districts shall equal or exceed the lesser of
(a) an amount equaling 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 years 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 to
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
entitys 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 entitys
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. A decision of the California Supreme Court upholding the
validity of Proposition 62 became final in December of 1995.
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 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 hospitals 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 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 creditors
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 trustees 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 creditors nonjudicial foreclosure rights under the power of
sale contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale. During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments. Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three
full monthly payments have become due and remain unpaid. The power of sale is
exercised by posting and publishing a notice of sale for at least 20 days
after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to
a substantial number of mortgages or deeds of trust securing an issuers
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 Californias 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 Funds portfolio. In such an
event, the Trustees would reevaluate the Funds investment objective and
policies and consider changes in its structure or possible dissolution.
Special Consideration Relating to New York
Exempt Obligations
New York Trust
Risk Factors-The information set forth below is derived from the official
statements and/or preliminary drafts of official statements prepared in
connection with the issuance of New York State and New York City municipal
bonds. The Trust has not independently verified this information.
Economic Trends. Over the long term, the State of New York (the "State") and
the City of New York (the "City") face serious economic problems. The City
accounts for approximately 41% of the State's population and personal income,
and the City's financial health affects the State in numerous ways. The State
historically has been one of the wealthiest states in the nation. For
decades, however, the State has grown more slowly than the nation as a whole,
gradually eroding its relative economic affluence. Statewide, urban centers
have experienced significant changes involving migration of the more affluent
to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and
business. The City has also had to face greater competition as other major
cities have developed financial and business capabilities which make them less
dependent on the specialized services traditionally available almost
exclusively in the City.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes
to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation,
in combination with the many other causes of regional economic dislocation,
has contributed to the decisions of some businesses and individuals to
relocate outside, or not locate within, the State.
Notwithstanding the numerous initiatives that the State and its localities may
take to encourage economic growth and achieve balanced budgets, reductions in
Federal spending could materially and adversely affect the financial condition
and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.3 million, is
an international center of business and culture. Its non-manufacturing
economy is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and construction
industries accounting for a significant portion of the City's total employment
earnings. Additionally, the City is the nation's leading tourist destination.
The City's manufacturing activity is conducted primarily in apparel and
printing.
The national economic downturn which began in July 1990 adversely affected the
local economy, which had been declining since late 1989. As a result, the
City experienced job losses in 1990 and 1991 and real Gross City Product
("GCP") fell in those two years. Beginning in calendar year 1992, the
improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year-end and real GCP increased, boosted by
strong wage gains. After noticeable improvements in the City's economy during
calendar year 1994, economic growth slowed in calendar year 1995, and the
City's current four-year financial plan assumes that moderate economic growth
will continue through calendar year 2000.
For each of the 1981 through 1996 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City was required to close substantial budget gaps
in recent years in order to maintain balanced operating results. There can be
no assurance that the City will continue to maintain a balanced budget as
required by State law without additional tax or other revenue increases or
reductions in City services, which could adversely affect the City's economic
base.
Pursuant to the New York State Financial Emergency Act for the City of New
York, the City prepares an annual four-year financial plan, which is reviewed
and revised on a quarterly basis and which includes the City's capital,
revenue and expense projections and outlines proposed gap-closing programs for
years with projected budget gaps. The City's current four-year financial plan
projects substantial budget gaps for each of the 1998 through 2000 fiscal
years, before implementation of the proposed gap-closing program contained in
the current financial plan. The City is required to submit its financial
plans to review bodies, including the New York State Financial Control Board
("Control Board").
The City depends on State aid both to enable the City to balance its budget
and to meet its cash requirements. The State's 1995-1996 Financial Plan
projects a balanced General Fund. There can be no assurance that there will
not be reductions in State aid to the City from amounts currently projected or
that State budgets in future fiscal years will be adopted by the April 1
statutory deadline and that such reductions or delay will not have adverse
effects on the City's cash flow or expenditures. In addition, the Federal
Budget negotiation process could result in a reduction in or a delay in the
receipt of Federal grants which could have additional adverse effects on the
City's cash flow or revenues.
The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1997 through 2000 fiscal
years (the "1997-2000 Financial Plan" or "Financial Plan"). The City's
projections set forth in the Financial Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes
in major assumptions could significantly affect the City's ability to balance
its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the
condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees
consistent with those assumed in the Financial Plan, employment growth, the
results of a pending actuarial audit of the City's pension system which is
expected to significantly increase the City's annual pension costs, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, which may require in certain cases the cooperation of
the City's municipal unions, the ability of the New York City Health and
Hospitals Corporation ("HHC") and the Board of Education ("BOE") to take
actions to offset reduced revenues, the ability to complete revenue generating
transactions and provision of State and Federal aid and mandate relief and the
impact on City revenues of proposals for Federal and State welfare reform and
any future legislation affecting Medicare or other entitlements.
Implementation of the Financial Plan is also dependent upon the City's ability
to market its securities successfully. The City's financing program for
fiscal years 1997 through 2000 contemplates the issuance of $9.0 billion of
general obligation bonds and $3.8 billion of bonds to be issued by the
proposed New York City Infrastructure Finance Authority ("Finance Authority")
to finance City capital projects. The creation of Finance Authority, which is
subject to the enactment of State legislation, is being proposed as part of
the City's effort to assist in keeping the City's indebtedness within the
forecast level of the constitutional restrictions on the amount of debt the
City is authorized to incur. Indebtedness subject to the constitutional debt
limit includes liability on capital contracts that are expected to be funded
with general obligation bonds. The City's projections of total debt subject
to the general debt limit that would be required to be issued to fund the
Updated Ten-Year Capital Strategy published in April 1995 indicates that
projected contracts for capital projects and debt issuance may exceed the
general debt limit by the end of fiscal year 1997 and would exceed the general
debt limit by a substantial amount thereafter, unless legislation is enacted
creating a Finance Authority or other legislative initiatives are identified
and implemented. Depending on a number of factors, including whether the
Legislature is expected to enact legislation creating the Finance Authority or
to take other action that would provide relief under the general debt limit,
the City may find it necessary to curtail its currently defined capital
program before the end of fiscal year 1997 to ensure that there is ongoing
capacity to enter into capital contracts necessary to preserve projects
designed to safeguard health and safety in the City. Without the Finance
Authority or other legislative relief, the City's general obligation financed
capital program with respect to new projects would be virtually brought to a
halt during the Financial Plan period. General obligation borrowing would
continue to reimburse the City's general fund for ongoing costs of existing
contractual commitments. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
success of projected public sales of City bonds and notes and Finance
Authority bonds will be subject to prevailing market conditions, and no
assurance can be given that such sales will be completed. If the City were
unable to sell its general obligation bonds and notes or bonds of the proposed
Finance Authority, it would be prevented from meeting its planned capital and
operating expenditures. Future developments concerning the City and Public
discussion of such developments, as well as prevailing market conditions, may
affect the market for outstanding City general obligation bonds and notes.
On November 14, 1996, the City submitted to the Control Board the Financial
Plan for the 1997 through 2000 fiscal years, which relates to the City, the
BOE and the City University of New York ("CUNY"). The Financial Plan is a
modification to the financial plan submitted to the Control Board on June 21,
1996 (the "June Financial Plan").
The June Financial Plan identified actions to close a previously projected gap
of approximately $2.6 billion for the 1997 fiscal year. The proposed actions
in the June Financial Plan for the 1997 fiscal year included (i) agency
actions totaling $1.2 billion; (ii) a revised tax reduction program which
would increase projected tax revenues by $369 million due to the four year
extension of the 12.5% personal income tax surcharge and other actions; (iii)
savings resulting from cost containment in entitlement program to reduce City
expenditures and additional proposed State aid of $75 million; (iv) the
assumed receipt of revenues relating to rent payments for the City's airports,
which are currently the subject of a dispute with the Port Authority of New
York and New Jersey (the "Port Authority"); (v) the sale of the City's
television station for $207 million; and (vi) pension costs savings totaling
$134 million resulting from a proposed increase in the earnings assumption for
pension assets from 8.5% to 8.75%.
The 1997-2000 Financial Plan published on November 14, 1996 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the June Financial Plan. The 1997-2000 Financial Plan projects revenues
and expenditures for 1997 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.2 billion, $2.1 billion and $3.0 billion for the 1998,
1999 and 2000 fiscal years, respectively. Changes since the June Financial
Plan include (i) an increase in projected tax revenues of $450 million, $120
million, $50 million and $45 million in fiscal years 1997 through 2000,
respectively; (ii) a delay in the assumed receipt of $304 million relating to
projected rent payments for the City airports from the 1997 fiscal year to the
1998 and 1999 fiscal years, and a $34 million reduction in assumed State and
Federal aid for the 1997 fiscal year; (iii) an approximately $200 million
increase in projected overtime and other expenditures in each of the fiscal
years 1997 through 2000; (iv) a $70 million increase in expenditures for BOE
in the 1997 fiscal year for school text books; (v) a reduction in projected
pension costs of $34 million, $50 million, $49 million and $47 million in
fiscal years 1997 through 2000, respectively; and (vi) additional agency
actions totaling $179 million, $386 million, $473 million and $589 million in
fiscal years 1997 through 2000, including personnel reductions through
attrition and early retirement.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 12.5% personal income tax surcharge, which
is projected to provide revenue of $170 million, $463 million, $492 million,
and $521 million, in the 1997 through 2000 fiscal years, respectively; (ii)
collection of the projected rent payments for the City's airports, totaling
$270 million and $180 million in the 1998 and 1999 fiscal years, respectively,
which may depend on the successful completion of negotiations with the Port
Authority or the enforcement of the City's rights under the existing leases
thereto through pending legal actions; (iii) the ability of HHC and BOE to
identify actions to offset substantial City and State revenue reductions and
the receipt by BOE of additional State aid; (iv) State approval of the cost
containment initiatives and State aid proposed by the City; and (v) a
reduction in City funding for labor settlements for certain public authorities
or corporations. Legislation extending the 12.5% personal income tax
surcharge beyond December 31, 1996, was not enacted in the special legislative
session held in December 1996. Such legislation may be enacted in the 1997
State Legislative Session. The Financial plan does not reflect any increased
costs which the City might incur as a result of welfare legislation recently
enacted by Congress or legislation proposed by the Governor, which would, if
enacted implement such Federal welfare legislation. In addition, the economic
and financial condition of the City may be affected by various financial,
social, economic and political factors which could have a material effect on
the City.
In January 1997, the Mayor is expected to publish a modification (the "January
Modification") to the financial plan for the City's 1997 through 2001 fiscal
years and a preliminary budget of the City's 1998 fiscal year. The January
Modification will reflect changes since the Financial Plan, including the
City's program to address the currently forecast gap of approximately $1.2
billion in the 1998 fiscal year. The gap-closing program, as proposed in the
Financial Plan, is currently being further developed and is subject to change
in connection with the January Modification. The Governor released the 1997-
1998 Executive Budget on January 14, 1997, which will be considered for
adoption by the State Legislature. Based on a preliminary evaluation of
currently available information, the City's Office of Management and Budget
("OMB") believes that the reductions in Medicaid reimbursement rates and other
entitlement and welfare initiatives proposed in the 1997-1998 Executive
Budget, if approved by the State Legislature without change, would provide the
City with a portion of the $650 million of additional aid and reductions in
entitlement costs assumed in the City's gap-closing program for the 1998
fiscal year. OMB expects that the January Modification will reflect
additional initiatives proposed by the City relating to reductions in cost
containment and other initiatives have been previously considered and rejected
by the State Legislature. The nature and extent of the impact on the City of
the State budget, when adopted, is uncertain, and no assurance can be given
that the State actions included in the State adopted budget may not have a
significant adverse impact on the City's budget and its Financial Plan. It
can be expected that the proposals contained in the January Modification to
close the projected budget gap for the 1998 fiscal year will engender
substantial public debate which will continue through the time the budget is
scheduled to be adopted in June 1997.
The City's financial plans have been the subject of extensive public comment
and criticism. On July, 1996, the staff of the City Comptroller issued a
report on the June Financial Plan. The report concluded that the City's
fiscal situation remains serious, and that the City faces budgetary risks of
approximately $787 million to $941 million for the 1997 fiscal year, which
increase to $4.16 billion to $4.31 billion for fiscal year 2000.
The projections for the 1997 through 2000 fiscal years reflect the costs of
the settlements with the United Federation of Teachers ("UFT") and a coalition
of unions headed by District Council 37 of the American Federation of State,
County and Municipal Employees, which together represent approximately two-
thirds of the City's workforce, and assume that the City will reach agreement
with its remaining municipal unions under terms which are generally consistent
with such settlements. The settlement provides for a wage freeze in the first
two years, followed by a cumulative effective wage increase of 11% by the end
of the five year period covered by the proposed agreements, ending in fiscal
years 2000 and 2001. Additional benefit increases would raise the total
cumulative effective increase to 13% above present costs. Costs associated
with similar settlements for all City-funded employees would total $49
million, $459 million and $1.2 billion in the 1997, 1998 and 1999 fiscal
years, respectively, and exceed $2 billion in each fiscal year after the 1999
fiscal year. There can be no assurance that the City will reach an agreement
with the unions that have not yet reached a settlement with the City on the
terms contained in the Financial Plan.
In the event of a collective bargaining impasse, the terms of wage settlements
could be determined through statutory impasse procedures, which can impose a
binding settlement except in the case of collective bargaining with the UFT,
which may be subject to non-binding arbitration. On January 23, 1996, the
City requested the Office of Collective Bargaining to declare an impasse
against the Patrolmen's Benevolent Association and the Uniformed Firefighters
Association.
On July 10, 1995, Standard & Poor's revised downward its rating on City
general obligation bonds from A to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's stated that "structural budgetary balance
remains elusive because of persistent softness in the City's economy,
highlighted by weak job growth and a growing dependence on the historically
volatile financial services sector". Other factors identified by Standard &
Poor's in lowering its rating on City bonds included a trend of using one-time
measures, including debt refinancings, to close projected budget gaps,
dependence on unratified labor savings to help balance the Financial Plan,
optimistic projections of additional federal and State aid or mandate relief,
a history of cash flow difficulties caused by State budget delays and
continued high debt levels.
On March 1, 1996, Moody's stated that the rating for City general obligation
bonds remains under review pending the outcome of the adoption of the City's
budget for the 1997 fiscal year, and, in light of the status of the debate on
public assistance and Medicaid reform; the enactment of a State budget, upon
which major assumptions regarding State aid are dependent, which may be
extensively delayed; and the seasoning of the City's economy with regard to
its strength and direction in the face of a potential national economic
slowdown. Since July 15, 1993, Fitch has rated City bonds A-. On February
28, 1996, Fitch placed the City's general obligation bonds on FitchAlert with
negative implications. On November 5, 1996, Fitch removed the City's general
obligation bonds from FitchAlert, although Fitch stated that the outlook
remains negative.
New York State and its Authorities. The State's current fiscal year
commenced on April 1, 1996, and ends on March 31, 1997, and is referred to
herein as the State's 1996-97 fiscal year. The State's budget for the 1996-97
fiscal year was enacted by the Legislature on July 13, 1996, more than three
months after the start of the fiscal year. The State Financial Plan for the
1996-97 fiscal year was formulated on July 25, 1996 and is based on the
State's budget as enacted by the Legislature and signed into law by the
Governor, as well as actual results for the first quarter of the current
fiscal year. The State's prior fiscal year commenced on April 1, 1995, and
ended on March 31, 1996, and is referred to herein as the State's 1995-96
fiscal year.
The State closed projected budget gaps of $5.0 billion and $3.9 billion for
its 1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap was
projected at $1.44 billion, based on the Governor's proposed budget of
December 1995. As a result of changes made in the enacted budget, that gap is
now expected to be larger. The gap, however, is not expected to be as large
as those faced in the prior two fiscal years. The Governor has indicated that
he will propose to close any potential imbalance primarily through General
Fund expenditure reductions and without increases in taxes or deferrals of
scheduled tax reductions.
The 1996-97 State Financial Plan is projected to be balanced on a cash basis.
As compared to the Governor's proposed budget as revised on March 20, 1996,
the State's adopted budget for 1996-97 increases General Fund spending by $842
million, primarily from increases for education, special education and higher
education ($563 million). The balance represents funding increases to a
variety of other programs, including community projects and increased
assistance to fiscally distressed cities. Resources used to fund these
additional expenditures include $540 million in increased revenues projected
for 1996-97 based on higher-than-projected tax collections during the first
half of calendar 1996, $110 million in projected receipts from a new State tax
amnesty program, and other resources including certain non-recurring
resources. The total amount of non-recurring resources included in the 1996-
97 State budget is projected by the State Division of the Budget ("DOB") to be
$1.3 billion, or 3.9 percent of total General Fund receipts.
The State issued its first update to the cash-basis 1996-97 State Financial
Plan (the "Mid-Year Update") on October 25, 1996. The Mid-Year Update
reflects a balanced 1996-97 State Financial Plan, with a reserve for
contingencies in the General Fund of $300 million. This reserve will be
utilized to help offset a variety of potential risks and other unexpected
contingencies that the State may face during the balance of the 1996-97 fiscal
year.
The State Financial Plan is based on a June 1996 projection by DOB of national
and State economic activity. The national economy has resumed a more robust
rate of growth after a "soft landing" in 1995, with over 11 million jobs added
nationally since early 1992. The State economy has continued to expand, but
growth remains somewhat slower than in the nation. Although the State has
added approximately 240,000 jobs since late 1992, employment growth in the
State has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, defense, and banking
industries. Government downsizing has also moderated these job gains.
In its Mid-Year Update the State revised its forecast of national and State
economic activity through the end of calendar year 1997 to reflect the
stronger-than-expected growth in the first half of 1996. The national
economic forecast has been changed slightly from the initial forecast on which
the original 1996-97 State Financial Plan was based. The revised forecast
projects real Gross Domestic Product growth in the nation of 2.5 percent for
1996 and 2.4 percent in 1997. The inflation rate is expected to be 3.0
percent in 1996 and 2.9 percent in 1997. The annual rate of job growth is
expected to slow gradually to about 1.8 percent in 1997, down from 2.3 percent
in 1996. Growth in personal income and wages are expected to slow
accordingly.
The State economic forecast has been changed slightly from the one formulated
with the July 1996-97 State Financial Plan. Moderate growth is projected to
continue through the second half of 1996, with employment, wages and incomes
continuing their modest rise. Personal income is projected to increase by 5.2
percent in 1996 and 4.7 percent in 1997, reflecting robust projected wage
growth fueled in part by financial sector bonus payments. Overall employment
growth will continue at a modest rate, reflecting the slowdown in the national
economy, continued spending restraint in government, and restructuring in the
health care and financial sectors.
The forecast for continued moderate growth, and any resultant impact on the
State's 1996-97 Financial Plan, contains some uncertainties. Stronger-than-
expected gains in employment could lead to a significant improvement in
consumption spending. Investments could also remain robust. Conversely, the
prospect of a continuing deadlock on federal budget deficit reduction or fears
of excessively rapid economic growth could create upward pressures on interest
rates. In addition, the State economic forecast could over- or underestimate
the level of future bonus payments or inflation growth, resulting in
forecasted average wage growth that could differ significantly from actual
growth. Similarly, the State forecast could fail to correctly account for
expected declines in government and banking employment and the direction of
employment change that is likely to accompany telecommunications deregulation.
The DOB believes that its projections of receipts and disbursements relating
to the current State Financial Plan, and the assumptions on which they are
based, are reasonable. Actual results, however, could differ materially and
adversely from the projections set forth below, and those projections may be
changed materially and adversely from time to time.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections. There can be
no assurance that the State economy will not experience results that are worse
than predicted, with corresponding material and adverse effects on the State's
financial projection.
The General Fund is the principal 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 1996-97 fiscal year, the General Fund is expected to account for
approximately 47 percent of total governmental-fund receipts and 71 percent of
total governmental-fund disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the 1996-97
fiscal year. Actual receipts through the first two quarters of the 1996-97
State fiscal year reflect stronger-than-expected growth in most taxes, with
actual receipts exceeding expectations by $276 million. Based on the revised
economic outlook and actual receipts for the first six months of 1996-97,
projected General Fund receipts for the 1996-97 State fiscal year have been
increased by $420 million. Most of this projected increase is in the yield of
the personal income tax ($241 million), with additional increases now expected
in business taxes ($124 million) and other tax receipts ($49 million).
Projected collections from user taxes and fees have been revised downward
slightly ($5 million). Revisions were also made to both miscellaneous
receipts and in transfers from other funds (an $11 million combined projected
increase).
Disbursements through the first six months of the fiscal year were $415
million less than projected, primarily because of delays in processing
payments following delayed enactment of the State budget. As a result, no
savings are included in the Mid-Year Update from this slower-than-expected
spending. Projections of 1996-97 General Fund disbursements are increased by
$120 million, since increased General Fund disbursements for education are
required to replace a projected decrease in lottery receipts. This
modification is shown in the form of an increased transfer of General Fund
monies to the Lottery Fund in the Special Revenue fund type. The projected
closing fund balance in the General Fund of $337 million reflects a balance of
$252 million in the Tax Stabilization Reserve Fund (following a payment of $15
million during the current fiscal year) and a deposit of $85 million to the
Contingency Reserve Fund.
On January 13, 1992, Standard & Poor's reduced 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. Standard & Poor's also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993, Standard &
Poor's revised the rating outlook assessment to stable. On February 14, 1994,
Standard & Poor's raised its outlook to positive and, on August 5, 1996,
confirmed its A- rating. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1. On July 26, 1996, Moody's reconfirmed its A rating on the
State's general obligation long-term indebtedness.
Litigation. A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant generally
involve State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the State of
those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon
the State's ability to maintain a balanced 1996-97 State Financial Plan.
The claims involving the City other than routine litigation incidental to the
performance of their governmental and other functions and certain other
litigation arise out of alleged constitution violations, torts, breaches of
contract and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the City of those proceedings
and claims are not currently predictable, adverse determinations in certain of
them might have a material adverse effect upon the City's ability to carry out
the 1997-2000 Financial Plan. The City has estimated that its potential
future liability on account of outstanding claims against it as of June 30,
1996 amounted to approximately $2.8 billion.
The Governor presented his 1996-97 Executive Budget to the Legislature on
December 15, 1995, one month before the legal deadline. There can be no
assurance that the Legislature will enact the Executive Budget into law or
that the projections set forth in the Executive Budget will not differ
materially and adversely from actual results.
The Governors Executive Budget projected balance on a cash basis in the
General Fund. It reflected a continuing strategy of substantially reduced
State spending, including programming restructuring, reductions in social
welfare spending, and efficiency and productivity initiatives. In his 1996-97
Executive Budget, the Governor indicated that the 1996-97 General Fund
financial plan (based on current law governing spending and revenues) would
have been out of balance by almost $3.9 billion as a result of the underlying
disparity between receipts and disbursements caused by anticipated spending
demands, the effect of current and prior-year tax changes, and the use of one-
time revenues to fund recurring spending in the 1995-96 State Financial Plan.
The Executive Budget proposes to close this gap primarily through a series of
spending reductions and cost containment measures.
To make progress toward addressing recurring budgetary imbalances, the 1996-97
Executive Budget proposes significant actions to align recurring receipts and
disbursements in future fiscal years. The Governor has proposed closing the
1996-97 fiscal year imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. However, there can be no assurance that the Legislature will
enact the Governors proposals or that the States actions will be sufficient to
preserve budgetary balance or to align recurring receipts and disbursements in
future fiscal years. The 1996-97 Executive Budget includes action that will
have an effect on the budget outlook for the State fiscal year 1997-98 and
beyond. The net impact of these and other factors is expected to produce a
potential imbalance in receipts and disbursements in State fiscal year 1997-
98, which the Governor proposes to close with further spending reductions.
The Executive Budget contains projections of a potential imbalance in the
1997-98 fiscal year of $1.4 billion and in the 1998-99 fiscal year of $2.5
billion, assuming implementation of the 1996-97 Executive Budget
recommendations.
The 1995-96 State Financial Plan and the Financial Plan Updates were 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 1995-96
State Financial Plan or the Financial Plan Updates, actual results could
differ materially and adversely 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.
A significant risk to the 1995-96 State Financial Plan projections arise from
tax legislation under consideration by Congress and the President.
Congressionally-adopted retroactive changes to federal tax treatment of
capital gains would flow through automatically to the State personal income
tax. Such changes, if ultimately enacted, could produce revenue losses in
both the 1995-96 fiscal year and the 1996-97 fiscal year.
RECENT FINANCIAL RESULTS. The General Fund is the principal 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 States largest fund
and receives almost all State taxes and other resources not dedicated to
particular purposes.
The State reported a General Fund operating deficit of $1.426 billion for the
1994-95 fiscal year, as compared to an operating surplus of $914 million for
the prior fiscal year. The 1994-95 fiscal year deficit was caused by several
factors, including the use of $1.026 billion of the 1993-94 cash-based surplus
to fund operating expenses in 1994-95 and the adoption of changes in
accounting methodologies by the State Comptroller. These factors were offset
by net proceeds of $315 million in bonds issued by the Local Government
Assistance Corporation. The General Fund is projected to be balanced on a
cash basis for the 1995-96 fiscal year.
Total revenues for 1994-95 were $31.455 billion. Revenues decreased by $173
million over the prior fiscal year, a decrease of less than one percent.
Total expenditures for 1994-95 totaled $33.079 billion, an increase of $2.083
billion, or 6.7 percent over the prior fiscal year.
The States financial position on a GAAP (generally accepted accounting
principles) basis as of March 31, 1995 showed an accumulated deficit in its
combined governmental funds of $1.666 billion, reflecting liabilities of
$14.778 billion and assets of $13.112 billion.
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 State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from
the sale of duly authorized but unissued general obligation bonds, by issuing
bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New Yorks 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 of New York.
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 and
rehabilitation 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 States 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-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 LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York States 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 dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. 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 June 1995, LGAC had issued bonds to provide
net proceeds of $4.7 billion, completing the program. The impact of LGACs
borrowing is that the State is able to meet its cash flow needs in the first
quarter of the fiscal year without relying on short-term seasonal borrowings.
The 1995-96 State Financial Plan includes no spring borrowing nor did the
1994-95 State Financial Plan, which was the first time in 35 years there was
no short-term seasonal borrowing.
In June 1994, the Legislature passed a proposed constitutional amendment that
would significantly change the long-term financing practices of the State and
its public authorities. The proposed amendment 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 (i) permit multiple purpose general obligation bond proposals to be
proposed on the same ballot, (ii) require that State debt be incurred only for
capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment 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 in November 1995. The
amendment was passed by the Senate in June 1995, and the Assembly is expected
to pass the amendment shortly. If approved by the voters, the amendment would
become effective January 1, 1996.
On January 13, 1992, S&P reduced its ratings on the States general obligation
bonds from A to A- and, in addition, reduced its ratings on the States 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, Moodys
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baal. On February 28, 1994, Moodys
reconfirmed its A rating on the States general obligation long-term
indebtedness.
The State anticipates that its capital programs will be financed, in part, by
State and public authorities borrowings in 1995-96. The State expects to
issue $248 million in general obligation bonds (including $170 million for
purposes of redeeming outstanding bond anticipation notes) and $186 million in
general obligation commercial paper. The Legislature has also authorized the
issuance of up to $33 million in certificates of participation during the
States 1995-96 fiscal year for equipment purchases and $14 million for capital
purposes. These projections are subject to 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 $793.3 million for the 1994-95 fiscal year, and are estimated to be
$774.4 million for the 1995-96 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 1994-95 fiscal year, and are estimated to be
$328.2 million for 1995-96. State lease-purchase rental and contractual
obligation payments for 1994-95, including State installment payments relating
to certificates of participation, were $1.607 billion and are estimated to be
$1.641 billion in 1995-96.
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.
AUTHORITIES. The fiscal stability of New York 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 States 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 is
State-supported or State-related. As of September 30, 1994, the 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 $70.3 billion. As of March 31, l995,
aggregate public authority debt outstanding as State-supported debt was $27.9
billion and as State related debt was $36.1 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, New York
State has provided financial assistance through appropriations, in some cases
of a recurring nature, to certain of the 18 Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. 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 LOCALlTIES. The fiscal health of the State of New
York may also be impacted by the fiscal health of its localities, particularly
the City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both
to enable the City to balance its budget and to meet its cash requirements.
The City has achieved balanced operating results for each of its fiscal years
since 1981 as reported in accordance with the then applicable GAAP.
In 1975, New York City suffered a fiscal crisis that impaired the borrowing
ability of both the City and New York 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 Citys
making further progress towards reducing budget gaps in the outlying years.
Moodys 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 Baal, in May
1988 to A and again in February 1991 to Baal. On July 10, 1995, S&P
downgraded its rating on the Citys $23 billion of outstanding general
obligation bonds to BBB+ from A-, citing to the Citys chronic structural
budget problems and weak economic outlook. S&P stated that New York Citys
reliance on one-time revenue measures to close annual budget gaps, a
dependence on unrealized labor savings, overly optimistic estimates of
revenues and state and federal aid and the Citys continued high debt levels
also contributed to its decision to lower the rating.
New York City is heavily dependent on New York 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 Citys 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 Citys portion of the State sales tax derived in the City
and, subject to certain prior claims, 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 MACs
long-term debt. The occurrence of an event of default may result in the
acceleration of the maturity of all or a portion of MACs debt. 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. As of June
30, 1995, MAC had outstanding an aggregate of approximately $4.882 billion of
its bonds. MAC is authorized to issue bonds and notes to refund its
outstanding bonds and notes and to fund certain reserves, without limitation
as to principal amount, and to finance certain capital commitments to certain
authorities in the event the City fails to provide such financing.
Since 1975, the Citys financial condition has been subject to oversight and
review by the New York State Financial Control Board (the Control Board") and
since 1978 the Citys 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. New
York 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 Boards powers of approval are suspended, but the Board continues to
have oversight responsibilities.
From time to time, the Control Board staff, OSDC, the City comptroller and
others issue reports and make public statements regarding the Citys financial
condition, commenting on, among other matters, the Citys financial plans,
projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have
warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the Citys future economic and social conditions and have questioned
whether the City has the capacity to generate sufficient revenues in the
future to meet the costs of its expenditure increases and to provide necessary
services.
The City submitted to the Control Board on July 21, 1995 a fourth quarter
modification to the Citys financial plan for the 1995 fiscal year (the 1995
Modification"), which projects a balanced budget in accordance with GAAP for
the 1995 fiscal year, after taking into account a discretionary transfer of
$75 million. On July 11, 1995, the City submitted to the Control Board the
Financial Plan for the 1996 through 1999 fiscal years (the 1996-1999 Financial
Plan").The 1996-1999 Financial Plan projected revenues and expenditures
for the 1996
fiscal year balanced in accordance with GAAP. The projections for the 1996
fiscal year reflected proposed actions to close a previously projected gap of
approximately $3.1 billion for the 1996 fiscal year. The proposed actions in
the 1996-1999 Financial Plan for the 1996 fiscal year included (i) a reduction
in spending of $400 million, primarily affecting public assistance and
Medicaid payment to the City; (ii) expenditure reductions in agencies,
totaling $1.2 billion; (iii) transitional labor savings, totaling $600
million; and (iv) the phase-in of the increased annual pension funding cost
due to revisions resulting from an actuarial audit of the Citys pension
systems, which would reduce such costs in the 1996 fiscal year.
Ratings as Investment Criteria
In general, the ratings of Moodys, S&P and Fitch Investors Service, L.P.
(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 Moodys, 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 Moodys,
S&P or Fitch, SBMFM will attempt to use comparable ratings as standards for
each Funds investments.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES FOR THE LARGE
CAPITALIZATION
GROWTH FUND
The Prospectus discusses the Large Capitalization Fund's investment objective
and the policies it employs to achieve its objective. This section contains
supplemental information concerning the types of securities and other
instruments in which the Fund may invest, the investment policies and
portfolio strategies that the Fund may utilize and certain risks attendant to
such investments, policies and strategies.
Money Market Instruments. As stated in the Prospectus, the Fund may invest for
temporary defensive purposes in corporate and government bonds and notes and
money market instruments. Money market instruments in which the Fund may
invest include: obligations issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. government securities");
certificates of deposit, time deposits and bankers' acceptances issued by
domestic banks (including their branches located outside the United States and
subsidiaries located in Canada), domestic branches of foreign banks, savings
and loan associations and similar institutions; high grade commercial paper;
and repurchase agreements with respect to the foregoing types of instruments.
The following is a more detailed description of such money market instruments.
Certificates of deposit ("CDs") are short-term, negotiable obligations of
commercial banks. Time deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified periods of time at stated
interest rates. Bankers' acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international transactions.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation the ("FDIC"). Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most state banks are
insured by the FDIC (although such insurance may not be of material benefit to
the Fund, depending upon the principal amount of CDs of each bank held by the
Fund) and are subject to Federal examination and to a substantial body of
Federal law and regulation. As a result of governmental regulations, domestic
branches of domestic banks are, among other things, generally required to
maintain specialized levels of reserves, and are subject to other supervision
and regulation designed to promote financial soundness.
Obligations of foreign branches of domestic banks, such as CDs and TDs, may be
general obligations of the parent bank in addition to the issuing branch, or
may be limited by the terms of a specific obligation and governmental
regulation. Such obligations are subject to different risks than are those of
domestic banks or domestic branches of foreign banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and financial recordkeeping requirements. In addition,
less information may be publicly available about a foreign branch of a
domestic bank than about a domestic bank. CDs issued by wholly owned Canadian
subsidiaries of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by Federal and state regulation as well as
governmental action in the country in which the foreign bank has its head
office. A domestic branch of a foreign bank with assets in excess of $1
billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required: (a) to pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (b) to maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies
or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less publicly
available information about a domestic branch of a foreign bank than about a
domestic bank.
In view of the foregoing factors associated with the purchase of CDs and TDs
issued by foreign branches of domestic banks or by domestic branches of
foreign banks, SBMFM will carefully evaluate such investments on a case-by-
case basis. Savings and loans associations whose CDs may be purchased by the
Fund are supervised by the Office of Thrift Supervision and are insured by the
Savings Association Insurance Fund. As a result, such savings and loan
associations are subject to regulation and examination.
American, European and Continental Depositary Receipts. The Fund may invest
in the securities of foreign and domestic issuers in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs are receipts typically
issued by a U.S. bank or trust company that evidence ownership of underlying
securities issued by a foreign corporation. EDRs, which sometimes are
referred to as Continental Depositary Receipts ("CDRs"), are receipts issued
in Europe typically by foreign banks and trust companies that evidence
ownership of either foreign or domestic securities. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and EDRs and
CDRs, in bearer form, are designed for use in European securities markets.
Miscellaneous Investment Policies
Each Fund may invest up to an aggregate amount equal to 10% of its net assets
of illiquid securities, which term includes securities subject to contractual
or other restrictions on resale and other instruments that lack readily
available markets. Neither of the Funds will lend its portfolio securities.
Repurchase Agreements - New York and California Funds
Both the New and California Funds 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
Yorks 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
Funds holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Funds 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 Funds 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 Funds net assets.
The value of the securities underlying a repurchase agreement of a Fund will
be monitored on an ongoing basis by SBMFM to ensure that the value is at least
equal at all times to the total amount of the repurchase obligation, including
interest. SBMFM will also monitor, on an ongoing basis to evaluate potential
risks, the creditworthiness of the banks and dealers with which a Fund enters
into repurchase agreements.
When-Issued and Delayed-Delivery Transactions - New York and California Funds
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 Funds incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
Investment Restrictions
The investment restrictions numbered 1 through 12 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 13 through 17 may be changed by a
vote of a majority of the Trusts 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. 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 Funds investments in U.S. government securities.
3. 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 Funds 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
Funds borrowings exceed 5% of the value of its total assets, the Fund will not
make any additional investments.
4. No Fund will pledge, hypothecate, mortgage or otherwise encumber its
assets, except to secure permitted borrowings.
5. 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 Funds investment objective
and policies.
6. 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.
7. No Fund will make short sales of securities or maintain a short position.
8. No Fund will purchase or sell real estate or real estate limited
partnership interests.
9. No Fund will purchase or sell commodities or commodity contracts.
10. 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.
11. No Fund will invest in oil, gas or other mineral leases or exploration or
development programs.
12. No Fund may write or sell puts, calls, straddles, spreads or combinations
of those transactions, except as permitted under the Funds investment
objective and policies.
13. 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 Funds total assets would be invested in
securities of any one or more closed-end investment companies.
14. 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.
15. No Fund may make investments for the purpose of exercising control of
management.
16. No Fund will purchase or retain securities of any issuer if, to the
knowledge of the Trust, any of the Trusts 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.
17. 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 commitments 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 purchase of
securities.
In addition, with respect to the Large Capitalization Growth Fund, the
investment policies prohibit it from with respect to 75% of the value of its
total assets, investing more than 5% of its total assets in securities of any
one issuer, except securities issued or guaranteed by the United States
government, or purchase more than 10% of the outstanding voting securities or
such issuer.
Portfolio Transactions
Decisions to buy and sell securities for each Fund are made by SBMFM, subject
to the overall review of the Trusts 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 its obligations to a Fund.
No Fund will purchase U.S. government securities or Municipal Obligations
during the existence of any underwriting or selling group relating to the
securities, of which 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 Funds 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 these 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:
Year
Year
Ended
Ended
Fund
11/30/96
11/30/95
California Fund
15%
8%
New York Fund
67%
0%
Large Capitalization
Growth Fund
Not Applicable
Not Applicable
PURCHASE OF SHARES
Volume Discounts
The schedules of sales charges described in the Prospectuses apply to
purchases of shares of each Fund made by any purchaser, which term is defined
to include the following: (a) an individual; (b) an individuals 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
shareholders 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.
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, equaling or exceeding $500,000)
is equal to the net asset value per share at the time of purchase and no sales
charge is imposed at the time of purchase. A contingent deferred sales charge
(CDSC"), however, is imposed on certain redemptions of Class 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 Funds 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 Funds 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 Funds 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
Funds 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 $50 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
shareholders 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 shareholders shares at the time the Withdrawal Plan commences). To
the extent that withdrawals exceed dividends, distributions and appreciation
of a shareholders investment in a Fund, continued withdrawal payments will
reduce the shareholders 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 the Transfer Agent 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. A shareholder who purchases shares directly through the Transfer
Agent may continue to do so and applications for participation in the
Withdrawal Plan must be received by the Transfer Agent no later than the
eighth day of the month to be eligible for participation beginning with that
months withdrawal. For additional information, shareholders should contact a
Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trusts 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 Trusts Board of Trustees on July 17,
1996.
For the fiscal years ended November 30, 1994, 1995, and 1996, Smith Barney or
its predecessor Shearson Lehman Brothers received the following in sales
charges for the sale of each Funds Class A shares, and did not reallow any
portion thereof to dealers:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/96
11/30/95
11/30/94
California Fund
$39,000
$22,000
$69,353
New York Fund
48,000
32,000
132,427
Large Capitalization
Growth Fund
N/A
N/A
N/A
For the fiscal years ended November 30, 1994, 1995, and 1996, Smith Barney or
Shearson Lehman Brothers received the following representing CDSC on
redemption of each Funds Class A shares:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/96
11/30/95
11/30/94
California Fund
$3,800
$18,705
New York Fund
2,000
8,000
22,791
Large Capitalization
Growth Fund
N/A
N/A
N/A
For the fiscal years ended November 30, 1994, 1995, and 1996, Smith Barney or
Shearson Lehman Brothers received the following representing CDSC on
redemption of each Funds Class C shares:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/96
11/30/95
11/30/94
California Fund
$200
$0
New York Fund
Large Capitalization
Growth Fund
N/A
N/A
N/A
* The inception dates for Class C shares of California Fund and New York Fund
are November 8, 1994 and December 5, 1994, respectively
When payment is made by the investor before the settlement date, unless
otherwise requested in writing by the investor, the funds will be held as a
free credit balance in the investors 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 Trusts
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.
For the fiscal year ended November 30, 1996, Smith Barney incurred
distribution expenses totaling approximately $125,118 consisting of
approximately $15,452 for advertising, $20,504 for printing and mailing of
prospectuses, $27,433 for support services, $60,587 to Smith Barney Financial
Consultants, and $1,142 in accruals for interest on the excess of Smith Barney
expenses incurred in distribution of the Funds shares over the sum of the
distribution fees and CDSC received by Smith Barney from the Fund.
Distribution Arrangements for the New York and California Fund
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, both the New York and California 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 Funds average daily net assets attributable to the
Funds Class A and Class C 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 each Funds
average net assets attributable to the shares of the Class.
The following service and distribution fees were incurred during the periods
indicated:
SERVICE FEES
California Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/96
11/30/95
11/30/94*
Class A
$37,644
$36,511
$47,722
Class C*
3,583
1,017
2
New York Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/96
11/30/95
11/30/94
Class A
76,380
$84,263
$103,579
Class C*
1,171
203
*The inception dates for Class C of California Fund and New York Fund are
November 8, 1994 and December 5, 1994, respectively.
DISTRIBUTION FEES
California Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/96
11/30/95
11/30/94*
Class C
4,778
$1,356
$3
New York Fund:
Year
Year
Ended
Ended
11/30/96
11/30/95*
Class C
1,562
$271
* The inception dates for Class C shares of California Fund and New York Fund
are November 8, 1994 and December 5, 1994, respectively.
For the fiscal years ended November 30, 1994, 1995 and 1996 Smith Barney
and/or its predecessor, Shearson Lehman Brothers, received $291,639, $123,621,
and $125,117 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.
Distribution Arrangements for the Large Capitalization Growth Fund
To compensate Smith Barney for the services it provides and for the expense it
bears under the Distribution Agreement, the Fund has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, the Fund pays Smith Barney a service fee, accrued daily and
paid monthly, calculated at the annual rate of 0.25% of the value of the
Fund's average daily net assets attributable to the Class A, Class B and Class
C shares. In addition, the Fund pays Smith Barney a distribution fee with
respect to the Class B and Class C shares primarily intended to compensate
Smith Barney for its initial expense of paying Financial Consultants a
commission upon sales of those shares. The Class B and Class C distribution
fee is calculated at the annual rate of 0.75% of the value of the Fund's
average daily net assets attributable to the shares of the respective Class.
VALUATION OF SHARES
The net asset value per share of each Funds 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 Years 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 Trusts Board of Trustees for
the New York and California Fund SBMFM, as administrator, may consult with an
independent pricing service (the Pricing Services") 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 SBMFM
after consultation with the Pricing Service. U.S. government securities will
be valued at the mean between the closing bid and asked prices on each day,
or, if market quotations for those securities are not readily available, at
fair value, as determined in good faith by the Trusts Board of Trustees. With
respect to other securities held by the Fund, 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.
Regarding the Large Capitalization Growth Fund, securities listed on a
national securities exchange will be valued on the basis of the last sale on
the date on which the valuation is made or, in the absence of sales, at the
mean between the closing bid and asked prices. Over-the-counter securities
will be valued at the mean between the closing bid and asked prices on each
day, or, if market quotations for those securities are not readily available,
at fair value, as determined in good faith by the Fund's Board of Trustees.
Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Fund's Board
of Trustees. Amortized cost involves valuing an instrument at its original
cost to the Fund and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the effect of fluctuating interest
rates on the market value of the instrument. All other securities and other
assets of the Fund will be valued at fair value as determined in good faith by
the Fund's Board of Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any of the Smith Barney Mutual Funds
may exchange all or part of their shares for shares of the same Class of other
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 the Fund may be exchanged without a sales charge
for Class A shares of any of the Smith Barney Mutual Funds.
B. Class C shares of any fund may be exchanged without a sales charge.
For purposes of CDSC applicability, Class C shares of the Fund exchanged
for Class C shares of another Smith Barney Mutual Fund will be deemed to
have been owned since the date the shares being exchanged were deemed to
be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investors 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 Smith Barney Mutual Fund 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 Funds 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 Funds shares. Such performance information may include the
following industry and financial publications- Barrons, 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 Funds 30-day yield described in the Prospectuses is calculated according to
a formula prescribed by the SEC, expressed as follows:
Where: a = Dividends and interest earned during the
period
b = Expenses accrued for the period (net of
reimbursements)
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
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 Funds 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.
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 Funds yield for each Class of shares
will tend to be somewhat higher than prevailing market rates, and in periods
of rising interest rates a Funds 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 Funds 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, 1996 for California Funds
Class A, Class C and Class Y shares were 4.28, 4.15% and 4.55%, respectively.
The yields for the 30-day period ended November 30, 1996 for New York Funds
Class A and Class C shares were 4.35% and 4.21%, respectively.
The equivalent taxable yields for the 30-day period ended November 30, 1996
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 shareholders; and New
York State and City income taxes at a rate of 10.5% for the New York Fund
shareholders would have been as follows: California Funds Class A, Class C and
Class Y shares: 6.84%, 6.63% and 7.27%, respectively, and New York Funds Class
A and Class C shares: 7.05% and 6.82%, respectively.
Average Annual Total Return
A Funds average annual total return, as described below, is computed
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of a 1-, 5- or 10-year period
(or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the end
of the measuring period. A Funds net investment income changes in response to
fluctuations in interest rates and the expenses of the Fund.
The following total returns 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 for Class A shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1996
Total Return
Fund
(With Fee
Waivers)
California Fund
3.00%
New York Fund
2.79%
Large Capitalization
Growth Fund
N/A
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(DECEMBER 31, l991)THROUGH NOVEMBER 30, 1996
Total Return
Fund
(With Fee
Waivers)
California Fund
6.15%
New York Fund
6.20%
Large Capitalization
Growth Fund
N/A
The Funds average annual total return for Class C shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1996**
Total Return
Fund
(With Fee Waivers)
California Fund
3.84%
New York Fund*
3.64%
Large Capitalization
Growth Fund
N/A
* For the period from December 5, 1994 (inception date) to November 30, 1995
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(NOVEMBER 8, 1994) THROUGH NOVEMBER 30, 1996
Total Return
Fund
(With Fee Waivers)
California Fund
9.57%
New York Fund
8.76%
Large Capitalization
Growth Fund
N/A
The Funds average annual total return for Class Y shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1996**
Total Return
Fund
(With Fee Waivers)
California Fund*
5.22%
Large Capitalization
Growth Fund
N/A
* For the period from September 8, 1995 (inception date) to November 30,
1996.
** As of November 30, 1996, no Class Y shares of New York Fund had been sold.
Aggregate Total Return
A Funds aggregate total return, as described below, represents the cumulative
change in the value of an investment in the Fund for the specified period and
is computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 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.
The ERV assumes complete redemption of the hypothetical investment at the end
of the measuring period.
The Funds aggregate total return for Class A shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1996
Total Return
Fund
(With Fee Waivers)
California Fund
5.05%
New York Fund
4.85%
Large Capitalization
Growth Fund
N/A
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(DECEMBER 31, l991)THROUGH NOVEMBER 30, 1996
Total Return
Fund
(With Fee Waivers)
California Fund
6.58%
New York Fund
6.64%
Large Capitalization
Growth Fund
N/A
The Funds aggregate total return for Class C shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1996**
Total Return
Fund
(With Fee Waivers)
California Fund
4.84%
New York Fund*
4.64%
Large Capitalization
Growth Fund
N/A
* For the period from December 5, 1994 (inception date) to November 30, l996
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(NOVEMBER 8, 1994) THROUGH NOVEMBER 30, 1996
Total Return
Fund
(With Fee Waivers)
California Fund
20.76%
New York Fund
18.26%
Large Capitalization
Growth Fund
N/A
The Funds aggregate total return for Class Y shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1996**
Total Return
Fund
(With Fee Waivers)
California Fund
5.22%
* For the period from September 8, 1995 (inception date) to November 30,
l996.
** As of November 30, 1996, no Class Y shares of New York Fund had been sold.
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
fluctuations in interest rates and the expenses of the Fund. Performance will
vary from time to time depends upon market conditions, the composition of the
Funds 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 - New York and California Fund
The following is a summary of selected Federal income tax considerations that
may affect the Trust and its 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" ofa 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 Funds 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 Funds dividends and distributions may affect a corporate
shareholders Federal environmental" tax liability. In addition, the receipt
of a Funds dividends and distributions may affect a foreign corporate
shareholders 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 Funds 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
shareholders gain or loss on a sale or redemption of shares of a Fund will be
a long-term capital gain or loss if the shareholder has held his or her Fund
shares for more than one year and will be a short-term capital gain or loss if
he or she has held the 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 Funds
prior taxable year as to the Federal income tax status of certain dividends or
distributions which were received from the Fund during the Funds 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 shareholders 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
individuals 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 taxpayers 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.
TAXES - Large Capitalization Growth Fund
The following is a summary of certain Federal income tax considerations that
may affect the Fund and its shareholders. The summary is not intended as a
substitute for individual tax advice and investors are urged to consult their
own tax advisors as to the tax consequences of an investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. To so qualify, the Fund must,
among other things, derive less than 30% of its gross income in each taxable
year from the sale or disposition of stocks, securities, and certain financial
instruments held for less than three months. This requirement may limit the
extent to which the Fund is able to sell stocks, securities or financial
instruments held for less than three months. If the Fund (a) qualifies as a
regulated investment company and (b) distributes to its shareholders at least
90% of its net investment income (including, for this purpose, its net
realized short-term capital gains), the Fund will not be liable for Federal
income taxes to the extent that its net investment income and its net realized
long- and short-term capital gains, if any, are distributed to its
shareholders.
Gains or losses on the sales of stock or securities by the Fund generally will
be long-term capital gains or losses if the Fund has held the stock or
securities for more than one year. Gains or losses on sales of stock or
securities held for not more than one year generally will be short-term
capital gains or losses.
Any net long-term capital gains realized by the Fund will be distributed
annually as described in the Prospectus. Such distributions ("capital gain
dividends") will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares, and will be
designated as capital gain dividends in a written notice mailed by the Fund to
shareholders after the close of the Fund's prior taxable year. If a
shareholder receives a capital gain dividend with respect to any share and if
the share has been held by the shareholder for six months or less, then any
loss on the sale or exchange of such share will be treated as a long-term
capital loss to the extent of the capital gain dividend.
The portion of the dividends received from the Fund that qualifies for the
dividends-received deduction for corporations will be reduced to the extent
that the Fund holds dividend-paying stock for less than 46 days (91 for
certain preferred stocks). The Fund's holding period will not include any
period during which the Fund has reduced its risk of loss from holding the
stock by purchasing an option to sell or entering into a short sale of
substantially identical stock or securities convertible into the stock. The
holding period for stock may also be reduced if the Fund diminishes its risk
of loss by holding one or more other positions with respect to substantially
similar or related properties. Dividends-received deductions will be allowed
only with respect to shares that a corporate shareholder has held for at least
46 days within the meaning of the same holding period rules applicable to the
Fund.
If the Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends shall be included
in the Fund's gross income as of the later of (a) the date that such stock
became ex-dividend with respect to such dividends (that is, the date on which
a buyer of the stock would not be entitled to receive the declared but unpaid,
dividends) or (b) the date that the Fund acquired such stock. Accordingly, in
order to satisfy its income distribution requirements, the Fund may be
required to pay dividends based on anticipated earnings and shareholders may
receive dividends in an earlier year than would otherwise be the case.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a mutual
fund for which the otherwise applicable sales charge is reduced by reason of a
reinvestment right (that is exchange privilege), the original sales charge
will not be taken into account in computing gain/loss on the original shares
to the extent the subsequent sales charge is reduced. Instead, it will he
added to the tax basis in the newly acquired shares. Furthermore, the same
rule also applies to a disposition of the newly acquired or redeemed shares
made within 90 days of the second acquisition. This provision prevents a
shareholder from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a record
date for a taxable dividend or capital gain distribution should be aware that,
regardless of whether the price of the Fund shares to be purchased reflects
the amount of the forthcoming dividend or distribution payment, any such
payment will be a taxable dividend or distribution payment.
If a shareholder fails to furnish a correct taxpayer identification number,
fails fully to report dividend and 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) any taxable
dividends and distributions and (b) the proceeds of any redemptions of Fund
shares. An individual's taxpayer identification number is his or her social
security number. The backup withholding tax is not an additional tax and may
be credited against a shareholder's regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a 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, October 14, 1994 and August 16, 1995, the
Trusts name was changed to Shearson Lehman Brothers Income Trust, Smith Barney
Shearson Income Trust, Smith Barney Income Trust and Smith Barney Investment
Trust, respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania, 19103,
serves as the custodian of the Fund. Under its custody agreement with the
Fund, PNC holds the Fund's securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon the month-end
market value of securities held in custody and also receives securities
transactions charges. The assets of the Fund are held under bank
custodianship in compliance with the 1940 Act.
First Data, is located at Exchange Place, Boston, Massachusetts 02109, and
serves as the Trusts transfer agent. Under the transfer agency agreement, the
Transfer Agent 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, the Transfer Agent 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 New York and California Fund for the fiscal
year ended November 30, 1996 accompany this Statement of Additional
Information.
APPENDIX
DESCRIPTION OF MOODYS, S&P AND FITCH RATINGS
Description of Moodys 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, 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.
Moodys 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 Moodys Municipal Note Ratings:
Moodys ratings for state and municipal notes and other short-term loans are
designated Moodys Investment Grade (MIG") and for variable demand obligations
are designated Variable Moodys 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 Moodys Commercial Paper Ratings:
The rating Prime-l is the highest commercial paper rating assigned by Moodys.
Issuers rated Prime-l (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-l 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.
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&Ps 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-l+.
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 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 obligors 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 obligors 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 obligors 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:
Fitchs 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 issuers obligations in a timely
manner.
Fitchs short term ratings are as follows: F-1+1/N 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.
Smith Barney
Investment
Trust
SMITH BARNEY
INVESTMENT TRUST
388 Greenwich Street
New York, NY 10013
SMITH BARNEY
A Member of Travelers Group
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