Registration Nos.: 33-43446
811-6444
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ___
___
Post-Effective Amendment No. 12
X
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 12 X
SMITH BARNEY INVESTMENT TRUST
.
(Exact name of Registrant as specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Christina T. Sydor
Secretary
Smith Barney Investment Trust
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment becomes effective
It is proposed that this filing will becomes effective:
immediately upon filing pursuant to Rule 485(b)
__X__ on March 24, 1997 pursuant to Rule 485(b)
____ days after filing pursuant to Rule 485(a)(2)
____ on _______ pursuant to Rule 485(a)
Registrant previously registered an indefinite number of its shares pursuant
to Rule 24f-2 of the Investment Company Act of 1940. The Registrants Rule
24f-2 Notice for the fiscal year ended November 30, 1996 was filed on January
28, 1997 as Accession No. 000091155-97-000045.<R/>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933(1)
<S>
Title of Securities
Being Registered
<C>
Proposed
Maximum
Offering
Amount Being
Registered (1)
Shares of
beneficial
Interest par value
$0.001 per share
of Smith Barney
Intermediate
Maturity New York
Municipals Fund
279,137
Shares of
beneficial
Interest par value
$0.001 per share
of Smith Barney
Intermediate
Maturity
California
Municipals Fund
159,494
The shares being registered as set forth in this table are in addition to the indefinite
number
of shares of beneficial interest which the Registrant has registered under the
Securities Act
of 1933, as amended (the "1933 Act"), pursuant to Rule 24f-2 under the Investment
company Act of 1940, as amended (the "1940 Act"). The Registrant's Rule 24f-2 Notice
for
the fiscal year ended November 30, 1996 was filed on January 28, 1997 as
Accession No. 0000091155-97-000045.
During its fiscal year ended November 30, 1996, Smith Barney Intermediate
Maturity New York Municipals Fund redeemed 279,137shares of common shares.
During its current fiscal year, the fund did not use any Class A shares it
redeemed during its fiscal year ended November 30, 1996, for a reduction
pursuant to Rule 24f-2(c).
During its current fiscal year, the fund filed no other post-effective
amendments for the purpose of reduction pursuant to Rule 24e-
2(a).
During its fiscal year ended November 30, 1996, Smith Barney Intermediate
Maturity California Municipals Fund redeemed 159,494 shares of common
shares. During its current fiscal year, the fund did not use any shares
it redeemed during its fiscal year ended November 30, 1996, for a reduction
pursuant to Rule 24f-2(c).
During its current fiscal year, the fund filed no other post-effective
amendments for the purpose of reduction pursuant to Rule 24e-
2(a).
CONTENTS OF REGISTRATION STATEMENT
Front Cover
Contents Page
Cross Reference Sheet
Part A: Prospectus dated March 24, 1997 for Smith Barney Intermediate
Maturity California Municipals Fund
Prospectus dated March 24, 1997 for Smith Barney Intermediate
Maturity New York Municipals Fund
(A prospectus dated November 13, 1995 for Smith Barney S&P 500
Advantage Fund was filed on November 13, 1995 (Accession No.
0000091155-95-000415). That Fund has not yet commenced operations
and therefore is not included in this filing.)
Part B: Statement of Additional Information dated March 24, 1997 for Smith
Barney Investment Trust
Part C: Other Information
SMITH BARNEY INVESTMENT TRUST
FORM N-1A
CROSS-REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment
Objective and Management Policies;
Additional Information
5. Management of the Fund
Management of the Trust and the
Fund; Distributor; Additional
Information; Annual Report
6. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares; Valuation of
Shares; Exchange Privilege;
Redemption of Shares; Minimum
Account Size; Distributor;
Additional Information
8. Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Pending Legal Proceedings
Not applicable
Part B Item No.
Statement of Additional
Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Table of Contents
12. General Information and
History
Distributor; Additional
Information
13. Investment Objective and
Policies
Investment Objectives and
Management Policies
14. Management of the Fund
Management of the Trust and the
Funds; Distributor
15. Control Persons and Principal
Holders of
Securities
Management of the Trust and the
Funds
16. Investment Advisory and Other
Services
Management of the Trust and the
Funds; Distributor
17. Brokerage Allocation and Other
Services
Investment Objectives and
Management Policies; Distributor
18. Capital Stock and Other
Securities
Investment Objectives and
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing of
Securities Being Offered
Purchase of Shares; Redemption of
Shares; Valuation of Shares;
Distributor; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
SMITH BARNEY INVESTMENT TRUST
PART A
PROSPECTUS
SMITH
BARNEY
Intermediate
Maturity
New
York
Municipals
Fund
MARCH 25, 1997
Prospectus begins on page
one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Prospectus March 25,
1997
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Smith Barney Intermediate Maturity
New York Municipals Fund
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Intermediate Maturity New York Municipals Fund (the "Fund")
seeks to provide New York investors with as high a level of current income
exempt from Federal income taxes and New York State and New York City personal
income tax as is consistent with preservation of principal. The Fund invests
primarily in investment grade obligations issued by the State of New York and
its political subdivisions, agencies and public authorities. The Fund is one
of
a number of funds, each having distinct investment objectives and policies
making up the Smith Barney Investment Trust (the "Trust"). The Trust is an
open-end management investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of the other funds offered by the Trust are described
in separate prospectuses which may be obtained by calling or writing the Trust
at the telephone number or address set forth above or by contacting a Smith
Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated March 25, 1997, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The
Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus
in
its entirety.
Smith Barney Inc.
Distributor
Smith Barney Mutual Funds Management Inc.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A
CRIMINAL OFFENSE.
1
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Table of Contents
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Prospectus Summary
3
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Financial Highlights
10
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Investment Objective and Management Policies
12
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Valuation of Shares
26
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Dividends, Distributions and Taxes
27
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Purchase of Shares
30
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Exchange Privilege
37
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Redemption of Shares
40
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Minimum Account Size
43
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Performance
43
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Management of the Trust and the Fund
44
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Distributor
45
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Additional Information
46
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==
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or
representations
must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to
make
such an offer or solicitation in such jurisdiction.
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==
2
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Prospectus Summary
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The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the
Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE. The Fund is a non-diversified intermediate-term
municipal
bond fund that seeks to provide New York investors with as high a level of
current income exempt from Federal income taxes and New York State and New
York
City personal income tax as is consistent with the preservation of principal.
The Fund invests primarily in investment-grade obligations issued by the State
of New York and its political subdivisions, agencies and public authorities.
The
weighted average maturity of the Fund's portfolio securities will normally not
be less than three nor more than 10 years. The maximum remaining maturity of
the
securities in which the Fund will normally invest will be no greater than 20
years. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS. The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which differ
principally in terms of sales charges and rates of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of $5,000,000. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an
initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of the
average daily net assets of the Class. The initial sales charge may be waived
for certain purchases. Purchases of Class A shares, which when combined with
current holdings of Class A shares offered with a sales charge equal or exceed
$500,000 in the aggregate, will be made at net asset value with no initial
sales
charge, but will be subject to a contingent deferred sales charge ("CDSC") of
1.00% on redemptions made within 12 months of purchase. See "Prospectus
Summary
- -- No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no
initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.20% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of the Fund shares, which when
combined
with current holdings of Class C shares of the Fund equal or exceed $500,000
in
the aggregate,
3
<PAGE>
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Prospectus Summary (continued)
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should be made in Class A shares at net asset value with no sales charge, and
will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any
service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended 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
C shares are sold without any initial sales charge so the entire purchase
price
is immediately invested in the Fund. Any investment return on these additional
invested amounts may partially or wholly offset the higher annual expenses of
this Class. Because the Fund's future return cannot be predicted, however,
there
can be no assurance that this would be the case. Finally, investors should
consider the effect of the CDSC period and any conversion rights of the
classes
in the context of their own investment time frame.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fees. The maximum purchase amount for Class A shares is
$4,999,999
and Class C shares is $499,999. There is no maximum purchase amount for Class
Y
shares.
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 would be immediately invested in the Fund. In addition, Class A share
purchases, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class
A shares offered with a sales charge held in funds sponsored by Smith Barney
Inc. ("Smith Barney") listed under "Exchange Privilege." See "Purchase of
Shares." Because the ongoing expenses of Class A shares may be lower than
those
for Class C shares, purchasers eligible to purchase Class A shares at net
asset
value should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of
4
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Prospectus Summary (continued)
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the CDSC on the Class C shares is the same as that of the initial sales charge
on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) AND EXECCHOICETM 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. Investors may also be eligible to participate in the Smith Barney
ExecChoiceTM Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase
of
Shares -- Smith Barney 401(k) and ExecChoiceTM Programs."
PURCHASE OF SHARES. Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. 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 Investor Services Group, Inc. ("First
Data").
See Purchase of Shares."
INVESTMENT MINIMUMS. Investors in Class A and Class C shares may open an
account
by making an initial investment of at least $1,000 for each account, 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 investment 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. 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 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."
5
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Prospectus Summary (continued)
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REDEMPTION OF SHARES. Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND. Smith Barney Mutual Funds Management
Inc.
("SBMFM") serves as the Fund's investment adviser and administrator. 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 segments: 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 Smith Barney Mutual Funds at the respective net asset
values next determined. See "Exchange Privilege."
VALUATION OF SHARES. Net asset value of the Fund for the prior day generally
is
quoted daily in the financial section of most newspapers and also is available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income are
generally
paid on the last Friday of each calendar month to shareholders of record as of
three business days prior thereto. Distributions of net realized capital
gains,
if any, are paid annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS. Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by reinvestments will not be subject to any sales charge or
CDSC. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS. There can be no assurance that the
Fund
will achieve its investment objective. Shares of the Fund, unlike certain bank
deposit accounts, are not guaranteed or insured by any Federal or state
authority. Changes in interest rates generally will result in increases or
decreases in the market value of the obligations held by the Fund. The yield
of
the Fund may not be as high as those of other funds that invest in lower
quality
and/or longer term securities. The Fund is not a tax-exempt money market fund
and therefore its investment portfolio can be expected to experience greater
volatility than that of a tax-exempt money market fund. The net asset value of
the Fund will be subject to greater fluctuation to the extent that the Fund
invests in zero coupon securities. The Fund's net asset value per share will
fluctuate depending on a combination of factors such as current market
interest
rates and the creditworthiness of the issuers in whose securities the Fund
invests. The Fund will not invest in obligations that are rated lower than Baa
by Moody's Investors Service, Inc. ("Moody's"), BBB by
6
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Prospectus Summary (continued)
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Standard & Poor's Ratings Group ("S&P") or BBB by Fitch Investors Service,
Inc.
("Fitch"), at the time of purchase. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the obligations that they
undertake to rate; the ratings are relative and subjective and are not
absolute
standards of quality.
The Fund may invest up to 20% of its total assets in unrated securities
that SBMFM determines to be of comparable quality to the securities rated
investment grade in which the Fund may invest. Dealers may not maintain daily
markets in unrated securities and retail secondary markets for many of them
may
not exist; lack of markets may affect the Fund's ability to sell these
securities when SBMFM deems it appropriate. The Fund has the right to invest
without limitation in state and local obligations that are "private activity
bonds," the income from which may be taxable as a specific preference item for
purposes of the Federal alternative minimum tax. Thus, the Fund may not be a
suitable investment for investors who are subject to the alternative minimum
tax.
Certain of the instruments held by the Fund, and certain of the
investment
techniques that the Fund may employ, might expose the Fund to certain risks.
The
instruments presenting the Fund with risks are municipal leases, zero coupon
securities, custodial receipts, municipal obligation components, floating and
variable rate demand notes and bonds, and participation interests. Entering
into
securities transactions on a when-issued or delayed-delivery basis are
investment techniques involving risks to the Fund. See "Investment Objective
and
Management Policies -- Investment Techniques -- Risk Factors and Special
Considerations" and "Dividends, Distributions and Taxes."
Investment in the Fund, which is classified as a non-diversified fund,
may
present a greater risk than an investment in a diversified fund. See
"Investment
Objective and Management Policies -- Risk Factors and Special Considerations."
Investment in the Fund involves risks and special considerations applicable to
the State of New York. See "Investment Objective and Management Policies --
Risk
Factors and Special Considerations."
7
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Prospectus Summary (continued)
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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, unless otherwise noted, the Fund's
operating
expenses for its most recent fiscal year:
Intermediate Maturity New York Municipals Fund Class A Class C Class
Y
==============================================================================
==
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is lower) None* 1.00% None
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==
Annual Fund Operating Expenses***
(as a percentage of average net assets)
Management fees (net of fee waivers) 0.23% 0.23%
0.23%
12b-1 fees** 0.15 0.35 0.0
Other expenses+ 0.43 0.45 0.43
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==
TOTAL OPERATING EXPENSES
(after waivers) 0.81% 1.03%
0.66%
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==
* Purchases of Class A shares which, when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in
the
aggregate, will be made at net asset value with no sales charge, but may
be
subject to a CDSC of 1.00% on redemptions made within 12 months.
** Class C shares are subject to an ongoing distribution fee and, as a
result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the
National
Association of Securities Dealers, Inc.
*** "Management fees" have been restated to reflect the management fee waiver
currently in effect for the Fund. During the fiscal year ended November
30,
1996, the Fund's investment adviser and administrator voluntarily waived
portions of its fees in the aggregate amount equal to 0.42% of the value
of
the Fund's average daily net assets thereby decreasing the amount paid by
the Fund in respect of management fees to 0.08% of the value of the
Fund's
average daily net assets. This had the effect of lowering the Fund's
overall expenses and increasing the returns available to investors. If
SBMFM had not elected to waive fees and reimburse expenses, the Fund's
total operating expenses for Class A shares and Class C shares for the
fiscal year ended November 30, 1996, would have been 1.08% and 1.30%,
respectively, of the value of the Fund's average daily net assets. As of
November 17, 1995, the Fund's investment advisory fee was reduced from
0.35% to 0.30% of the average daily net assets of the Fund.
+ For Class Y shares, "Other expenses" have been estimated based on
expenses
incurred by Class A shares because prior to November 30, 1996 no Class Y
shares were sold.
Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant
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
8
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Prospectus Summary (continued)
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actually pay lower or no charges, depending on the amount purchased and, in
the
case of Class C shares 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
ExecChoiceTM Programs. See "Purchase of Shares" and "Redemption of Shares."
Smith Barney receives an annual 12b-1 service fee of 0.15% of the value of
average daily net assets of Class A shares. For Class C shares, Smith Barney
receives an annual 12b-1 fee of 0.35% of the value of average daily net assets
of this Class, consisting of a 0.20% distribution fee and a 0.15% 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>
<TABLE>
<CAPTION>
Intermediate Maturity New York Municipals Fund 1 year 3 years 5 years
10 years
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<S> <C> <C> <C>
<C>
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each
time period:
Class A $ 28 $45 $64
$118
Class C 21 33 57
126
Class Y 7 21 37
82
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A $ 28 $45 $64
$118
Class C 11 33 57
126
Class Y 7 21 37
82
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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
representation of past or future expenses and actual expenses may be greater
or
less than those shown.
9
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Financial Highlights
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The following information for the fiscal years ended November 30, 1996
and November 30, 1995 have
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's Annual Report dated November 30, 1996. The
following information for the period ended November 30, 1992 and for the
fiscal
years ended November 30, 1993 and November 30, 1994 has been audited by other
auditors. This information should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report,
which
is incorporated by reference into the Statement of Additional Information.
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Intermediate Maturity
New York Municipals Fund Year Ended November 30,
Class A Shares 1996 1995 1994 1993
1992(1)
==============================================================================
===============
<S> <C> <C> <C> <C>
<C>
Net Asset Value, Beginning of Year $ 8.48 $ 7.80 $ 8.54 $ 8.18
$ 7.90
Income (Loss) From Operations
Net investment income(2) 0.41 0.41 0.40 0.40
0.38
Net realized and unrealized
gain (loss) (0.01) 0.68 (0.72) 0.38
0.28
- ------------------------------------------------------------------------------
- ---------------
Total Income (Loss) From Operations 0.40 1.09 (0.32) 0.78
0.66
- ------------------------------------------------------------------------------
- ---------------
Less Distributions From:
Net investment income (0.41) (0.41) (0.40)
(0.40) (0.38)
Net realized gains -- -- (0.02)
(0.02) --
- ------------------------------------------------------------------------------
- ---------------
Total Distributions (0.41) (0.41) (0.42)
(0.42) (0.38)
- ------------------------------------------------------------------------------
- ---------------
Net Asset Value, End of Year $8.47 $ 8.48 $ 7.80 $ 8.54
$ 8.18
- ------------------------------------------------------------------------------
- ---------------
Total Return 4.85% 14.31% (3.97)%
9.76% 8.59%++
- ------------------------------------------------------------------------------
- ---------------
Net Assets, End of Year (in 000s) $49,355 $52,568 $62,090 $67,230
$24,543
- ------------------------------------------------------------------------------
- ---------------
Ratios to Average Net Assets:
Expenses(2) 0.66% 0.65% 0.65%
0.65% 0.65%+
Net investment income 4.86 5.01 4.77 4.59
4.95+
- ------------------------------------------------------------------------------
- ---------------
Portfolio Turnover Rate 67% -- 68%
22% 68%
==============================================================================
===============
</TABLE>
(1) For the period from December 31, 1991 (inception date) to November 30,
1992.
(2) The investment adviser has waived all or part of its fees for the three
years ended November 30, 1996 and the period ended November 30, 1992. If
such fees were not waived, the per share decreases in net investment
income
and the expense ratios would be as follows:
Per Share Decrease Expense Ratio
In Net Investment Income Without Fee Waivers
---------------------------------- ---------------------------------
- --
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Class A $0.04 $0.03 $0.03 $0.04 $0.06 1.08% 0.97% 0.98% 1.10%
1.45%+
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized
10
<PAGE>
- ------------------------------------------------------------------------------
- --
Financial Highlights (continued)
- ------------------------------------------------------------------------------
- --
For a share of beneficial interest outstanding throughout the year:
Intermediate Maturity New York Municipals Fund
Class C Shares 1996 1995(1)5
- ------------------------------------------------------------------------------
- --
Net Asset Value, Beginning of Year $ 8.48 $ 7.87
- ------------------------------------------------------------------------------
- --
Income From Operations
Net investment income(2) 0.39 0.38
Net realized and unrealized gain (loss) (0.01) 0.61
- ------------------------------------------------------------------------------
- --
Total Income From Operations 0.38 0.99
- ------------------------------------------------------------------------------
- --
Less Distributions From:
Net investment income (0.39) (0.38)
- ------------------------------------------------------------------------------
- --
Total Distributions (0.39) (0.38)
- ------------------------------------------------------------------------------
- --
Net Asset Value, End of Year $ 8.47 $ 8.48
- ------------------------------------------------------------------------------
- --
Total Return 4.64% 13.01%++
- ------------------------------------------------------------------------------
- --
Net Assets, End of Year (in 000s) $1,192 $ 393
- ------------------------------------------------------------------------------
- --
Ratios to Average Net Assets:
Expenses(2) 0.88% 0.86%+
Ratio of Net Investment Income 4.64 4.74+
- ------------------------------------------------------------------------------
- --
Portfolio Turnover Rate 67% --
==============================================================================
==
(1) For the period from December 5, 1994 (inception date) to November 30,
1995.
(2) The investment adviser has waived a part of its fees for the period ended
November 30, 1996 and for the period ended November 30, 1995. If such
fees
were not waived, the per share effect on net investment income and
expense
ratios would have been as follows:
Per Share Decreases to Expense Ratios
Net Investment Income Without Fee Waivers
---------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
Class C $0.02 $0.03 1.30% 1.19%+
++ Total return is not annualized, as it may not be representative of the
total for the year.
+ Annualized.
As of November 30, 1996, the Fund had not sold any Class Y shares, and
accordingly, no comparable financial information is available at this time for
that class.
11
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies
- ------------------------------------------------------------------------------
- --
Set out below is a description of the investment objective and principal
investment policies of the Fund. No assurance can be given that the Fund will
be
able to achieve its investment objective, which may be changed only with the
approval of a majority (as defined by the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Fund's outstanding shares.
The Fund's investment objective is to provide New York investors with as
high a level of current income exempt from Federal income taxes and New York
State and New York City personal income taxes as is consistent with
preservation
of principal. Under normal market conditions, the Fund attempts to invest 100%
in a portfolio of investment grade debt obligations issued by or on behalf of
the State of New York and other states, territories and possessions of the
United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political subdivisions ("Municipal
Obligations"). For purposes of this Prospectus, debt obligations issued by the
State of New York and its political subdivisions, agencies and public
authorities (together with certain other governmental issuers such as the
Commonwealth of Puerto Rico), the interest from which debt obligations is, in
the opinion of bond counsel to the issuer, excluded from gross income for
Federal income tax purposes and exempt from New York State personal income tax
are defined as "New York Exempt Obligations." The Fund will operate subject to
a
fundamental investment policy providing that, under normal market conditions,
the Fund will invest at least 80% of its net assets in New York Exempt
Obligations.
The Fund will invest at least 80% of its total assets in New York Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20%
of
the Fund's total assets may be invested in unrated securities that are deemed
by
SBMFM to be of a quality comparable to investment grade. The Fund will not
invest in New York Exempt Obligations that are rated lower than Baa by
Moody's,
BBB by S&P or BBB by Fitch, at the time of purchase.
The Fund is classified as a non-diversified fund under the 1940 Act,
which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax and New York State franchise tax to the extent that its earnings
are
distributed to shareholders. To qualify as a regulated investment company, the
Fund will, among other things, limit its investments so that, at the close of
each quarter of the taxable year (a) not more than 25% of the market value of
the Fund's total assets will be invested in the securities of a single issuer
and (b) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested
12
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
in the securities of a single issuer and the Fund will not own more than 10%
of
the outstanding voting securities of a single issuer.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the New York Exempt Obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
SBMFM's judgment as to credit quality of a New York Exempt Obligation, thus,
may
differ from that suggested by the ratings published by a rating service. A
description of Moody's, S&P and Fitch ratings relevant to the Fund's
investments
is included as an appendix to the Statement of Additional Information. The
policies of the Fund described above as to ratings of portfolio investments
will
apply only at the time of the purchase of a security, and the Fund will not be
required to dispose of a security in the event Moody's, S&P or Fitch
downgrades
its assessment of the credit characteristics of the security's issuer.
New York Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenue derived from a
particular facility or class of facilities or, in some cases, from the
proceeds
of a special excise or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. New York Exempt Obligations bear fixed, floating
and
variable rates of interest, and variations exist in the security of New York
Exempt Obligations, both within a particular classification and between
classifications.
The yields on, and values of, New York Exempt Obligations are dependent
on
a variety of factors, including general economic and monetary conditions,
conditions in the New York Exempt Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently,
New
York Exempt Obligations with the same maturity, coupon and rating may have
different yields or values, whereas obligations of the same maturity and
coupon
with different ratings may have the same yield or value. See "Risk Factors and
Special Considerations -- New York Exempt Obligations."
Issuers of New York Exempt Obligations may be subject to the provisions
of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act
of 1978, affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future
by
Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
the
obligations or upon the ability of municipalities to levy taxes. The
possibility
also exists that, as a result of litigation or other conditions, the power or
ability of any issuer to pay, when due, the principal of, and interest on, its
obligations may be materially affected.
13
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
MATURITY OF OBLIGATIONS HELD BY THE FUND
SBMFM believes that the Fund may offer an attractive investment
opportunity
for investors seeking a higher effective tax yield than a tax-exempt money
market fund or a tax-exempt short-term bond fund and less fluctuation in net
asset value than a longer term tax-exempt bond fund. The Fund will normally
invest in intermediate maturity securities; the weighted average maturity of
the
Fund will normally be not less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally invest
will
be no greater than 20 years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in New York Exempt Obligations that are
"private activity bonds," as defined in the Code, which are in most cases
revenue bonds. Private activity bonds generally do not carry the pledge of the
credit of the issuing municipality, but are guaranteed by the corporate entity
on whose behalf they are issued. Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance nongovernmental
activities
is a specific tax preference item for purposes of the Federal individual and
corporate alternative minimum taxes. Individual and corporate shareholders may
be subject to a Federal alternative minimum tax to the extent the Fund's
dividends are derived from interest on these bonds. Dividends derived from
interest income on New York Exempt Obligations are a "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum tax.
See "Dividends, Distributions and Taxes." Private activity bonds held by the
Fund will be included in the term New York Exempt Obligations for purposes of
determining compliance with the Fund's policy of investing at least 80% of its
total assets in New York Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in New York Exempt Obligations that are
repayable out of revenues generated from economically related projects or
facilities or debt obligations whose issuers are located in the same state.
Sizable investments in these obligations could involve an increased risk to
the
Fund should any of the related projects or facilities experience financial
difficulties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to an aggregate amount equal to 10% of its net
assets in illiquid securities, which term includes securities subject to
contractual or other restrictions on resale and other instruments that lack
readily available markets. In addition, up to 5% of the value of the Fund's
assets may be invested in securities of entities that have been in continuous
operation for fewer than three years.
14
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
TYPES OF NEW YORK EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal
leases."
Municipal leases may take the form of a lease or an installment purchase
contract issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. Interest payments on
qualifying municipal leases are exempt from Federal income taxes and state
income taxes within the state of issuance. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's
taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless
money is appropriated for such purpose on a yearly basis. In addition to the
"non-appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated
with
more conventional bonds. Although "non-appropriation" lease obligations are
often secured by the underlying property, disposition of the property in the
event of foreclosure might prove difficult. The Fund may invest in municipal
leases without non-appropriation clauses only when the municipality is
required
to continue the lease under all circumstances except bankruptcy. There is no
limitation on the percentage of the Fund's assets that may be invested in
municipal lease obligations. In evaluating municipal lease obligations, SBMFM
will consider such factors as it deems appropriate, which may include: (a)
whether the lease can be canceled; (b) the ability of the lease obligee to
direct the sale of the underlying assets; (c) the general creditworthiness of
the lease obligor; (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality; (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding; (f)
whether
the security is backed by a credit enhancement such as insurance; and (g) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services other than those covered by the lease
obligation.
Municipal leases that the Fund may acquire will be both rated and
unrated.
Rated leases include those rated investment grade at the time of investment or
those issued by issuers whose senior debt is rated investment grade at the
time
of investment. The Fund may acquire unrated issues that SBMFM deems to be
comparable in quality to rated issues in which the Fund is authorized to
invest.
A determination that an unrated lease obligation is comparable in quality to a
rated lease obligation will be subject to oversight and approval by the
Trust's
Board of Trustees.
15
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that the
leases are readily marketable. An unrated municipal lease with a
non-appropriation risk that is backed by an irrevocable bank letter of credit
or
an insurance policy issued by a bank or insurer deemed by SBMFM to be of high
quality and minimal credit risk, will not be deemed to be illiquid solely
because the underlying municipal lease is unrated, if SBMFM determines that
the
lease is readily marketable because it is backed by the letter of credit or
insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in
zero
coupon New York Exempt Obligations. Zero coupon New York Exempt Obligations
are
generally divided into two categories: pure zero obligations, which pay no
interest for their entire life and zero/fixed obligations, which pay no
interest
for some initial period and thereafter pay interest currently. In the case of
a
pure zero obligation, the failure to pay interest currently may result from
the
obligation's having no stated interest rate, in which case the obligation pays
only principal at maturity and is issued at a discount from its stated
principal
amount. A pure zero obligation may, in the alternative, provide for a stated
interest rate, but provide that no interest is payable until maturity, in
which
case accrued, unpaid interest on the obligation may be capitalized as
incremental principal. The value to the investor of a zero coupon New York
Exempt Obligation consists of the economic accretion either of the difference
between the purchase price and the nominal principal amount (if no interest is
stated to accrue) or of accrued, unpaid interest during the New York Exempt
Obligation's life or payment deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or
certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on certain New York Exempt
Obligations. The underwriter of these certificates or receipts typically
purchases New York Exempt Obligations and deposits the obligations in an
irrevocable trust or custodial account with a custodian bank, which then
issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Custodial
receipts evidencing specific coupon or principal payments have the same
general
attributes as zero coupon New York Exempt Obligations described above.
Although
under the terms of a custodial receipt, the Fund would be typically authorized
to assert its rights directly against the issuer of the underlying obligation,
the Fund could be required to assert through the custodian bank those rights
as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the Fund may be
subject
to delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security
16
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
would be reduced in recognition of any taxes paid.
New York Exempt Obligation Components. The Fund may invest in New York
Exempt Obligations, the interest rate on which has been divided by the issuer
into two different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction
Component")
pays an interest rate that is reset periodically through an auction process,
whereas the second of the components (the "Residual Component") pays a
residual
interest rate based on the difference between the total interest paid by the
issuer on the New York Exempt Obligation and the auction rate paid on the
Auction Component. The Fund may purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
Component holders will decrease as the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the magnitude of
the increases and decreases in market value of Residual Components may be
larger
than comparable changes in the market value of an equal principal amount of a
fixed rate New York Exempt Obligation having similar credit quality,
redemption
provisions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating
and
variable rate demand notes and bonds, which are New York Exempt Obligations
normally having a stated maturity in excess of one year, but which permit
their
holder to demand payment of principal at any time, or at specified intervals.
The maturity of a floating or variable rate demand note or bond will not be
deemed shortened by virtue of a demand feature for purposes of calculating the
Fund's net asset value or determining its weighted average maturity.
The issuer of floating and variable rate demand obligations normally has
a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of these obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time
that
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, floating and
variable
rate obligations are secured by letters of credit or other credit support
arrangements provided by banks. Use of letters of credit or other credit
support
arrangements will not adversely affect the tax-exempt status of these
obligations. Because they are direct lending arrangements between the lender
and
borrower, floating and variable rate obligations will generally not be traded.
In addition, no secondary market generally exists for these obligations,
although their holders may demand their payment at face value. For these
reasons, when floating and variable rate obligations held by the Fund are not
secured by letters of credit or
17
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
other credit support arrangements, the Fund's right to demand payment is
dependent on the ability of the borrower to pay principal and interest on
demand. SBMFM, on behalf of the Fund, will consider the creditworthiness of
the
issuers of floating and variable rate demand obligations in the Fund on an
ongoing basis.
Participation Interests. The Fund may purchase from financial
institutions
tax-exempt participation interests in New York Exempt Obligations. A
participation interest gives the Fund an undivided interest in the New York
Exempt Obligation in the proportion that the Fund's participation interest
bears
to the total amount of the New York Exempt Obligation. These instruments may
have floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of
a
bank that the Trust's Board of Trustees has determined meets certain quality
standards or the payment obligation otherwise will be collateralized by
obligations of the United States government or its agencies and
instrumentalities ("U.S. government securities"). The Fund will have the
right,
with respect to certain participation interests, to demand payment, on a
specified number of days' notice, for all or any part of the Fund's interest
in
the New York Exempt Obligation, plus accrued interest. The Fund intends to
exercise its right with respect to these instruments to demand payment only
upon
a default under the terms of the New York Exempt Obligation or to maintain or
improve the quality of its investment portfolio.
Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Bonds it owns or an increase in the price of Municipal
Bonds it proposes to purchase, the Fund may enter into financial futures
contracts and invest in options on financial futures contracts that are traded
on a domestic exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Bonds or relate to debt
securities the prices of which are anticipated by SBMFM to correlate with the
prices of the Municipal Bonds owned or to be purchased by the Fund.
In entering into a financial futures contract, the Fund will be required
to
deposit with the broker through which it undertakes the transaction an amount
of
cash or cash equivalents equal to approximately 5% of the contract amount.
This
amount, which is known as "initial margin," is subject to change by the
exchange
or board of trade on which the contract is traded, and members of the exchange
or board of trade may charge a higher amount. Initial margin is in the nature
of
a performance bond or good faith deposit on the contract that is returned to
the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. In accordance with a process known as
"marking-to-market," subsequent payments, known as "variation margin," to and
from the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short
positions
in the futures contract more or less valuable. At
18
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
any time prior to the expiration of a futures contract, the Fund may elect to
close the position by taking an opposite position, which will operate to
terminate the Fund's existing position in the contract.
A financial futures contract provides for the future sale by one party
and
the purchase by the other party of a certain amount of a specified property at
a
specified price, date, time and place. Unlike the direct investment in a
futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case
of
a put, the exercise price of the option on the futures contract. The potential
loss related to the purchase of an option on financial futures contracts is
limited to the premium paid for the option (plus transaction costs). The value
of the option may change daily and that change would be reflected in the net
asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options
on
financial futures contracts be engaged in for bona fide hedging purposes, or
if
the Fund enters into futures contracts for speculative purposes, that the
aggregate initial margin deposits and premiums paid by the Fund will not
exceed
5% of the market value of its assets. In addition, the Fund will, with respect
to its purchases of financial futures contracts, establish a segregated
account
consisting of cash or cash equivalents in an amount equal to the total market
value of the futures contracts, less the amount of initial margin on deposit
for
the contracts. The Fund's ability to trade in financial futures contracts and
options on financial futures contracts may be limited to some extent by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable to a regulated investment company that are described below under
"Dividends, Distributions and Taxes."
Although the Fund intends to enter into financial futures contracts and
options on financial futures contracts that are traded on a domestic exchange
or
board of trade only if an active market exists for those instruments, no
assurance can be given that an active market will exist for them at any
particular time. If closing a futures position in anticipation of adverse
price
movements is not possible, the Fund would be required to make daily cash
payments of variation margin. In those circumstances, an increase in the value
of the portion of the Fund's investments being hedged, if any, may offset
partially or completely losses on the futures contract. No assurance can be
given, however, that the price of the securities being hedged will correlate
with the price movements in a futures contract and, thus,
19
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
provide an offset to losses on the futures contract or option on the futures
contract. In addition, in light of the risk of an imperfect correlation
between
securities held by the Fund that are the subject of a hedging transaction and
the futures or options used as a hedging device, the hedge may not be fully
effective because, for example, losses on the securities held by the Fund may
be
in excess of gains on the futures contract or losses on the futures contract
may
be in excess of gains on the securities held by the Fund that were the subject
of the hedge. In an effort to compensate for the imperfect correlation of
movements in the price of the securities being hedged and movements in the
price
of futures contracts, the Fund may enter into financial futures contracts or
options on financial futures contracts in a greater or lesser dollar amount
than
the dollar amount of the securities being hedged if the historical volatility
of
the futures contract has been less or greater than that of the securities.
This
"over hedging" or "under hedging" may adversely affect the Fund's net
investment
results if market movements are not as anticipated when the hedge is
established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities it holds and rates decrease
instead, the Fund will lose part or all of the benefit of the increased value
of
securities that it has hedged because it will have offsetting losses in its
futures or options positions. In addition, in those situations, if the Fund
has
insufficient cash, it may have to sell securities to meet daily variation
margin
requirements on the futures contracts at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets
in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, when SBMFM believes that
market conditions warrant, the Fund may take a temporary defensive posture and
invest without limitation in short-term New York Exempt Obligations and
Taxable
Investments. To the extent the Fund holds Taxable Investments and, under
certain
market conditions, certain floating and variable rate demand obligations or
Auction Components, the Fund may not achieve its investment objective.
Money market instruments in which the Fund may invest include: U.S.
government securities; tax-exempt notes of municipal issuers rated, at the
time
of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch or,
if
not rated, by issuers having outstanding, unsecured debt then rated within the
three highest rating categories; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks, domestic
savings and loan associations and similar institutions); commercial paper
rated
no lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch or the equivalent
from
another major rating
20
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
service or, if unrated, of an issuer having an outstanding, unsecured debt
issue
then rated within the three highest rating categories; and repurchase
agreements. At no time will the Fund's investments in bank obligations,
including time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct
obligations of the United States and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the
United
States are Treasury Bills, Treasury Notes and Treasury Bonds, which differ
principally in terms of their maturities. Included among the securities issued
by U.S. government agencies and instrumentalities are: securities that are
supported by the full faith and credit of the United States (such as
Government
National Mortgage Association certificates); securities that are supported by
the right of the issuer to borrow from the United States Treasury (such as
securities of Federal Home Loan Banks); and securities that are supported by
the
credit of the instrumentality (such as Federal National Mortgage Association
and
Federal Home Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase or
sell
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future in order to secure what
is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. The Fund's Custodian will maintain, in a
segregated account of the Fund, cash, U.S. Government securities or other
liquid, high-grade debt obligations having a value equal to or greater than
the
Fund's purchase commitments; the Custodian will likewise segregate securities
sold on a delayed basis. The payment obligations and the interest rates that
will be received are each fixed at the time the Fund enters into the
commitment
and no interest accrues to the Fund until settlement. Thus, it is possible
that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to New York Exempt Obligations held in its portfolio. Under a stand-by
commitment, a broker, dealer or bank is obligated to repurchase at the Fund's
option specified securities at a specified price and, in this way, stand-by
commitments are comparable to put options. Each exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio
21
<PAGE>
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- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
liquidity and does not intend to exercise the rights afforded by the
commitments
for trading purposes. The Fund anticipates that stand-by commitments will be
available from brokers, dealers and banks without the payment of any direct or
indirect consideration. The Fund may pay for stand-by commitments if payment
is
deemed necessary, thus increasing to a degree the cost of the underlying New
York Exempt Obligation and similarly decreasing the security's yield to
investors.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with
respect to the Fund that may not be changed without approval of a majority of
the Fund's outstanding voting securities as defined in the 1940 Act. Included
among those fundamental restrictions are the following:
1. The Fund will not purchase securities other than Municipal and New
York Exempt Obligations and Taxable Investments as those terms are
defined in this Prospectus or the Statement of Additional
Information.
2. The Fund will not borrow money, except that the Fund may borrow from
banks for temporary or emergency (not leveraging) purposes,
including
the meeting of redemption requests and cash payments of dividends
and
distributions that might otherwise require the untimely disposition
of
securities, in an amount not to exceed 10% of the value of the
Fund's
total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the
borrowing is made. Whenever the Fund's borrowings exceed 5% of the
value of its total assets, the Fund will not make any additional
investments.
3. The Fund will not lend money to other persons, except through
purchasing Municipal and New York Exempt Obligations or Taxable
Investments and entering into repurchase agreements in a manner
consistent with the Fund's investment objective.
4. The Fund will not invest more than 25% of the value of its total
assets in securities of issuers in any one industry, except that
this
limitation is not applicable to a Fund's investments in U.S.
government securities.
5. The Fund will not pledge, hypothecate, mortgage or otherwise
encumber
its assets, except to secure permitted borrowings.
Certain other investment restrictions adopted by the Fund are described
in
the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
22
<PAGE>
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- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
New York Exempt Obligations. Even though New York Exempt Obligations are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of New York
Exempt
Obligations with longer remaining maturities typically fluctuate more than
those
of similarly rated New York Exempt Obligations with shorter remaining
maturities
such as the Fund intends to hold. The values of fixed-income securities also
may
be affected by changes in the credit rating or financial condition of the
issuing entities.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal income taxes (and, with respect to
New York Exempt Obligations, to the exemption of interest on them from New
York
state personal income taxes) are rendered by bond counsel to the respective
issuers at the time of issuance. Neither the Fund nor SBMFM will review the
proceedings relating to the issuance of New York Exempt Obligations or the
basis
for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax
exemption
on various types of Municipal Obligations and may enact other similar laws in
the future. If any such laws are enacted that would reduce the availability of
New York Exempt Obligations for investment by the Fund so as to affect the
Fund's shareholders adversely, the Trust will reevaluate the Fund's investment
objective and policies and might submit possible changes in the Fund's
structure
to shareholders for their consideration. If legislation were enacted that
would
treat a type of New York Exempt Obligation as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible Taxable
Investment
within the applicable limits set forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that SBMFM
determines to be of comparable quality to the rated securities in which the
Fund
may invest. Dealers may not maintain daily markets in unrated securities and
retail secondary markets for many of them may not exist. As a result, the
Fund's
ability to sell these securities when SBMFM deems it appropriate may be
diminished.
Municipal Leases. Municipal leases in which the Fund may invest have
special risks not normally associated with Municipal Obligations. These
obligations frequently contain non-appropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under the
lease or contract unless money is appropriated for that purpose by a
legislative
body annually or on another periodic basis. Municipal leases have additional
risks because they represent a type of financing that has not yet developed
the
depth of marketability generally associated with other Municipal Obligations.
Moreover, although a municipal lease will be secured by financed equipment or
facilities, the disposition
23
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
of the equipment or facilities in the event of foreclosure might prove
difficult. In addition, in certain instances the tax-exempt status of the
municipal lease will not be subject to the legal opinion of a nationally
recognized bond counsel, although in all cases the Fund will require that a
municipal lease purchased by the Fund be covered by a legal opinion to the
effect that, as of each effective date of the municipal lease, the lease is
the
valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability
of issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost
burdens
are allocated and reallocated among Federal, state and local governmental
units.
Such non-payment would result in a reduction of income to the Fund, and could
result in a reduction in the value of the municipal lease experiencing
non-payment and a potential decrease in the net asset value of the Fund.
Issuers
of municipal securities might seek protection under the bankruptcy laws. In
the
event of bankruptcy of such an issuer, the Fund could experience delays and
limitations with respect to the collection of principal and interest on such
municipal leases and the Fund may not, in all circumstances, be able to
collect
all principal and interest to which it is entitled. To enforce its rights in
the
event of a default in the lease payments, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation
of
such assets may not be tax-exempt. In addition, the Fund's intention to
qualify
as a "regulated investment company" under the Code may limit the extent to
which
the Fund may exercise its rights by taking possession of such assets, because
as
a regulated investment company the Fund is subject to certain limitations on
its
investments and on the nature of its income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from
time
to time, invest a portion of its assets in non-publicly traded New York Exempt
Obligations. Non-publicly traded securities may be less liquid than publicly
traded securities. Although non-publicly traded securities may be resold in
privately negotiated transactions, the prices realized from these sales could
be
less than those originally paid by the Fund.
When-Issued and Delayed-Delivery Transactions. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery.
Purchasing securities on a when-issued or delayed-delivery basis can involve
the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Non-Diversified Classification. Investment in the Fund, which is
classified
as a non-diversified fund under the 1940 Act, may present greater risks to
investors
24
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
than an investment in a diversified fund. The investment return on a
non-diversified fund typically is dependent upon the performance of a smaller
number of securities relative to the number of securities held in a
diversified
fund. The Fund's assumption of large positions in the obligations of a small
number of issuers will affect the value of its portfolio to a greater extent
than that of a diversified fund in the event of changes in the financial
condition, or in the market's assessment, of the issuers.
Special Considerations. In seeking to achieve its objective, the Fund may
invest without limit in Municipal Obligations which are private activity
bonds.
Moreover, although the Fund does not currently intend to do so on a regular
basis, it may invest more than 20% of its assets in Municipal Obligations
which
are repayable out of revenue streams generated from economically related
projects or facilities, if such investment is deemed necessary or appropriate
by
SBMFM. To the extent the Fund's assets are concentrated in Municipal
Obligations
payable from revenues on economically related projects and facilities, the
Fund
will be subject to the particular risks presented by such projects to a
greater
extent than it would be if the Fund's assets were not so concentrated.
Certain substantial issuers of New York Exempt Obligations (including
issuers whose obligations may be acquired by the Fund) have experienced
serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all
New
York issuers and have generally contributed to higher interest costs for their
borrowing and fewer markets for their outstanding debt obligations. In recent
years, several different issues of municipal securities of New York State and
its agencies and instrumentalities and of New York City have been downgraded
by
S&P and Moody's. On July 10, 1995, S&P downgraded its rating of New York
City's
$23 billion of outstanding general obligation bonds to "BBB+" from "A-",
citing
the City's chronic structural budget problems and weak economic outlook. S&P
stated that New York City's 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 City's continued high debt
levels also contributed to its decision to lower the ratings. On the other
hand,
strong demand for New York Exempt Obligations has more recently had the effect
of permitting New York Exempt Obligations to be issued with yields relatively
lower, and after issuance, to trade in the market at prices relatively higher,
than comparably rated municipal obligations issued by other jurisdictions. A
recurrence of the financial difficulties previously experienced by certain
issuers of New York Exempt Obligations could result in defaults or declines in
the market values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Exempt Obligations. As of the date of
this Prospectus, the Fund is not aware that any issuers of New York Exempt
Obligations are in default with respect to the payment of their municipal
obligations; any such default could affect adversely the market values and
25
<PAGE>
- ------------------------------------------------------------------------------
- --
Investment Objective and Management Policies (continued)
- ------------------------------------------------------------------------------
- --
marketability of all New York Exempt Obligations and, consequently the net
asset
value of the Fund's portfolio.
Other considerations affecting the Fund's investment in New York Exempt
Obligations are summarized in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities
ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through
principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer acting as agent.
The Fund cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%.
An annual turnover rate of 100% would occur if all of the securities held by
the
Fund are replaced once during a period of one
year. SBMFM will not consider turnover rate a limiting factor in making
investment decisions consistent with the investment objective and policies of
the Fund.
- ------------------------------------------------------------------------------
- --
Valuation of Shares
- ------------------------------------------------------------------------------
- --
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number
of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees.
Short-term investments that mature in 60 days or less are valued at amortized
cost. Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.
26
<PAGE>
- ------------------------------------------------------------------------------
- --
Dividends, Distributions and Taxes
- ------------------------------------------------------------------------------
- --
Dividends and Distributions
The Fund declares dividends from its net investment income (that is,
income
other than net realized capital gains) monthly; dividends ordinarily will be
paid on the last Friday of each calendar month to shareholders of record as of
the three business days prior. The Fund's net realized capital gains, if any,
are declared and distributed annually, normally at the end of the calendar
year
in which earned or at the beginning of the subsequent year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same
Class at net asset value, subject to no sales charge or CDSC. In order to
avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make a distribution
shortly before December 31 of each year of any undistributed ordinary income
or
capital gains and expects to pay any other distributions as are necessary to
avoid the application of this tax.
The per share dividends on Class C shares of the Fund may be lower than
the
per share dividends on Class A and Class Y shares principally as a result of
the
distribution fee applicable with respect to Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per share
dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be
in
the same amount for Class A, Class C and Class Y shares.
Taxes
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from the Fund's
net
investment income (other than dividends derived from interest earned on
qualifying tax-exempt obligations as described below) and distributions of the
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, regardless of how long shareholders in the Fund have held
their
shares and whether the dividends or distributions are received in cash or
reinvested in additional shares of the Fund. Distributions of the Fund's net
realized long-term capital gains will be taxable to shareholders as long-term
capital gains, regardless of how long shareholders have held their shares of
the
Fund and whether the distributions are received in cash or are reinvested in
additional Fund shares. In addition, as a general rule, a shareholder's gain
or
loss on a sale or redemption of shares of the Fund will be a long-term capital
gain or loss if the shareholder has held the shares for more than one year and
will be a short-term capital gain or loss if the shareholder has held the
shares
for one year or less.
Dividends paid by the Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest"
dividends
that
27
<PAGE>
- ------------------------------------------------------------------------------
- --
Dividends, Distributions and Taxes (continued)
- ------------------------------------------------------------------------------
- --
shareholders may exclude from their gross incomes for Federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of the Fund derived from interest on New York Exempt
Obligations, the interest on which is a specific tax preference item for
Federal
income tax purposes, will be a specific tax preference item for purposes of
the
Federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum
income
tax and corporate shareholders may incur a larger Federal environmental tax
liability through the receipt of Fund dividends and distributions from the
Fund.
Dividends of the Fund derived from interest on New York Exempt Obligations
will
be exempt from New York State personal income (but not corporate franchise or
income) taxes.
Statements as to the tax status of the dividends and distributions
received
by shareholders of the Fund are mailed annually. These statements set forth
the
dollar amount of income excluded from Federal income taxes and the dollar
amount, if any, subject to Federal income taxes. Statements from the Fund will
also show the dollar amount of income excluded or exempted from New York State
personal income taxes and the dollar amount, if any, subject to these taxes.
These statements will also designate the amount of exempt-interest dividends
that are a specific preference item for purposes of the Federal individual and
corporate alternative minimum taxes.
Shareholders of the Fund should consult their tax advisors with specific
reference to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows New York taxpayers who are individuals how to
translate Federal and New York State tax savings from investments such as the
Fund into an equivalent return from a taxable investment. To the extent that
the
equivalent taxable yields illustrated in this table are based on an effective
tax rate which combines the Federal and New York marginal income tax rates,
the
table is not applicable to individuals who do not pay New York State personal
income taxes. The yields used below are for illustration only and are not
intended to represent current or future yields for the Fund, which may be
higher
or lower than those shown.
28
<PAGE>
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- --
Dividends, Distributions and Taxes (continued)
- ------------------------------------------------------------------------------
- --
<TABLE>
<CAPTION>
New York,
Combined 1996 State, City
State Federal and Federal
New York Tax-Exempt
Taxable Income and City Marginal Effective
Equivalent Yields
Single Joint Rates**** Rate Rate**
2.00% 3.00% 4.00% 5.00% 6.00%
==============================================================================
=====================================
<C> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
$ 0-24,000 0-40,001 10.43% 15.00% 23.87%
2.63% 3.94% 5.25% 6.57% 7.88%
24,001-58,150 40,101-96,900 10.48 28.00 35.55
3.10 4.65 6.21 7.76 9.31
58,151-121,300 96,901-147,700 10.53 31.00 38.27
3.24 4.86 6.48 8.10 9.72
121,301-263,750 147,701-263,750 10.53 36.00 42.74
3.49 5.24 6.99 8.73 10.48
over 263,751 over 263,751 10.53 39.60 45.96
3.70 5.55 7.40 9.25 11.10
==============================================================================
=====================================
</TABLE>
<TABLE>
<CAPTION>
New York,
Combined 1996 State, City
State Federal and Federal
New York Tax-Exempt
Taxable Income and City Marginal Effective
Equivalent Yields
Single Joint Rates**** Rate Rate**
7.00% 8.00% 9.00% 10.00%
==============================================================================
=============================
<C> <C> <C> <C> <C>
<C> <C> <C> <C>
$ 0-24,000 0-40,000 10.43% 15.00% 23.87%
9.19% 10.51% 11.82% 13.13%
24,001-58,150 40,100-96,900 10.48 28.00 35.55
10.86 12.41 13.96 15.51
58,151-121,300 96,901-147,700 10.53 31.00 38.27
11.34 12.96 14.58 16.20
121,301-263,750 147,701-263,750 10.53 36.00 42.74
12.22 13.97 15.72 17.46
over 263,751 over 263,751 10.53 39.60 45.96
12.95 14.80 16.65 18.50
==============================================================================
=============================
</TABLE>
* This amount represents taxable income as defined in the Code. It is
assumed
that taxable income as defined in the Code is the same as under the New
York State or City personal income tax law, however, New York State or
City
taxable law may differ due to differences in exemptions, itemized
deductions, and other items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates and rate brackets for 1996, including indexing the rate
brackets for inflation. These rates include the effect of deducting state
and City taxes on your Federal return. For New York purposes, these
combined rates reflect the expected New York State and New York City tax
and surcharge rates for 1996.
*** These represent New York State, City and Federal Tax Equivalent Yields.
**** These rates represent the highest New York State and City personal income
tax rates within the applicable Federal income tax brackets for 1996.
The Federal tax rates and New York State and New York City tax rates
shown
are those in effect for 1996 and are subject to change. The calculations
reflected in the table assume that no income will be subject to the Federal
alternative minimum taxes.
29
<PAGE>
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- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
General
The Fund offers three Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain
redemptions.
Class Y shares are sold without an initial sales charge or 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-Alternate
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including qualified
retirement plans and certain 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 C or Class Y
shares. No maintenance fee will be charged by the Fund in connection with a
brokerage account through which an investor purchases or holds shares.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account, or $250 for an IRA or
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. 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 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
and Class C shares and the subsequent investment requirement for all Classes
is
$25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment
requirement
for Class A and Class C shares and the subsequent investment requirement for
all
Classes is $50. There are no minimum 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
spouses
and children. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's account
by
the Fund's transfer agent, 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
30
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
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
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.
Initial Sales Charge Alternative -- Class A Shares
The sales charges applicable to purchases of Class A shares of the Fund
are
as follows:
Sales
Charge as Sales Dealers
% of Charge as Reallowance
Offering % of as % of
Amount of Investment Price Amount Invested Offering Price
==============================================================================
==
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
==============================================================================
==
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in
the
aggregate, will be made at net asset value without any initial sales
charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The CDSC on Class A shares is payable to Smith
Barney, which compensates Smith Barney Financial Consultants and other
dealers whose clients make purchases of $500,000 or more. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class C
shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of
CDSC."
31
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
Members of the selling group may receive up to 90% of the sales charge
and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of
1933, as amended.
The $500,000 investment may be met by aggregating the purchases of Class
A
shares of the Fund made at one time by "any person," which includes an
individual, his or her spouse and children, or a trustee or other fiduciary of
a
single trust estate or single fiduciary account. It may also be met by
aggregating the purchase with the net asset value of all Class A shares
offered
with a sales charge held in funds sponsored by Smith Barney listed under
"Exchange Privilege."
Initial Sales Charge Waivers
Purchases of Class A shares may be made at net asset value without a
sales
charge in the following circumstances: (a) sales 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
persons and (ii) employees of members of the National Association of
Securities
Dealers, Inc., 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 in connection with the combination of
such company with the Fund by merger, acquisition of assets or otherwise; (c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the condition the
purchase of Class A shares is made with the proceeds of the redemption of
shares
of a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii)
was
subject to a sales charge; (d) shareholders who have redeemed Class A shares
in
the Fund (or Class A shares of another fund of the Smith Barney Mutual Funds
that are offered with a sales charge equal to or greater than the maximum
sales
charge of the Fund) and who wish to reinvest their redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar days of the
redemption; (e) accounts managed by registered investment advisory
subsidiaries
of Travelers; (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) purchasees by separate
accounts used to fund certain unregistered 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
32
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
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
aggregating the dollar amount of the new purchase and the total net asset
value
of all Class A shares of the Fund and of funds sponsored by Smith Barney which
are offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In
order
to obtain such discount, the purchaser must provide sufficient information at
the time of purchase to permit verification that the purchase qualifies for
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
purchase 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 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 requirements. One such requirement is that the plan must be
open
to specified partners or employees of the employer and its subsidiaries, if
any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Section 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
enables 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
33
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
of the Fund and its members, and must agree to include sales and other
materials
related to the Fund in its publications and mailing to members at no cost to
Smith Barney. In order to obtain such reduced sales charge or to purchase at
net
asset value, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for 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 purchase shares at net asset value by
aggregating the investments over a 13 month period, provided that the investor
refers to such Letter when placing orders. For purposes of a Letter of Intent,
the "Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other funds of the
Smith Barney Mutual Funds offered with a sales charge over a 13 month period
based on the total amount of intended purchases plus the value of all Class A
shares previously purchased and still owned. An alternative is to compute the
13
month period starting up to 90 days before the date of execution of a Letter
of
Intent. Each investment made during the period receives the sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously
paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or the Transfer Agent to obtain a Letter of
Intent application.
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 months from the date of the Letter. If a total investment of
$5,000,000 is not made with the six-month period, all Class Y shares purchased
to date will the transferred to Class A shares, where they will be subject to
all fees (including a service fee of 0.15%) 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 net asset value next determined without an
initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
34
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and (b)
Class A shares which when combined with Class A shares offered with a sales
charge currently held by an investor equal or exceed $500,000 in the
aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original 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 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 determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain
distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have
been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The
amount of any CDSC will be paid to Smith Barney.
Waivers of CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan
commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within
twelve
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans
or
IRAs upon the attainment of age 5911/42; (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 funds of the Smith Barney
Mutual
Funds may, under certain circumstances, reinvest all or part of the redemption
proceeds within 60 days and receive pro rata credit for any CDSC imposed on
the
prior redemption.
35
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings,
as
the case may be.
Smith Barney 401(k) and ExecChoiceTM Programs
Investors may be eligible to participate in the Smith Barney 401(k)
Program
or the Smith Barney ExecChoiceTM 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.
The Fund offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoiceTM
Programs.
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 CDSC. Once a Participating Plan has made an initial investment in
the
Fund, all of its subsequent investments in the Fund must be in the same Class
of
shares, except as otherwise described below.
Class A Shares. Class A shares of the 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 the 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 ExecChoiceTM Plans Opened On or After June 21, 1996. If, 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 ExecChoiceTM Program, a
Participating Plan's total Class C holdings in all non-money market Smith
Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of
the
Fund. (For Participating Plans that were originally established 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
Participating Plan enrolled in the Smith Barney 401(k) Program, if its total
Class C
36
<PAGE>
- ------------------------------------------------------------------------------
- --
Purchase of Shares (continued)
- ------------------------------------------------------------------------------
- --
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 the
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) or ExecChoiceTM
Program,
whether opened before or after June 21, 1996, that has not previously
qualified
for an exchange into Class A shares will be offered the opportunity to
exchange
all of its Class C shares for Class A shares of the Fund regardless of asset
size, at the end of the eighth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) or ExecChoiceTM 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
subject
to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the
Smith
Barney 401(k) Program or the Smith Barney
ExecChoiceTM Program must purchase such shares directly from the Transfer
Agent.
For further information regarding these Programs, investors should contact a
Smith Barney Financial Consultant.
- ------------------------------------------------------------------------------
- --
Exchange Privilege
- ------------------------------------------------------------------------------
- --
Except as otherwise noted below, shares of each Class may be exchanged
for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to other requirements of
the
fund into which exchanges are made.
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
37
<PAGE>
- ------------------------------------------------------------------------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------------------
- --
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Concert Social Awareness 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 Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New 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
38
<PAGE>
- ------------------------------------------------------------------------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------------------
- --
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 Y 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 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) or ExecChoiceTM 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.
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
respective 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
determine 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 the
shareholder. 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
39
<PAGE>
- ------------------------------------------------------------------------------
- --
Exchange Privilege (continued)
- ------------------------------------------------------------------------------
- --
any of the funds of the Smith Barney Mutual Funds ordinarily available, which
position the shareholder would be expected to maintain for a significant
period
of time. All relevant factors will be considered in determining what
constitutes
an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption
procedures
discussed below are also applicable for exchanging shares, and exchanges will
be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- ------------------------------------------------------------------------------
- --
Redemption of Shares
- ------------------------------------------------------------------------------
- --
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close
of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The
redemption
proceeds will be remitted on or before the third business day following
receipt
of proper tender, except on days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the
redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will
not
be invested for the shareholder's benefit without specific instruction and
Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official
bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
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
40
<PAGE>
- ------------------------------------------------------------------------------
- --
Redemption of Shares (continued)
- ------------------------------------------------------------------------------
- --
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Intermediate Maturity New York Municipals Fund
Class A, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or
dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are
registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power)
and
must be submitted to 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 guarantor
institution, such as domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal 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. 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
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder 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
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's 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. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
41
<PAGE>
- ------------------------------------------------------------------------------
- --
Redemption of Shares (continued)
- ------------------------------------------------------------------------------
- --
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 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 on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program.
Neither the Fund nor its agents will be liable for the following instructions
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 periodic 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 value of a shareholder's shares subject to the CDSC.)
For
further information regarding the automatic cash withdrawal plan, shareholders
should contact a Smith Barney Financial Consultant.
42
<PAGE>
- ------------------------------------------------------------------------------
- --
Minumum Account Size
- ------------------------------------------------------------------------------
- --
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
- ------------------------------------------------------------------------------
- --
Performance
- ------------------------------------------------------------------------------
- --
From time to time, the Fund may advertise its total return, average
annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include the Fund's current dividend return. These
figures are computed separately for Class A, Class C and Class Y shares of the
Fund. These figures are based on historical earnings and are not intended to
indicate future performance. Total return is computed for a specified 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 yield
of
a Fund Class refers to the net investment income earned by investments in the
Class over a thirty-day period. This net investment income is then annualized;
i.e., the amount of income earned by the investments during that 30-day period
is assumed to be earned each 30-day period for twelve periods and is expressed
as a percentage of the investments. The yield is calculated according to a
formula prescribed by the SEC to facilitate comparison with yields quoted by
other investment companies. The Fund calculates current dividend return for
each
Class by annualizing the most recent monthly distribution and dividing by the
net asset value or the maximum public offering price (including sales charge)
on
the last day of the period for which current dividend return for a Fund Class
is
presented. The current dividend return for each Class may vary from time to
time
depending on market conditions, the composition of its investment portfolio
and
operating expenses. These factors and possible differences in the methods used
in calculating current dividend return should be considered when comparing a
Class' current return to yields published for other investment companies and
other investment vehicles. The Fund may also include comparative performance
information in
43
<PAGE>
- ------------------------------------------------------------------------------
- --
Performance (contunied)
- ------------------------------------------------------------------------------
- --
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 management and supervision of the Trust and
the
Fund rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the companies that furnish
services
to the Fund, including agreements with the Fund's investment adviser,
administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's investment adviser and
administrator. The Statement of Additional Information contains background
information regarding each Trustee of the Trust and the executive officers of
the Fund.
Investment Adviser and Administrator -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as
the Fund's investment adviser pursuant to a transfer of the investment
advisory
agreement, most recently approved by the Trust's Board of Trustees on July 17,
1996. 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 February 28, 1997, in excess of $84 billion.
Subject to the supervision and direction of the Trust's Board of
Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional
portfolio
managers and securities analysts who provide research services to the Fund.
For
investment advisory services rendered to the Fund, the Fund pays SBMFM a fee
at
the annual rate of 0.30% of the value of the Fund's average daily net assets.
Prior to November 17, 1995, the Fund paid SBMFM an investment advisory fee at
the annual rate of 0.35% of the value of the Fund's average daily net assets.
For the fiscal year ended November 30, 1996, the Fund paid an investment
advisory fee to SBMFM in an amount equal to 0.05% of the Fund's average daily
net assets. During the same period, the Fund's investment adviser waived
investment advisory fees in an amount equal to 0.25% of the value of the
Fund's
average daily net assets.
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered to the Fund,
the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1996, the
Fund
paid an
44
<PAGE>
- ------------------------------------------------------------------------------
- --
Management of the Trust and the Fund (continued)
- ------------------------------------------------------------------------------
- --
administration fee to SBMFM in an amount equal to 0.03% of the Fund's average
daily net assets and the administrator voluntarily waived administrative fees
in
an amount equal to 0.17% of the value of the Fund's average daily net assets.
Prior to July 10, 1995, The Boston Company Advisors, Inc. ("Boston
Advisors") served as the Fund's sub-administrator. Under a sub-administration
agreement dated July 20, 1994, Boston Advisors was paid a portion of the
administration fee paid by the Fund to SBMFM at a rate agreed upon from time
to
time between Boston Advisors and SBMFM.
Portfolio Management
Peter Coffey, Vice President and Investment Officer of SBMFM, has served
as
Vice President and Investment Officer of the Fund since February 20, 1996. He
manages the day-to-day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended
November 30, 1996, is included in the Annual Report dated November 30, 1996. A
copy of the Annual Report may be obtained upon
request without charge from a Smith Barney Financial Consultant or by writing
or
calling the Fund at the address or phone number listed on page one of this
Prospectus.
- ------------------------------------------------------------------------------
- --
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 a service fee with
respect to Class A and Class C shares of the Fund at the annual rate of 0.15%
of
the average daily net assets of the respective Class. Smith Barney is also
paid
a distribution fee with respect to Class C shares at the annual rate of 0.20%
of
the average daily net assets attributable to that Class. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder
accounts
and, in the case of Class C shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential
investors;
payments to and expenses of Smith Barney Financial Consultants and other
persons
who provide support services in connection with the distribution of shares;
interest and/or carrying charges; and indirect and overhead costs of Smith
Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
45
<PAGE>
- ------------------------------------------------------------------------------
- --
Distributor (continued)
- ------------------------------------------------------------------------------
- --
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 and Class C shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a
holder
of that Class. Smith Barney Financial Consultants may receive different levels
of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class C shares are not tied
exclusively to the shareholder distribution and service expenses actually
incurred by Smith Barney, and the payments may exceed expenses actually
incurred
by Smith Barney. The Trust's Board of Trustees will evaluate the
appropriateness
of the Plan and its payment terms with respect to the Fund on a continuing
basis
and in doing so will consider all relevant factors, including expenses borne
by
Smith Barney and amounts received under the Plan and proceeds of the CDSC.
- ------------------------------------------------------------------------------
- --
Additional Information
- ------------------------------------------------------------------------------
- --
The Trust was organized on October 17, 1991 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust."
Each Class of the Fund represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights,
privileges
and preferences, except with respect to: (a) the designation of each Class;
(b)
the effect of the respective sales charges for each Class; (c) the
distribution
and/or service fees borne by each Class pursuant to the Plan; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; and (f) the exchange privilege of each Class. The
Trust's Board of Trustees does not anticipate that there will be any conflicts
among the interests of the holders of the different Classes. The Trustees, on
an
ongoing basis, will consider whether any such conflict exists and, if so, take
appropriate action.
When matters are submitted for shareholder vote, shareholders of each
Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the
Fund
will be voted on a Fund-wide basis on all matters except matters affecting
only
the interests of one Class, in which case only shares of the affected Class
would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will
be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders of record of
no
less than two-
46
<PAGE>
- ------------------------------------------------------------------------------
- --
Additional Information (continued)
- ------------------------------------------------------------------------------
- --
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.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as custodian of the Fund's investments.
First Data is located at Exchange Place, Boston, Massachusetts 02109.
The Fund sends shareholders a semi-annual report and an audited annual
report, each of which includes a listing of investment securities held by the
Fund at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Fund also plans to
consolidate the mailing of its Prospectus so that a shareholder having
multiple
accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their
Financial Consultants or the Fund's Transfer Agent.
47
<PAGE>
SMITH
BARNEY
----------
- --
A Member of TravelersGroup
[LOGO]
Smith
Barney
Intermediate
Maturity
New
York
Municipals
Fund
388 Greenwich
Street
New York, New York
10013
FD 0247
3/97
P R O S P E C T U S
SMITH
BARNEY
Intermediate
Maturity
California
Municipals
Fund
MARCH 25, 1997
PROSPECTUS BEGINS ON PAGE
ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS MARCH 25, 1997
Smith Barney Intermediate Maturity
California Municipals Fund
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Intermediate Maturity California Municipals Fund (the "Fund")
seeks to provide California investors with as high a level of current income
exempt from Federal income taxes and California State personal income taxes as
is consistent with the preservation of principal. The Fund invests primarily
in
investment grade obligations issued by the State of California and its politi-
cal subdivisions, agencies and public authorities. The Fund is one of a number
of funds, each having distinct investment objectives and policies making up
the
Smith Barney Investment Trust (the "Trust"). The Trust is an open-end manage-
ment investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of the other funds offered by the Trust are described
in separate prospectuses which may be obtained by calling or writing the Trust
at the telephone number or address set forth above or by contacting a Smith
Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information dated March 25, 1997, as amended or
supplemented
from time to time, that is available upon request and without charge by
calling
or writing the Trust at the telephone number or address set forth above or by
contacting a Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 13
- -------------------------------------------------
VALUATION OF SHARES 27
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 27
- -------------------------------------------------
PURCHASE OF SHARES 30
- -------------------------------------------------
EXCHANGE PRIVILEGE 38
- -------------------------------------------------
REDEMPTION OF SHARES 41
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 44
- -------------------------------------------------
PERFORMANCE 44
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 45
- -------------------------------------------------
DISTRIBUTOR 46
- -------------------------------------------------
ADDITIONAL INFORMATION 47
- -------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
- --
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
an
offer or solicitation in such jurisdiction.
- ------------------------------------------------------------------------------
- --
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed informa-
tion 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 seeks to provide California investors with as
high a level of current income exempt from Federal income taxes and California
State personal income taxes as is consistent with the preservation of princi-
pal. The Fund invests primarily in investment grade obligations issued by the
State of California and its political subdivisions, agencies and public
authorities. The weighted average maturity of the Fund's portfolio securities
will normally not be less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally invest
will be no greater than 20 years. See "Investment Objective and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which differ
principally in terms of sales charges and rates of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of $5,000,000. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of the
average daily net assets of the Class. The initial sales charge may be waived
for certain purchases. Purchases of Class A shares which, when combined with
current holdings of Class A shares offered with a sales charge, equal or
exceed $500,000 in the aggregate will be made at net asset value with no ini-
tial 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 "Pro-
spectus Summary--No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.20% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of the Fund shares, which, when
combined with current holdings of Class C shares of the Fund, equal or exceed
$500,000 in the aggregate should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 charge and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class C shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any con-
version rights of the classes in the context of their own investment time
frame.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or distribu-
tion fees. The maximum purchase amount for Class A shares is $4,999,999 and
Class C shares is $499,999. There is no maximum purchase amount for Class Y
shares.
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, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares offered with a sales charge held in funds sponsored by Smith
Barney Inc. ("Smith Barney") listed under "Exchange Privilege." See "Purchase
of Shares." Because the ongoing expenses of Class A shares may be lower than
those for Class C shares, purchasers eligible to purchase Class A shares at
net asset value should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class C shares is the same as that of the initial
sales charge on the Class A shares.
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences among 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. Investors may also be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available without sales
charge as investment alternatives under both of these programs. See "Purchase
of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. 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 Investor Services Group, Inc. ("First
Data").
See "'Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class C shares may open an
account
by making an initial investment of at least $1,000 for each account, 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
Clas-
ses. 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 and Class C shares and the subsequent investment 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 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 require-
ment for Class A 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."
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual Funds Management Inc.
("SBMFM") serves as the Funds investment adviser and administrator. SBMFM is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a diversi-
fied financial services holding company engaged, through its subsidiaries,
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
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 respec-
tive net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are generally
paid on the last Friday of each calendar month to shareholders of record as of
three business days prior thereto. Distributions of net realized capital
gains, if any, are paid annually. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund will achieve its investment objective. Shares of the Fund, unlike certain
bank deposit accounts, are not guaranteed or insured by any Federal or state
authority. Changes in interest rates generally will result in increases or
decreases in the market value of the obligations held by the Fund. The yield
of the Fund may not be as high as those of other funds that invest in lower
quality and/or longer term securities. The Fund is not a tax-exempt money mar-
ket fund and therefore its investment portfolio can be expected to experience
greater volatility than that of a tax-exempt money market fund. The net asset
value of the Fund will be subject to greater fluctuation to the extent that
the Fund invests in zero coupon securities. The Funds net asset value per
share will fluctuate depending on a combination of factors such as current
market interest rates and the creditworthiness of the issuers in whose securi-
ties the Fund invests. The Fund will not invest in obligations that are rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB by Standard
& Poor's Ratings Group ("S&P") or BBB by Fitch Investors Service, L.P.
("Fitch"), at the time of purchase. The ratings of Moody's, S&P and Fitch rep-
resent their opinions as to the quality of the obligations that they undertake
to rate; the ratings are relative and subjective and are not absolute stan-
dards of quality.
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The Fund may invest up to 20% of its total assets in unrated securities that
SBMFM determines to be of comparable quality to the securities rated invest-
ment grade in which the Fund may invest. Dealers may not maintain daily mar-
kets in unrated securities and retail secondary markets for many of them may
not exist; lack of markets may affect the Funds ability to sell these securi-
ties when SBMFM deems it appropriate. The Fund has the right to invest without
limitation in state and local obligations that are "private activity bonds,"
the income from which may be taxable as a specific preference item for pur-
poses of the Federal alternative minimum tax. Thus, the Fund may not be a
suitable investment for investors who are subject to the alternative minimum
tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks.
The instruments exposing the Fund to risks are municipal leases, zero coupon
securities, custodial receipts, municipal obligation components, floating and
variable rate demand notes and bonds, and participation interests. Entering
into securities transactions on a when-issued or delayed-delivery basis are
investment techniques involving risks to the Fund. See "Investment Objective
and Management Policies--Investment Techniques--Risk Factors and Special Con-
siderations" and "Dividends, Distributions and Taxes."
Investment in the Fund which is classified as a non-diversified fund, may
present a greater risk than an investment in a diversified fund. See "Invest-
ment Objective and Management Policies--Risk Factors and Special Considera-
tions." Investment in the Fund involves risks and special considerations
applicable to the State of California. See "Investment Objective and Manage-
ment Policies--Risk Factors and Special Considerations."
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based upon the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and, unless otherwise noted, the Funds
operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND CLASS A CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) None* 1.00% None
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES***
(as a percentage of average net assets)
Management fees (after fee waivers) ----% ----% -----%
12b-1 fees** 0.15 0.35 0.00
Other expenses 0.89 0.90 0.86
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(after waivers) 1.04% 1.25% 0.86%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares which, when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in
the
aggregate will be made at net asset value with no sales charge, but may be
subject to a CDSC of 1.00% on redemptions made within 12 months.
** Class C shares are subject to an ongoing distribution fee and, as a
result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
*** "Other Expenses" have been restated to reflect the reimbursement
percentages
currently in effect for the Fund. During the fiscal year ended November
30,
1996, the Funds investment adviser and administrator voluntarily waived
all
of its fees and reimburse the fund for other expenses in the aggregate
amounts
equal to 0.50% and 0.27% respectively, of the value of the
Funds average daily net assets thereby decreasing the amount paid in
respect of management fees to 0.00% of the value of the Funds average
daily
net assets. This had the effect of lowering the Funds overall expenses and
increasing the returns available to investors. If SBMFM had elected not to
waive fees and reimburse expenses, the Fund's total operating expenses for
Class A, Class C and Class Y shares for the fiscal year ended November 30,
1996 would have been 1.54%, 1.75% and 1.36%, respectively, of the value of
the Fund's average daily net assets. As of November 17, 1995, the Fund's
investment advisory fee was decreased from 0.35% to 0.30% of the average
daily net assets of the Fund.
Class A shares of the Fund purchased through the Smith Barney Asset One Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
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 actu-
ally may pay lower or no charges, depending on the amount purchased and the
length of time the shares are held through the Smith Barney 401(k) or
ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of Shares."
Smith Barney
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
receives an annual 12b-1 service fee of 0.15% of the value of average daily
net
assets of Class A shares. Smith Barney also receives with respect to Class C
shares an annual 12b-1 fee of 0.35% of the value of average daily net assets
of
that Class, consisting of a 0.20% distribution fee and a 0.15% service fee.
The
nature of the services for which the Fund pays management fees is described
under "Management of the Trust and the Fund." "Other expenses" in the above
table includes fees for shareholder services not provided by Smith Barney,
cus-
todial fees, legal and accounting fees, printing costs and registration fees,
the costs of regulatory compliance, the costs associated with maintaining the
Trust's legal existence and the costs involved in communicating with
sharehold-
ers of the Fund.
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 INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND 1 YEAR 3 YEARS 5 YEARS 10
YEARS
- ------------------------------------------------------------------------------
- ----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each
time period:
Class A...................................... $30 $52 $76
$145
Class C...................................... 23 40 69
151
Class Y...................................... 9 27 48
106
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A...................................... $30 $52 $76
$145
Class C...................................... 13 40 69
151
Class Y...................................... 9 27 48
106
- ------------------------------------------------------------------------------
- ----
</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 Funds actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN
THOSE SHOWN.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the fiscal years ended November 30, 1996
and November 30, 1995 have
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Funds Annual Report dated November 30, 1996. The fol-
lowing information for the period ended November 30, 1992 and for the fiscal
years ended November 30, 1993 and November 30, 1994 has been audited by other
auditors. This information should be read in conjunction with the financial
statements and related notes that also appear in the Funds Annual Report,
which is incorporated by reference into the Statement of Additional Informa-
tion.
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------
- --
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS A SHARES 1996 1995 1994 1993
1992(1)
- ------------------------------------------------------------------------------
- -----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $8.53 $7.80 $8.50 $8.04
$7.90
- ------------------------------------------------------------------------------
- -----
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2) 0.40 0.40 0.39 0.39
0.35
Net realized and unrealized
gain (loss) 0.02 0.73 (0.69) 0.46
0.14
- ------------------------------------------------------------------------------
- -----
Total Income (Loss) From
Operations 0.42 1.13 (0.30) 0.85
0.49
- ------------------------------------------------------------------------------
- -----
LESS DISTRIBUTION FROM:
Net investment income (0.40) (0.40) (0.39) (0.39)
(0.35)
Net realized gains -- -- (0.01) --
- --
- ------------------------------------------------------------------------------
- -----
Total Distributions (0.40) (0.40) (0.40) (0.39)
(0.35)
- ------------------------------------------------------------------------------
- -----
NET ASSET VALUE, END OF YEAR $8.55 $8.53 $7.80 $8.50
$8.04
- ------------------------------------------------------------------------------
- -----
TOTAL RETURN 5.05% 14.85% (3.65)% 10.70%
6.33%++
- ------------------------------------------------------------------------------
- -----
NET ASSETS, END OF YEAR (000S) $24,537 $26,211 $25,359 $32,514
$10,667
- ------------------------------------------------------------------------------
- -----
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.77% 0.75% 0.75% 0.72%
0.65%+
Net investment income 4.69 4.89 4.73 4.45
4.81+
- ------------------------------------------------------------------------------
- -----
PORTFOLIO TURNOVER RATE 15% 8% 39% 16%
46%
- ------------------------------------------------------------------------------
- -----
</TABLE>
(1) For the period from December 31, 1991 (inception date) to November 30,
1992.
(2) The investment adviser has waived all or part of its fees for the four
years ended November 30, 1996, and the period ended November 30, 1992. If
such fees were not waived, the per share effect on net investment income
and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES TO EXPENSE RATIOS
NET INVESTMENT INCOME WITHOUT FEE WAIVERS
----------------------------- ------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.07 $0.03 $0.04 $0.07 $0.11 1.54% 1.16% 1.24% 1.49% 2.18%+
</TABLE>
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------------
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS C SHARES 1996 1995 1994(1)
- -------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR $8.52 $7.80 $7.76
- -------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.38 0.38 0.01
Net realized and
unrealized gain 0.02 0.72 0.05**
- -------------------------------------------------------------------
Total Income From
Operations 0.40 1.10 0.06
- -------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.38) (0.38) (0.02)
- -------------------------------------------------------------------
Total Distributions (0.38) (0.38) (0.02)
- -------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $8.54 $8.52 $7.80
- -------------------------------------------------------------------
TOTAL RETURN 4.84% 14.36% 0.72%++
- -------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $2,607 $2,254 $45
- -------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(2) 0.98% 0.98% 0.95%+
Net investment income 4.48 4.54 4.53+
- -------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 15% 8% 39%
- -------------------------------------------------------------------
</TABLE>
(1) For the period from November 8, 1994 (inception date) to November 30,
1994.
(2) The investment adviser has waived all or part of its fees for the two
years
ended November 30, 1996, and the period ended November 30, 1994. If such
fees were not waived, the per share effect on net investment income and
the
expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE EXPENSE RATIOS
DECREASES TO NET WITHOUT FEE
INVESTMENT INCOME WAIVERS
----------------- ------------------
1996 1995 1994 1996 1995 1994
----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Class C $0.07 $0.03 $0.00* 1.75% 1.39% 1.44%+
</TABLE>
* Amount represents less than $0.01 per share.
** The amount in this caption for each share outstanding throughout the period
may not accord with the change in aggregate gains and losses in the
portfolio securities for the period because of the timing of purchases and
withdrawals of shares in relation to the fluctuating market values of the
portfolio.
++Total return is not annualized, as it may not be representative of the
total
return for the year.
+ Annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS Y SHARES 1996 1995 (1)
- ----------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.54 $8.39
- ----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.41 0.09
Net realized and unrealized gain 0.02 0.15
- ----------------------------------------------------------------
Total Income From Operations 0.43 0.24
- ----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.41) (0.09)
- ----------------------------------------------------------------
Total Distributions (0.41) (0.09)
- ----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.56 $8.54
- ----------------------------------------------------------------
TOTAL RETURN 5.22% 2.92%++
- ----------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $274 $261
- ----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.59% 0.58%+
Net investment income 4.87 4.74+
- ----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 15% 8%
- ----------------------------------------------------------------
</TABLE>
(1) For the period from September 8, 1995 (inception date) to November 30,
1995.
(2) The investment adviser has waived a part of its fees for the year ended
November 30, 1996 and the period ended November 30, 1995. If such fees
were
not waived, the per share effect on net investment income and the expense
ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES TO EXPENSE RATIOS
NET INVESTMENT INCOME WITHOUT FEE WAIVER
----------------------- ------------------
1996 1995 1996 1995
----------- ----------- ------------------
<S> <C> <C> <C> <C>
Class Y $0.07 $0.03 1.36% 0.99%+
</TABLE>
++Total return is not annualized, as it may not be representative of the
total
return for the year.
+ Annualized.
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
Set out below is a description of the investment objective and principal
investment policies of the Fund. No assurance can be given that the Fund will
be able to achieve its investment objective, which may be changed only with
the approval of a majority (as defined in the Investment Company Act of 1940,
as amended (the "1940 Act")) of the Fund's outstanding shares.
The Fund's investment objective is to provide California investors with as
high a level of current income exempt from Federal income taxes and California
State personal income taxes as is consistent with the preservation of princi-
pal. Under normal market conditions, the Fund attempts to invest 100% of its
assets in a portfolio of investment grade debt obligations issued by or on
behalf of the State of California and other states, territories and posses-
sions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political subdivisions ("Munici-
pal Obligations"). For purposes of this Prospectus, debt obligations issued by
the State of California and its political subdivisions, agencies and public
authorities (together with certain other governmental issuers such as the Com-
monwealth of Puerto Rico), the interest from which debt obligations is, in the
opinion of bond counsel to the issuer, excluded from gross income for Federal
income tax purposes and exempt from California State personal income tax, are
defined as "California Exempt Obligations." The Fund will operate subject to a
fundamental investment policy providing that, under normal market conditions,
the Fund will invest at least 80% of its net assets in California Exempt Obli-
gations rated investment grade.
The Fund is classified as a non-diversified fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax and California State franchise tax to the extent that its earnings
are distributed to shareholders. To qualify as a regulated investment company,
the Fund will, among other things, limit its investments so that, at the close
of each quarter of the taxable year (a) not more than 25% of the market value
of the Fund's total assets will be invested in the securities of a single
issuer and (b) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer.
The Fund will invest at least 80% of its total assets in California Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moodys, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20%
of the Fund's total assets may be invested in unrated securities that are
deemed by
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
SBMFM to be of a quality comparable to investment grade. The Fund will not
invest in California Exempt Obligations that are rated lower than investment
grade at the time of purchase. Although California Exempt Obligations rated
Baa
by Moody's, BBB by S&P or BBB by Fitch are considered to be investment grade,
they may be viewed as being subject to greater risks than other investment
grade securities. California Exempt Obligations rated Baa by Moody's, for
exam-
ple, are considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. California
Exempt
Obligations rated BBB by S&P are regarded as having an adequate capacity to
pay
principal and interest. California Exempt Obligations rated BBB by Fitch are
deemed to be subject to a higher likelihood that their rating will fall below
investment grade than higher rated bonds.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the California Exempt Obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
SBMFM's judgment as to credit quality of a California Exempt Obligation, thus,
may differ from that suggested by the ratings published by a rating service. A
description of Moody's, S&P and Fitch ratings relevant to the Fund's invest-
ments is included as an Appendix to the Statement of Additional Information.
The policies of the Fund described above as to ratings of portfolio
investments
will apply only at the time of the purchase of a security, and the Fund will
not be required to dispose of a security in the event Moody's, S&P or Fitch
downgrades its assessment of the credit characteristics of the security's
issu-
er.
California Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenue derived from a
partic-
ular facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general tax-
ing power. Notes are short-term obligations of issuing municipalities or agen-
cies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. California Exempt Obligations bear fixed, floating
and variable rates of interest, and variations exist in the security of Cali-
fornia Exempt Obligations, both within a particular classification and between
classifications.
The yields on, and values of, California Exempt Obligations are dependent on
a variety of factors, including general economic and monetary conditions, con-
ditions in the California Exempt Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently,
California Exempt Obligations with the same maturity, coupon and rating may
have different yields or values, whereas obligations of the same maturity and
coupon with different ratings
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
may have the same yield or value. See "Risk Factors and Special Considera-
tions--California Exempt Obligations."
Issuers of California Exempt Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
the obligations or upon the ability of municipalities to levy taxes. The
possi-
bility also exists that, as a result of litigation or other conditions, the
power or ability of any issuer to pay, when due, the principal of, and
interest
on, its obligations may be materially affected.
MATURITY OF OBLIGATIONS HELD BY THE FUND
SBMFM believes that the Fund may offer an attractive investment opportunity
for investors seeking a higher effective tax yield than a tax-exempt money
mar-
ket fund or a tax-exempt short-term bond fund and less fluctuation in net
asset
value than a longer term tax-exempt bond fund. The Fund will normally invest
in
intermediate maturity securities; the weighted average maturity of the Fund
will normally be not less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally invest
will be no greater than 20 years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in California Exempt Obligations that are
"private activity bonds," as defined in the Code, which are in most cases
reve-
nue bonds. Private activity bonds generally do not carry the pledge of the
credit of the issuing municipality, but are guaranteed by the corporate entity
on whose behalf they are issued. Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance non-governmental activi-
ties is a specific tax preference item for purposes of the Federal individual
and corporate alternative minimum taxes. Individual and corporate shareholders
may be subject to a Federal alternative minimum tax to the extent the Fund's
dividends are derived from interest on these bonds. Dividends derived from
interest income on California Exempt Obligations are a "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum tax.
See "Dividends, Distributions and Taxes." Private activity bonds held by the
Fund will be included in the term California Exempt Obligations for purposes
of
determining compliance with the Fund's policy of investing at least 80% of its
total assets in California Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in California Exempt Obligations that are
repayable out of revenues generated from economically related projects or
facilities
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
or debt obligations whose issuers are located in the same state. Sizable
investments in these obligations could involve an increased risk to the Fund
should any of the related projects or facilities experience financial diffi-
culties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to 10% of its net assets in illiquid securities,
which term includes securities subject to contractual or other restrictions on
resale and other instruments that lack readily available markets. In addition,
up to 5% of the value of the Fund's assets may be invested in securities of
entities that have been in continuous operation for fewer than three years.
TYPES OF CALIFORNIA EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal leases."
Municipal leases may take the form of a lease or an installment purchase con-
tract issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. Interest payments on
qualifying municipal leases are exempt from Federal income taxes and state
income taxes within the state of issuance. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. In addition
to the "non-appropriation" risk, these securities represent a relatively new
type of financing that has not yet developed the depth of marketability asso-
ciated with more conventional bonds. Although "non-appropriation" lease obli-
gations are often secured by the underlying property, disposition of the prop-
erty in the event of foreclosure might prove difficult. The Fund may invest in
municipal leases without non-appropriation clauses only when the municipality
is required to continue the lease under all circumstances except bankruptcy.
There is no limitation on the percentage of the Fund's assets that may be
invested in municipal lease obligations. In evaluating municipal lease obliga-
tions, SBMFM will consider such factors as it deems appropriate, which may
include: (a) whether the lease can be canceled; (b) the ability of the lease
obligee to direct the sale of the underlying assets; (c) the general credit-
worthiness of the lease obligor; (d) the likelihood that the municipality will
discontinue appropriating funding for the leased property in the event such
property is no longer considered essential by the municipality; (e) the legal
recourse of the lease obligee in the event of such a failure to appropriate
funding; (f) whether the security is backed by a credit enhancement such as
insurance; and
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
(g) any limitations which are imposed on the lease obligor's ability to uti-
lize substitute property or services other than those covered by the lease
obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of investment or
those issued by issuers whose senior debt is rated investment grade at the
time of investment. The Fund may acquire unrated issues that SBMFM deems to be
comparable in quality to rated issues in which the Fund is authorized to
invest. A determination that an unrated lease obligation is comparable in
quality to a rated lease obligation will be subject to the oversight and
approval by the Trust's Board of Trustees.
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that the
leases are readily marketable. An unrated municipal lease with a non-appropri-
ation risk that is backed by an irrevocable bank letter of credit or an insur-
ance policy issued by a bank or insurer deemed by SBMFM to be of high quality
and minimal credit risk, will not be deemed to be illiquid solely because the
underlying municipal lease is unrated, if SBMFM determines that the lease is
readily marketable because it is backed by the letter of credit or insurance
policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in zero
coupon California Exempt Obligations. Zero coupon California Exempt Obliga-
tions are generally divided into two categories: pure zero obligations, which
are those that pay no interest for their entire life and zero/fixed obliga-
tions, which pay no interest for some initial period and thereafter pay inter-
est currently. In the case of a pure zero obligation, the failure to pay
interest currently may result from the obligation's having no stated interest
rate, in which case the obligation pays only principal at maturity and is
issued at a discount from its stated principal amount. A pure zero obligation
may, in the alternative, provide for a stated interest rate, but provide that
no interest is payable until maturity, in which case accrued, unpaid interest
on the obligation may be capitalized as incremental principal. The value to
the investor of a zero coupon California Exempt Obligation consists of the
economic accretion either of the difference between the purchase price and the
nominal principal amount (if no interest is stated to accrue) or of accrued,
unpaid interest during the California Exempt Obligations life or payment
deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on certain California Exempt
Obligations. The underwriter of these certificates or receipts typically pur-
chases California Exempt Obligations and deposits the obligations in an irrev-
ocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Custodial
receipts evidencing specific coupon or
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
principal payments have the same general attributes as zero coupon California
Exempt Obligations described above. Although under the terms of a custodial
receipt, the Fund would be typically authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the under-
lying issuer. Thus, in the event the underlying issuer fails to pay principal
and/or interest when due, the Fund may be subject to delays, expenses and
risks
that are greater than those that would have been involved if the Fund had pur-
chased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a non-
taxable entity, the yield on the underlying security would be reduced in
recog-
nition of any taxes paid.
California Exempt Obligation Components. The Fund may invest in California
Exempt Obligations, the interest rate on which has been divided by the issuer
into two different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction
Component")
pays an interest rate that is reset periodically through an auction process,
whereas the second of the components (the "Residual Component") pays a
residual
interest rate based on the difference between the total interest paid by the
issuer on the California Exempt Obligation and the auction rate paid on the
Auction Component. The Fund may purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally
determined by subtracting the interest rate paid to the holders of Auction
Com-
ponents from a fixed amount, the interest rate paid to Residual Component
hold-
ers will decrease as the Auction Component's rate increases and increase as
the
Auction Component's rate decreases. Moreover, the magnitude of the increases
and decreases in market value of Residual Components may be larger than compa-
rable changes in the market value of an equal principal amount of a fixed rate
California Exempt Obligation having similar credit quality, redemption provi-
sions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating and
variable rate demand notes and bonds, which are California Exempt Obligations
normally having a stated maturity in excess of one year, but which permit
their
holder to demand payment of principal at any time, or at specified intervals.
The maturity of a floating or variable rate demand note or bond will not be
deemed shortened by virtue of a demand feature for purposes of calculating the
Fund's net asset value or determining its weighted average maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the
out-
standing principal amount of the obligations plus accrued interest upon a
spec-
ified number of
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
days' notice to the holders of these obligations. The interest rate on a
float-
ing rate demand obligation is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time that rate is adjusted. The
interest rate on a variable rate demand obligation is adjusted automatically
at
specified intervals. Frequently, floating and variable rate obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Use of letters of credit or other credit support arrangements will not
adversely affect the tax-exempt status of these obligations. Because they are
direct lending arrangements between the lender and borrower, floating and
vari-
able rate obligations will generally not be traded. In addition, no secondary
market generally exists for these obligations, although their holders may
demand their payment at face value. For these reasons, when floating and vari-
able rate obligations held by the Fund are not secured by letters of credit or
other credit support arrangements, the Fund's right to demand payment is
depen-
dent on the ability of the borrower to pay principal and interest on demand.
SBMFM, on behalf of the Fund, will consider on an ongoing basis the creditwor-
thiness of the issuers of floating and variable rate demand obligations held
by
the Fund.
Participation Interests. The Fund may purchase from financial institutions
tax-exempt participation interests in California Exempt Obligations. A
partici-
pation interest gives the Fund an undivided interest in the California Exempt
Obligation in the proportion that the Fund's participation interest bears to
the total amount of the California Exempt Obligation. These instruments may
have floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of
a
bank that the Trust's Board of Trustees has determined meets certain quality
standards, or the payment obligation otherwise will be collateralized by obli-
gations of the United States government or its agencies and instrumentalities
("U.S. government securities"). The Fund will have the right, with respect to
certain participation interests, to demand payment, on a specified number of
days' notice, for all or any part of the Fund's interest in the California
Exempt Obligation, plus accrued interest. The Fund intends to exercise its
right with respect to these instruments to demand payment only upon a default
under the terms of the California Exempt Obligation or to maintain or improve
the quality of its investment portfolio.
Financial Futures and Options Transactions. To hedge against a decline in
the
value of Municipal Bonds it owns or an increase in the price of Municipal
Bonds
it proposes to purchase, the Fund may enter into financial futures contracts
and invest in options on financial futures contracts that are traded on a
domestic exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Bonds or relate to debt
securities the prices of which are anticipated by SBMFM to correlate with the
prices of the Municipal Bonds owned or to be purchased by the Fund.
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
In entering into a financial futures contract, the Fund will be required to
deposit with the broker through which it undertakes the transaction an amount
of cash or cash equivalents equal to approximately 5% of the contract amount.
This amount, which is known as "initial margin," is subject to change by the
exchange or board of trade on which the contract is traded, and members of the
exchange or board of trade may charge a higher amount. Initial margin is in
the nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. In accordance with a process
known as "marking-to-market," subsequent payments, known as "variation mar-
gin," to and from the broker will be made daily as the price of the index or
securities underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable. At any time
prior to the expiration of a futures contract, the Fund may elect to close the
position by taking an opposite position, which will operate to terminate the
Fund's existing position in the contract.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at
a specified price, date, time and place. Unlike the direct investment in a
futures contract, an option on a financial futures contract gives the pur-
chaser the right, in return for the premium paid, to assume a position in the
financial futures contract at a specified exercise price at any time prior to
the expiration date of the option. Upon exercise of an option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account, which represents the amount by which the market price
of the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of an option on financial futures
contracts is limited to the premium paid for the option (plus transaction
costs). The value of the option may change daily and that change would be
reflected in the net asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options
on financial futures contracts be engaged in for bona fide hedging purposes,
or if the Fund enters into futures contracts for speculative purposes, that
the aggregate initial margin deposits and premiums paid by the Fund will not
exceed 5% of the market value of its assets. In addition, the Fund will, with
respect to its purchases of financial futures contracts, establish a segre-
gated account consisting of cash or cash equivalents in an amount equal to the
total market value of the futures contracts, less the amount of initial margin
on deposit for the contracts. The Fund's ability to trade in financial futures
contracts and options on financial futures contracts may be limited to some
extent by the requirements of the Internal Revenue Code of 1986,
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
as amended (the "Code"), applicable to a regulated investment company that are
described below under "Dividends, Distributions and Taxes."
Although the Fund intends to enter into financial futures contracts and
options on financial futures contracts that are traded on a domestic exchange
or board of trade only if an active market exists for those instruments, no
assurance can be given that an active market will exist for them at any
partic-
ular time. If closing a futures position in anticipation of adverse price
move-
ments is not possible, the Fund would be required to make daily cash payments
of variation margin. In those circumstances, an increase in the value of the
portion of the Fund's investments being hedged, if any, may offset partially
or
completely losses on the futures contract. No assurance can be given, however,
that the price of the securities being hedged will correlate with the price
movements in a futures contract and, thus, provide an offset to losses on the
futures contract of option on the futures contract. In addition, in light of
the risk of an imperfect correlation between securities held by the Fund that
are the subject of a hedging transaction and the futures or options used as a
hedging device, the hedge may not be fully effective because, for example,
losses on the securities held by the Fund may be in excess of gains on the
futures contract or losses on the futures contract may be in excess of gains
on
the securities held by the Fund that were the subject of the hedge. In an
effort to compensate for the imperfect correlation of movements in the price
of
the securities being hedged and movements in the price of futures contracts,
the Fund may enter into financial futures contracts or options on financial
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures
con-
tract has been less or greater than that of the securities. This "over
hedging"
or "under hedging" may adversely affect the Fund's net investment results if
market movements are not as anticipated when the hedge is established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities it holds and rates decrease
instead, the Fund will lose part or all of the benefit of the increased value
of securities that it has hedged because it will have offsetting losses in its
futures or options positions. In addition, in those situations, if the Fund
has
insufficient cash, it may have to sell securities to meet daily variation mar-
gin requirements on the futures contracts at a time when it may be disadvanta-
geous to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, when SBMFM believes that
market conditions warrant, the Fund may take a temporary defensive posture and
21
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
invest without limitation in short-term California Exempt Obligations and Tax-
able Investments. To the extent the Fund holds Taxable Investments and, under
certain market conditions, certain floating and variable rate demand obliga-
tions or Auction Components, the Fund may not achieve its investment
objective.
Money market instruments in which the Fund may invest include: U.S. govern-
ment securities; tax-exempt notes of municipal issuers rated, at the time of
purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch or, if
not rated, by issuers having outstanding, unsecured debt then rated within the
three highest rating categories; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks, domestic
savings and loan associations and similar institutions); commercial paper
rated
no lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch or the equivalent
from
another major rating service or, if unrated, of an issuer having an outstand-
ing, unsecured debt issue then rated within the three highest rating catego-
ries; and repurchase agreements. At no time will the Fund's investments in
bank
obligations, including time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct obli-
gations of the United States and obligations issued by U.S. government
agencies
and instrumentalities. Included among direct obligations of the United States
are Treasury Bills, Treasury Notes and Treasury Bonds, which differ
principally
in terms of their maturities. Included among the securities issued by U.S.
gov-
ernment agencies and instrumentalities are: securities that are supported by
the full faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported by the right
of the issuer to borrow from the United States Treasury (such as securities of
Federal Home Loan Banks); and securities that are supported by the credit of
the instrumentality (such as Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below,
which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis. When-issued or delayed-
delivery transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future in order to secure what
is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. The Fund's Custodian will maintain, in a segre-
gated account of the Fund, cash, U.S. Government securities or other liquid,
high-grade debt obligations having a value equal to or greater than the Fund's
purchase commitments; the Custodian will likewise segregate securities sold on
a delayed basis. The payment obligations and the interest rates that will be
received are each fixed at the time the
22
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fund enters into the commitment and no interest accrues to the Fund until set-
tlement. Thus, it is possible that the market value at the time of settlement
could be higher or lower than the purchase price if the general level of
interest rates has changed.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to California Exempt Obligations held in its portfolio. Under a stand-
by commitment, a broker, dealer or bank is obligated to repurchase at the
Fund's option specified securities at a specified price and, in this way,
stand-by commitments are comparable to put options. Each exercise of a stand-
by commitment, therefore, is subject to the ability of the seller to make pay-
ment on demand. The Fund will acquire stand-by commitments solely to facili-
tate portfolio liquidity and does not intend to exercise the rights afforded
by the commitments for trading purposes. The Fund anticipates that stand-by
commitments will be available from brokers, dealers and banks without the pay-
ment of any direct or indirect consideration. The Fund may pay for stand-by
commitments if payment is deemed necessary, thus increasing to a degree the
cost of the underlying California Exempt Obligation and similarly decreasing
the security's yield to investors.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with
respect to the Fund that may not be changed without approval of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities. Included
among those fundamental restrictions are the following:
1. The Fund will not purchase securities other than Municipal and California
Exempt Obligations and Taxable Investments as those terms are defined in
this Prospectus or the Statement of Additional Information.
2. The Fund will not borrow money, except that the Fund may borrow from banks
for temporary or emergency (not leveraging) purposes, including the meet-
ing of redemption requests and cash payments of dividends and distribu-
tions that might otherwise require the untimely disposition of securities,
in an amount not to exceed 10% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the borrowing is made. Whenever
the Fund's borrowings exceed 5% of the value of its total assets, the Fund
will not make any additional investments.
3. The Fund will not lend money to other persons, except through purchasing
Municipal and California Exempt Obligations or Taxable Investments and
entering into repurchase agreements in a manner consistent with the Fund's
investment objective.
4. The Fund will not invest more than 25% of the value of its total assets in
securities of issuers in any one industry, except that this limitation is
not applicable to a Fund's investments in U.S. government securities.
23
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
5. The Fund will not pledge, hypothecate, mortgage or otherwise encumber its
assets, except to secure permitted borrowings.
Certain other investment restrictions adopted by the Fund are described in
the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
California Exempt Obligations. Even though California Exempt Obligations are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of California
Exempt Obligations with longer remaining maturities typically fluctuate more
than those of similarly rated California Exempt Obligations with shorter
remaining maturities such as the Fund intends to hold. The values of fixed-
income securities also may be affected by changes in the credit rating or
financial condition of the issuing entities.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest on them from Federal income taxes (and, with respect to Cali-
fornia Exempt Obligations, to the exemption of interest on them from Califor-
nia state personal income taxes) are rendered by bond counsel to the respec-
tive issuers at the time of issuance. Neither the Fund nor SBMFM will review
the proceedings relating to the issuance of California Exempt Obligations or
the basis for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemp-
tion on various types of Municipal Obligations and may enact other similar
laws in the future. If any such laws are enacted that would reduce the avail-
ability of California Exempt Obligations for investment by the Fund so as to
affect the Fund's shareholders adversely, the Trust will reevaluate the Fund's
investment objective and policies and might submit possible changes in the
Fund's structure to shareholders for their consideration. If legislation were
enacted that would treat a type of California Exempt Obligation as taxable for
Federal income tax purposes, the Fund would treat the security as a permissi-
ble Taxable Investment within the applicable limits set forth in this Prospec-
tus.
Unrated Securities. The Fund may invest in unrated securities that SBMFM
determines to be of comparable quality to the rated securities in which the
Fund may invest. Dealers may not maintain daily markets in unrated securities
and retail secondary markets for many of such securities may not exist. As a
result, the Fund's ability to sell these securities when SBMFM deems it appro-
priate may be diminished.
24
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Municipal Leases. Municipal leases in which the Fund may invest have special
risks not normally associated with Municipal Obligations. These obligations
frequently contain non-appropriation clauses that provide that the
governmental
issuer of the obligation need not make future payments under the lease or con-
tract unless money is appropriated for that purpose by a legislative body
annu-
ally or on another periodic basis. Municipal leases have additional risks
because they represent a type of financing that has not yet developed the
depth
of marketability generally associated with other Municipal Obligations. More-
over, although a municipal lease will be secured by financed equipment or
facilities, the disposition of the equipment or facilities in the event of
foreclosure might prove difficult. In addition, in certain instances the tax-
exempt status of the municipal lease will not be subject to the legal opinion
of a nationally recognized bond counsel, although in all cases the Fund will
require that a municipal lease purchased by the Fund be covered by a legal
opinion to the effect that, as of each effective date of the municipal lease,
the lease is the valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability of
issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost bur-
dens are allocated and reallocated among Federal, state and local governmental
units. Such non-payment would result in a reduction of income to the Fund, and
could result in a reduction in the value of the municipal lease experiencing
non-payment and a decrease in the net asset value of the Fund. Issuers of
municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays and
limitations with respect to the collection of principal and interest on such
municipal leases and the Fund may not, in all circumstances, be able to
collect
all principal and interest to which it is entitled. To enforce its rights in
the event of a default in the lease payments, the Fund may take possession of
and manage the assets securing the issuer's obligations on such securities,
which may increase the Fund's operating expenses and adversely affect the net
asset value of the Fund. Any income derived from the Fund's ownership or
opera-
tion of such assets may not be tax-exempt. In addition, the Fund's intention
to
qualify as a "regulated investment company" under the Code may limit the
extent
to which the Fund may exercise its rights by taking possession of such assets,
because as a regulated investment company the Fund is subject to certain limi-
tations on its investments and on the nature of its income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from time
to time, invest a portion of its assets in non-publicly traded California
Exempt Obligations. Non-publicly traded securities may be less liquid than
pub-
licly traded securities. Although non-publicly traded securities may be resold
in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by the Fund.
25
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
When-Issued and Delayed-Delivery Transactions. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery. Pur-
chasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Non-Diversified Classification. Investment in the Fund, which is classified
as a non-diversified fund under the 1940 Act, may present greater risks to
investors than an investment in a diversified fund. The investment return on a
non-diversified fund typically is dependent upon the performance of a smaller
number of securities relative to the number of securities held in a
diversified
fund. The Fund's assumption of large positions in the obligations of a small
number of issuers will affect the value of its portfolio to a greater extent
than that of a diversified fund in the event of changes in the financial
condi-
tion, or in the market's assessment, of the issuers.
Special Considerations. In seeking to achieve its objective, the Fund may
invest without limit in Municipal Obligations which are private activity
bonds.
Moreover, although the Fund does not currently intend to do so on a regular
basis, it may invest more than 20% of its assets in Municipal Obligations
which
are repayable out of revenue streams generated from economically related pro-
jects or facilities, if such investment is deemed necessary or appropriate by
SBMFM. To the extent the Fund's assets are concentrated in Municipal Obliga-
tions payable from revenues on economically related projects and facilities,
the Fund will be subject to the particular risks presented by such projects to
a greater extent than it would be if the Fund's assets were not so concen-
trated.
The payment of principal and interest on most securities purchased by the
Fund will depend on the ability of the issuers to meet their obligations. The
Fund's portfolio will be affected by general changes in interest rates, which
will result in increases or decreases in the value of the obligations held by
the Fund. The market value of the obligations in the Fund's portfolio can be
expected to vary inversely to changes in prevailing interest rates. On July
15,
1994, Moody's and S&P, citing the State's deteriorating financial position,
lowered California's general obligation bond rating from Aa to A1 and from AA
to A+, respectively.
Investors should be aware that certain California constitutional amendments,
legislative measures, executive orders, administrative regulations and voter
initiatives could result in certain adverse consequences affecting California
Exempt Obligations. For instance, certain provisions of the California Consti-
tution and statutes that limit the taxing and spending authority of California
governmental entities may impair the ability of the issuers of some California
Exempt Obligations to maintain debt service on their obligations. Other mea-
sures affecting the taxing or spending authority of California or its
political
sub-divisions may be approved or enacted in
26
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the future. Some of the significant financial considerations relating to the
Fund's investments in California Exempt Obligations are summarized in the
Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities
ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through
principal
transactions, although the price paid usually includes an undisclosed
compensa-
tion to the dealer acting as agent.
The Fund cannot accurately predict its portfolio turnover rate, but antici-
pates that the annual turnover will not exceed 100%. An annual turnover rate
of
100% would occur if all of the securities held by the Fund are replaced once
during a period of one year. SBMFM will not consider turnover rate a limiting
factor in making investment decisions consistent with the investment objective
and policies of the Fund.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular
trading on the NYSE on each day that the NYSE is open, by dividing the value
of
the Fund's net assets attributable to each Class by the total number of shares
of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Short-
term investments that mature in 60 days or less are valued at amortized cost.
Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Funds valuation
policies is contained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net investment income (that is, income
other than net realized capital gains) monthly; dividends ordinarily will be
paid on
27
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
the last Friday of each calendar month to shareholders of record as of three
business days prior. The Fund's net realized capital gains, if any, are
declared and distributed annually, normally at the end of the calendar year in
which earned or at the beginning of the subsequent year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make
a distribution shortly before December 31 of each year of any undistributed
ordinary income or capital gains and expects to pay any other distributions as
are necessary to avoid the application of this tax.
The per share dividends on Class C shares of the Fund may be lower than the
per share dividends on Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per share divi-
dends on Class Y shares principally as a result of the service fee applicable
to Class A shares. Distributions of capital gains, if any, will be in the same
amount for Class A, Class C and Class Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from the Fund's
net investment income (other than dividends derived from interest earned on
qualifying tax-exempt obligations as described below) and distributions of the
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, regardless of how long shareholders in the Fund have held
their shares and whether the dividends or distributions are received in cash
or reinvested in additional shares of the Fund. Distributions of the Fund's
net realized long-term capital gains will be taxable to shareholders as long-
term capital gains, regardless of how long shareholders have held their shares
of the Fund and whether the distributions are received in cash or are rein-
vested in additional Fund shares. In addition, as a general rule, a sharehold-
er's gain or loss on a sale or redemption of shares of the Fund will be a
long-term capital gain or loss if the shareholder has held the shares for more
than one year and will be a short-term capital gain or loss if the shareholder
has held the shares for one year or less.
Dividends paid by the Fund that are derived from interest earned on qualify-
ing tax-exempt obligations are expected to be "exempt-interest" dividends that
shareholders may exclude from their gross incomes for Federal income tax pur-
poses if the Fund satisfies certain asset percentage requirements. Any exempt-
interest dividends of the Fund derived from interest on California Exempt
Obligations, the
28
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
interest on which is a specific tax preference item for Federal income tax
pur-
poses, will be a specific tax preference item for purposes of the Federal
indi-
vidual and corporate alternative minimum taxes. In addition, all exempt-inter-
est dividends will be a component of the "current earnings" adjustment item
for
purposes of the Federal corporate alternative minimum income tax and corporate
shareholders may incur a larger Federal environmental tax liability through
the
receipt of Fund dividends and distributions from the Fund. Dividends of the
Fund derived from interest on California Exempt Obligations will be exempt
from
California State personal income (but not corporate franchise or income)
taxes.
Statements as to the tax status of the dividends and distributions received
by shareholders of the Fund are mailed annually. These statements set forth
the
dollar amount of income excluded from Federal income taxes and the dollar
amount, if any, subject to Federal income taxes. Statements from the Fund will
also show the dollar amount of income excluded or exempted from California
State personal income taxes and the dollar amount, if any, subject to these
taxes. These statements will also designate the amount of exempt-interest
divi-
dends that are a specific preference item for purposes of the Federal individ-
ual and corporate alternative minimum taxes.
Shareholders of the Fund should consult their tax advisors with specific
ref-
erence to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows California taxpayers who are individuals how to trans-
late Federal and California State tax savings from investments such as the
Fund
into an equivalent return from a taxable investment. To the extent that the
equivalent taxable yields illustrated in this table are based on an effective
tax rate which combines the Federal and California marginal income tax rates,
the table is not applicable to individuals who do not pay California State
per-
sonal income taxes. The yields used below are for illustration only and are
not
intended to represent current or future yields for the Fund, which may be
higher or lower than those shown.
29
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
<TABLE>
<CAPTION>
1996 CALIFORNIA
TAX-EXEMPT
TAXABLE INCOME* CALIFORNIA FEDERAL COMBINED
EQUIVALENT YIELDS
SINGLE JOINT RATE*** RATE RATE** 2.00% 3.00%
4.00% 5.00% 6.00%
- ------------------------------------------------------------------------------
- -------------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
$0-24,000 0-40,100 6.00% 15.00% 20.10% 2.50% 3.75%
5.01% 6.26% 7.51%
24,001-58,150 40,101-96,900 9.30 28.00 34.70 3.06 4.59
6.13 7.66 9.19
58,151-121,300 96,901-147,700 9.30 31.00 37.42 3.20 4.79
6.39 7.99 9.59
121,301-263,750 147,701-263,750 10.00 36.00 42.40 3.47 5.21
6.94 8.68 10.42
over 263,751 over 263,751 10.00 39.60 45.64 3.68 5.52
7.36 9.20 11.04
- ------------------------------------------------------------------------------
- -------------------
</TABLE>
<TABLE>
<CAPTION>
1996 CALIFORNIA TAX-EXEMPT
TAXABLE INCOME* CALIFORNIA FEDERAL COMBINED EQUIVALENT YIELDS
SINGLE JOINT RATE*** RATE RATE** 7.00% 8.00% 9.00%
10.00%
- ------------------------------------------------------------------------------
- -----
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
$0-
24,000 0-40,100 6.00% 15.00% 20.10% 8.76% 10.01% 11.26%
12.52%
24,001-
58,150 40,101-96,900 9.30 28.00 34.70 10.72 12.25 13.78
15.31
58,151-
121,300 96,901-147,700 9.30 31.00 37.42 11.19 12.78 14.38
15.98
121,301-
263,750 147,701-263,750 10.00 36.00 42.40 12.15 13.89 15.63
17.36
over
263,751 over 263,751 10.00 39.60 45.64 12.88 14.72 16.56
18.40
- ------------------------------------------------------------------------------
- -----
</TABLE>
* This amount represents taxable income as defined in the Code. It is assumed
that taxable income as defined in the Code is the same as under the
California personal income tax law; however, California taxable income may
differ due to differences in exemptions, itemized deductions and other
items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates and rate brackets for 1996, including indexing the rate
bracket for inflation. These rates include the effect of deducting state
and city taxes on your Federal return.
*** These rates represent the highest California personal income tax rates
within the applicable Federal income tax brackets for 1996. Where there is
a difference between the California personal income tax rates for single
and married filing joint, an average rate was used.
The Federal tax rates and California tax rates shown are those in effect for
1996 and are subject to change. The calculations reflected in the table assume
that no income will be subject to the Federal alternative minimum taxes.
PURCHASE OF SHARES
GENERAL
The Fund currently offers three Classes of shares. Class A shares are sold
to investors with an initial sales charge and Class C shares are sold without
an initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. 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--
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the sell-
ing group. In addition, certain investors, including qualified retirement
plans and certain
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 C or Class Y shares. No maintenance fee
will
be charged by the Fund in connection with a brokerage account through which an
investor purchases or holds shares.
Investors in Class A and Class C shares may open an account by making an
ini-
tial 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. Subsequent invest-
ments of at least $50 may be made for all Classes. For participants in retire-
ment plans qualified under Section 403(b)(7) or Section 401(a) of the Code,
the
minimum initial investment requirement for Class A 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
and Class C shares and the subsequent investment requirement for all Classes
is
$25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment require-
ment for Class A and Class C shares and the subsequent investment requirement
for all Classes is $50. There are no minimum 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
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the shareholder's
account by the Fund's transfer agent, 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 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
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
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
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 insti-
tution indicated by the shareholder, to provide systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to com-
plete the transfer will be charged a fee of up to $25 by Smith Barney or First
Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholders' 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 Bar-
ney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES CHARGE AS
REALLOWANCE AS
AMOUNT OF INVESTMENT % OF OFFERING PRICE % OF AMOUNT INVESTED % OF
OFFERING PRICE
- ------------------------------------------------------------------------------
- --------
<S> <C> <C> <C>
Less than $500,000 2.00% 2.04%
1.80%
$500,000 and over * * *
- ------------------------------------------------------------------------------
- --------
</TABLE>
* Purchases of Class A shares which, when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class C shares is waived. See
"Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an indi-
vidual, his or her spouse and children, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. It may also be met by aggre-
gating the purchase with the net asset value of all Class A shares offered
with a sales charge held in funds sponsored by Smith Barney listed under "Ex-
change Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales 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
persons and
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
(ii) employees of members of the National Association of Securities Dealers,
Inc., 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 in connection with the combination of such
company
with the Portfolio by merger, acquisition of assets or otherwise; (c)
purchases
of Class A shares by any client of a newly employed Smith Barney Financial
Con-
sultant (for a period up to 90 days from the commencement of the Financial
Con-
sultant's employment with Smith Barney), on the condition the purchase of
Class
A shares is made with the proceeds of the redemption of shares of a mutual
fund
which (i) was sponsored by the Financial Consultant's prior employer, (ii) was
sold to the client by the Financial Consultant and (iii) was subject to a
sales
charge; (d) shareholders who have redeemed Class A shares in the Fund (or
Class
A shares of another fund of the Smith Barney Mutual Funds that are offered
with
a sales charge equal to or greater than the maximum sales charge of the Fund)
and who wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) accounts
managed by registered investment advisory subsidiaries of Travelers; (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 unregistered 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 elimi-
nation 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
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
same employer purchasing as a group, provided each participant makes the mini-
mum initial investment required. The sales charge applicable to purchases by
each member of such 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 Smith Barney Mutual Funds offered with a
sales charge to, and share holdings of, all members of the group. To be eligi-
ble for such reduced sales charges or to purchase at net asset value, all pur-
chases must be pursuant to an employer- or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investment pursuant to retirement plans under Section 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
crite-
ria which enables Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified group must have more than 10 members, must be
available to arrange for group meetings between representatives of the Fund
and
the members, and must agree to include sales and other materials related to
the
Fund in its publications and mailings to members at no cost to Smith Barney.
In
order to obtain such reduced sales charge or to purchase at net asset value,
the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the
discre-
tion 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 purchase shares at net asset value by aggregat-
ing the investments over a 13 month period, provided that the investor refers
to such Letter when placing orders. For purposes of a Letter of Intent, the
"Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Fund and other Smith Barney
Mutual Funds offered with a sales charge over a 13 month period based on the
total amount of intended purchases plus the value of all Class A shares previ-
ously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the
34
<PAGE>
PURCHASE OF SHARES (CONTINUED)
date of execution of a Letter of Intent. Each investment made during the
period
receives the sales charge applicable to the total amount of the investment
goal. If the goal is not achieved within the period, the investor must pay the
difference between the sales charges applicable to the purchases made and the
charges previously paid, or an appropriate number of escrowed shares will be
redeemed. Please contact a Smith Barney Financial Consultant or First Data to
obtain a Letter of Intent application.
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 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 0.15%) 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 ALTERNATIVE
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and (b)
Class A shares which, when combined with Class A shares offered with a sales
charge currently held by an investor, equal or exceed $500,000 in the aggre-
gate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the
time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions;
or
(c) shares redeemed more than 12 months after their purchase. CDSC Shares are
subject to a 1.00% CDSC if redeemed within 12 months of purchase.
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distribu-
tions, and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged therefor were initially acquired in one of the other Smith Barney
Mutual Funds, and Fund shares being redeemed will be considered to represent,
as applicable, capital appreciation or dividend and capital
35
<PAGE>
PURCHASE OF SHARES (CONTINUED)
gain distribution reinvestments in such other funds. For Federal income tax
purposes, the amount of the CDSC will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption. The amount of any CDSC
will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class C shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the tenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which repre-
sents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 1.00% (the applicable rate for Class C shares) for a
total deferred sales charge of $2.40.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, automatic
cash withdrawals in amounts equal to or less than 2.00% per month of the value
of the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within
twelve months following the death or disability of the shareholder; (d)
redemption 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 funds of the Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part of
the redemption proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate 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 par-
ticipating ("Participating Plans") in these programs.
36
<PAGE>
PURCHASE OF SHARES (CONTINUED)
The Fund offers to Participating Plans Class A and Class C shares as invest-
ment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Programs.
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 CDSC. Once a Participating Plan has made an initial investment in
the
Fund, all of its subsequent investments in the Fund must be in the same Class
of shares, except as otherwise described below.
Class A Shares. Class A shares of the 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 the 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. If, 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, a Par-
ticipating Plan's total Class C holdings in all non-money market Smith Barney
Mutual Funds equal at least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of
the
Fund. (For Participating Plans that were originally established 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
the
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) or ExecChoice(TM) Program,
whether opened before or after June 21, 1996, that has not previously
qualified
for
37
<PAGE>
PURCHASE OF SHARES (CONTINUED)
an exchange into Class A shares will be offered the opportunity to exchange
all
of its Class C shares for Class A shares of the Fund, regardless of asset
size,
at the end of the eighth year after the date the Participating Plan enrolled
in
the Smith Barney 401(k) or ExecChoice(TM) 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 the 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.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to 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
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Concert Social Awareness Fund
Smith Barney Utilities Fund
38
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New 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
39
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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 Y 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 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.
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
respective Class in any of the funds identified above may do so without impo-
sition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Fund's other shareholders. In this event, the Fund
may, at its discretion, decide to limit additional purchases and/or exchanges
by the shareholder. Upon such a determination the Fund will provide notice in
writing or by telephone to the shareholder at least 15 days prior to sus-
pending 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 Smith Barney Mutual Funds
ordinarily available, which position the shareholder would expect to maintain
for a significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
Redemption of Shares--Telephone Redemption and Exchange Program. Exchanges
will be
40
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
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.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close
of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
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 Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The
redemption
proceeds will be remitted on or before the third business day following
receipt
of proper tender, except on days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the
redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will
not
be invested for the shareholder's benefit without specific instruction and
Smith Barney will benefit from the use of temporarily uninvested funds.
Redemp-
tion 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 Intermediate Maturity California Municipals Fund
Class A, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
41
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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
redemp-
tion request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in a 10-day period. First Data may require additional supporting docu-
ments 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
eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
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 signature guaran-
tee, that will be provided by First Data upon request. (Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's 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. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted 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
shareholders account from which shares were redeemed. In order to change the
bank account designated to
42
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 fund being acquired is identical to the registra-
tion 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 on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated 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 periodic 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 value of a shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
43
<PAGE>
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund, 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.
PERFORMANCE
From time to time, the Fund may advertise its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include its current dividend return. These figures are
computed separately for Class A, Class C and Class Y shares of the Fund. These
figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified 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 distribu-
tions on the reinvestment dates at prices calculated as stated in this
Prospec-
tus, then dividing the value of the investment at the end of the period so
cal-
culated by the initial amount invested and subtracting 100%. The standard
aver-
age 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 yield of a Fund class
refers to the net investment income earned by investments in the Class over a
thirty-day period. This net investment income is then annualized; i.e., the
amount of income earned by the investments during that 30-day period is
assumed
to be earned each 30-day period for twelve periods and is expressed as a per-
centage of the investments. The yield is calculated according to a formula
pre-
scribed by the SEC to facilitate comparison with yields quoted by other
invest-
ment companies. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the
last
day of the period for which current dividend return for a Fund Class is pre-
sented. The current dividend return for each Class may vary from time to time
depending on market conditions, the composition of its investment fund and
operating expenses. These factors and possible differences in the methods used
in calculating current dividend return should be considered when comparing a
Class' current return to yields published for other investment companies and
other investment vehicles. The Fund may also include comparative performance
information in advertising or marketing its shares.
44
<PAGE>
PERFORMANCE (CONTINUED)
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 management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all
signif-
icant agreements between the Trust and the persons and companies that furnish
services to the Fund, including agreements with the Fund's investment adviser
and administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Fund have been delegated to the Fund's investment adviser
and
administrator. The Statement of Additional Information contains background
information regarding each Trustee of the Trust and the executive officers of
the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the investment
advisory
agreement, most recently approved by the Trust's Board of Trustees on July 17,
1996. SBMFM (through predecessor entities) has been in the investment counsel-
ing business since 1934 and is a registered investment adviser. SBMFM renders
investment advice to investment companies that had aggregate assets under man-
agement as of February 28, 1997 in excess of $84 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-
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 advisory services rendered to the Fund, the Fund pays SBMFM a fee
at
the annual rate of 0.30% of the value of the Fund's average daily net assets.
Prior to November 17, 1995, the Fund paid SBMFM an investment advisory fee at
the annual rate of 0.35% of the value of the Fund's average daily net assets.
For the fiscal year ended November 30, 1996, the Fund paid investment advisory
fees to SBMFM in an amount equal to 0.00% of the Fund's average daily net
assets. During the same period, the Fund's investment adviser waived
investment
advisory fees in an amount equal to 0.30% of the value of the Fund's average
daily net assets.
SBMFM also serves as the Fund's administrator and oversees all aspects of
the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1996, the
Fund
paid an
45
<PAGE>
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
administration fee of 0.00% of the value of its average daily net assets and
the administrator voluntarily waived administration fees in an amount equal to
0.20% of the value of the Fund's average daily net assets.
Prior to July 10, 1995, The Boston Company Advisors, Inc. ("Boston
Advisors")
served as the Fund's sub-administrator. Under a sub-administration agreement
dated July 20, 1994, Boston Advisors was paid a portion of the administration
fee paid by the Fund to SBMFM at a rate agreed upon from time to time between
Boston Advisors and SBMFM.
PORTFOLIO MANAGEMENT
Joseph P. Deane, an Investment Officer of SBMFM, has served as Vice
President
and Investment Officer of the Fund since it commenced operations on December
31, 1991. He manages the day-to-day operations of the Fund, including making
all investment decisions.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended November 30, 1996, is included
in the Annual Report dated November 30, 1996. A copy of the Annual Report may
be obtained upon request without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed
on
page one of this Prospectus.
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 a service fee
with respect to Class A and Class C shares of the Fund at the annual rate of
0.15% of the average daily net assets of the respective Class. Smith Barney is
also paid a distribution fee with respect to Class C shares at the annual rate
of 0.20% of the average daily net assets attributable to that Class. The fees
are used by Smith Barney to pay its Financial Consultants for servicing share-
holder accounts and, in the case of Class C shares, to cover expenses
primarily
intended to result in the sale of those shares. These expenses include: adver-
tising expenses; the cost of printing and mailing prospectuses to potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charges; and indirect and overhead costs
of
Smith Barney associated with the sale of Fund shares, including lease,
utility,
communications and sales promotion expenses.
46
<PAGE>
DISTRIBUTOR (CONTINUED)
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 and Class C shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a
holder of that Class. Smith Barney Financial Consultants may receive different
levels of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class C shares are not tied exclu-
sively to the shareholder distribution and service expenses actually incurred
by Smith Barney and the payments may exceed distributed expenses actually
incurred. The Trust's Board of Trustees will evaluate the appropriateness of
the Plan and its payment terms on a continuing basis and in so doing will con-
sider 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."
Each Class of the Fund represents an identical interest in the Fund's
invest-
ment portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b)
the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class pursuant to the Plan; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; and (f) the exchange privilege of each Class. The
Trust's Board of Trustees does not anticipate that there will be any conflicts
among the interests of the holders of the different Classes. The Trustees, on
an ongoing basis, will consider whether any such conflict exists and, if so,
take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the
Fund
will be voted on a Fund-wide basis on all matters except matters affecting
only
the interests of one Class, in which case only shares of the affected Class
would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will be
no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees.
47
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
Shareholders of record of not 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 hold-
ing 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.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103,
serves as custodian of the Fund's investments.
First Data is located at Exchange Place, Boston, Massachusetts 02109.
The Fund sends shareholders a semi-annual report and an audited annual which
includes a listing of investment securities held by the Fund at the end of the
period covered. In an effort to reduce the Fund's printing and mailing costs,
the Fund plans to consolidate the mailing of its semi-annual and annual
reports
by household. This consolidation means that a household having multiple
accounts with the identical address of record will receive a single copy of
each report. In addition, the Fund also plans to consolidate the mailing of
its
Prospectus so that a shareholder having multiple accounts (that is,
individual,
IRA and/or Self-Employed Retirement Plan accounts) will receive a single Pro-
spectus annually. 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.
48
<PAGE>
SMITH
BARNEY
------------------------------
- --
A Member of
TravelersGroup[LOGO]
SMITH
BARNEY
INTERMEDIATE
MATURITY
CALIFORNIA
MUNICIPALS
FUND
388 Greenwich
Street
New York, New York
10013
FD0248 3/97
SMITH BARNEY INVESTMENT TRUST
PART B
Smith Barney
INVESTMENT TRUST
388 Greenwich Street
New York, New York 10013
(212) 723-9218
March 25, 1997
This Statement of Additional Information supplements the information contained
in the current Prospectuses of Smith Barney Intermediate Maturity California
Municipals Fund (the "California Fund") and Smith Barney Intermediate Maturity
New York Municipals Fund (the "New York Fund") dated March 25, 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 and New York Fund (individually
referred to as a"Fund" and collectively referred to as the Funds") is a
series, at the address or telephone number set forth above. This Statement of
Additional Information, although not in itself a prospectus, is incorporated
by reference into each Prospectus in its entirety.
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 7
Purchase of Shares 37
Redemption of Shares 37
Distributor 38
Valuation of Shares 41
Exchange Privilege 41
Performance Data (See in the Prospectuses "Performance ") 42
Taxes (See in the "Prospectuses Dividend, Distribution and Taxes") 47
Additional Information 48
Financial Statements 48
Appendix 49
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
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.
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 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 each of the 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.
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
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 was approved by the California voters, which added Article XIIIB
to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual appropriations limit and are not allowed
to spend certain monies called appropriations subject to limitation in an
amount higher than the appropriations limit. Article XIIIB does not affect
the appropriation of moneys which are excluded from the definition of
appropriations subject to limitation, including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the appropriations
limit is required to be based on 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.
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
Each Fund may engage in repurchase agreement transactions with banks which are
the issuers of instruments acceptable for purchase by the Fund and certain
dealers on the Federal Reserve Bank of New 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
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.
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%
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
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
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
0
0
0
* 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
To compensate Smith Barney for the services it provides and for the expense it
bears under the Distribution Agreement, the Trust has adopted a services and
distribution plan (the Plan) pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, each Fund pays Smith Barney a service fee, accrued daily and
paid monthly, calculated at the annual rate of 0.15% of the value of the 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.
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,
SBMFM, as administrator, may consult with an independent pricing service (the
Pricing Service) retained by the Trust. Debt securities of domestic issuers
(other than U.S. government securities and short-term investments), including
Municipal Obligations, are valued by 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.
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%
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%
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%
* 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%
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%
* 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%
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%
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%
* 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%
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
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 of a facility financed by the bonds, or
a related person of the substantial user. Moreover, as noted in the
Prospectuses (a) some or all of a 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.
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 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
SMITH BARNEY INVESTMENT <R/>TRUST
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
Smith Barney Intermediate Maturity New York Municipals Fund Annual
Report for the fiscal year ended November 30, 1996 and the Reports of
Independent Accountants dated January 9, 1997, together with Smith Barney
Intermediate Maturity California Municipals Fund Annual Report for the fiscal
year ended November 30, 1996 and the Reports of Independent Accountants dated
January 13, 1997, are incorporated by reference to the Rule 30(b)2-1 filings
made on January 31, 1997 as Accession No. 91155-97-000060.
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
Unless otherwise noted, all references are to the Registrants
Registration Statement on Form N-1A (the Registration Statement) as filed
with the Securities and Exchange Commission ("SEC") on October 21,
1991 (File Nos. 33-43446 and 811-6444).
(1)(a) Registrants Master Trust Agreement dated October 17, 1991 and
Amendments to the Master Trust Agreement dated November 21, 1991 and July 30,
1993, respectively, are incorporated by reference to Post-Effective Amendment
No. 4 to the Registration Statement filed on January 28, 1994 (Post-Effective
Amendment No. 4).
(b) Amendments to the Master Trust Agreement dated October 14, 1994 and
November 7, 1994, respectively, are incorporated by reference to a
Registration Statement filed on Form N-14 on January 6, 1995 (the N-14).
(c) Amendments to the Master Trust Agreement dated July 20, 1995 and
August 10, 1995 are incorporated by reference to Post-Effective Amendment No.
9 to the Registration Statement filed on August 29, 1995 ("Post-Effective
Amendment No. 9").
(2) Registrants By-Laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) Registrants form of stock certificate is incorporated by reference
to Pre-Effective Amendment No. 1 to the Registration Statement filed on
December 6, 1991 (Pre-Effective Amendment No. 1).
(5)(a) Investment Advisory Agreement between the Registrant and
Greenwich Street Advisors dated July 30, 1993 is incorporated by reference to
Post-Effective Amendment No. 3 to the Registration Statement filed on December
1, 1993 (Post-Effective Amendment No. 3).
(b) Transfer of Investment Advisory Agreement dated November 7, 1994
between the Registrant on behalf of Smith Barney Intermediate Maturity
California Municipals Fund, Greenwich Street Advisors and Smith Barney Mutual
Funds Management Inc. is incorporated by reference to the N-14.
(c) Form of Transfer of Investment Advisory Agreement for Smith Barney
Limited Maturity Municipals Fund, Smith Barney Intermediate Maturity New York
Municipals Fund and Smith Barney Limited Maturity Treasury Fund is
incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement filed on January 27, 1995 (Post-Effective Amendment No.
6).
(d) Form of Investment Advisory Agreement between the Registrant on
behalf of Smith Barney S&P 500 Advantage Fund and Travelers Investment
Management Company is incorporated by reference to Post-Effective
Amendment No. 10 to the Registration Statement filed on November 13, 1995
("Post-Effective Amendment No. 10").
(6)(a) Distribution Agreement between Registrant and Smith Barney
Shearson Inc. dated July 30, 1993 is incorporated by reference to Post-
Effective Amendment No. 3.
(b) Form of Distribution Agreement between the Registrant on behalf of
Smith Barney S&P 500 Advantage Fund and PFS Distributors is incorporated
by reference to Post-Effective Amendment No. 10.
(7) Not Applicable.
(8) Form of Custody Agreement with PNC Bank, National Association, is
incorporated by reference to Post-Effective Amendment No. 9.
(9)(a) Administration Agreement between the Registrant on behalf of
Smith Barney Intermediate Maturity California Municipals Fund and Smith,
Barney Advisers, Inc. (SBA) is incorporated by reference to the N-14.
(b) Form of Administration Agreement between the Registrant on behalf
of Smith Barney Limited Maturity Municipals Fund and Smith Barney Intermediate
Maturity New York Municipals Fund and SBA is incorporated by reference to
Post-Effective Amendment No. 6.
(c) Form of Administration Agreement between the Registrant on behalf
of Smith Barney S&P 500 Advantage Fund and Smith Barney Mutual Funds
Management Inc.
is incorporated by reference to Post-Effective Amendment
No. 10.
(d) Transfer Agency Agreement with The Shareholder Services Group, Inc.
is incorporated by reference to Post-Effective Amendment No. 3.
(e) Form of Sub-Transfer Agency Agreement between the Registrant on
behalf of Smith Barney S&P 500 Advantage Fund and PFS Shareholder Services is
incorporated by reference to Post-Effective Amendment No. 10.
(10) Opinion of counsel regarding legality of shares being
registered is incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement filed on December 6, 1991.
(11) Consent of Independent Accountants is filed herewith.
(12) Not Applicable.
(13) Purchase Agreement between the Registrant and Shearson Lehman
Brothers Inc. is incorporated by reference to Pre-Effective Amendment No. 1.
(14) Not Applicable.
(15)(a) Amended Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant on behalf of Smith Barney Intermediate Maturity
California Municipals Fund and Smith Barney Inc. is incorporated by reference
to the N-14.
(b) Form of Amended Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant on behalf of Smith Barney Limited Maturity Municipals
Fund and Smith Barney Intermediate Maturity New York Municipals Fund and Smith
Barney Inc. is incorporated by reference to Post-Effective Amendment No. 6.
(c) Form of Shareholder Services and Distribution Plan pursuant to Rule
12b-1 between the Registrant on behalf of Smith Barney S&P 500 Advantage Fund
and Smith Barney Inc. is incorporated by reference to Post-Effective
Amendment No. 10.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement as filed on April 1, 1993.
(17) A Financial Data Schedule is filed herein.
(18) Plan adopted pursuant to Rule 18f-3(d) of the Investment Company
Act of 1940, as amended, is incorporated by reference to Post-Effective
Amendment No. 10
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
(1) (2)
Title of Class
Beneficial Interest par value Number of Record Holders
$0.001 per share as of February 28,
1997
Intermediate Maturity California
Municipals Fund 601
Intermediate Maturity New York
Municipals Fund 1,268
Smith Barney S&P 500
Advantage Fund None
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-Effective
Amendment No. 1.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser -- Smith Barney Mutual Funds Management Inc. (formerly
known as Smith, Barney Advisers, Inc. (SBMFM).
SBMFM, through its predecessors, has been in the investment counseling
business since 1934 and was incorporated in December 1968 under the laws of
the State of Delaware. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. (formerly known as Smith Barney Shearson Holdings Inc.), which
in turn is a wholly owned subsidiary of Travelers Group Inc. (formerly known
as Primerica Corporation) ("Travelers"). SBMFM is registered as an investment
adviser under the Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of the officers and directors of SBMFM
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two fiscal years, is incorporated by reference to Schedules A
and D of FORM ADV filed by SBMFM pursuant to the Advisers Act (SEC File No.
801-8314).
Prior to the close of business on November 7, 1994, Greenwich Street Advisors
served as investment adviser. Greenwich Street Advisors, through its
predecessors, has been in the investment counseling business since 1934 and
was a division of Mutual Management Corp. ("MMC"). MMC was incorporated in
1978 and is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which in turn is a wholly owned subsidiary of Travelers. The
list required by this Item 28 of officers and directors of MMC and Greenwich
Street Advisors, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two fiscal years, is incorporated by
reference to Schedules A and D of Form ADV filed by MMC on behalf of Greenwich
Street Advisors pursuant to the Advisers Act (SEC File No. 801-14437).
Item 29. Principal Underwriters
Smith Barney Inc. (Smith Barney) currently acts as distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney California Municipals Fund
Inc., Smith Barney Massachusetts Municipals Fund, Smith Barney Global
Opportunities Fund, Smith Barney Aggressive Growth Fund Inc., Smith Barney
Appreciation Fund Inc., Smith Barney Principal Return Fund, Smith Barney
Managed Governments Fund Inc., Smith Barney Income Funds, Smith Barney Equity
Funds, Smith Barney Investment Funds Inc., Smith Barney Natural Resources Fund
Inc. (formerly, Smith Barney Precious Metals and Minerals Fund Inc.), Smith
Barney Telecommunications Trust, Smith Barney Arizona Municipals Fund Inc.,
Smith Barney New Jersey Municipals Fund Inc., Smith Barney Fundamental Value
Fund Inc., Smith Barney Series Fund, Consulting Group Capital Markets Funds,
Smith Barney Adjustable Rate Government Income Fund, Smith Barney Oregon
Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni Funds, Smith
Barney World Funds, Inc., Smith Barney Money Funds, Inc., Smith Barney Tax
Free Money Fund, Inc., Smith Barney Variable Accounts Funds, Smith Barney U.S.
Dollar Reserve Fund (Cayman), Worldwide Special Fund, N.V., Worldwide
Securities Limited (Bermuda), Smith Barney International Fund (Luxembourg),
Smith Barney Institutional Cash Management Fund, Inc., Smith Barney Concert
Allocation Series Inc. and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Holdings . The
information required by this Item 29 with respect to each director, officer
and partner of Smith Barney is incorporated by reference to Schedule A of Form
BD filed by Smith Barney pursuant to the Securities Exchange Act of 1934 (SEC
File No. 812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Investment Trust
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(Records relating to its function as investment adviser to certain
of the Funds and administrator to all of the Funds)
(3) Travelers Investment Management Company
One Tower Square
Hartford, CT 06183-2030
(Records relating to its function as investment adviser to Smith
Barney S&P 500 Advantage Fund)
(4) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(Records relating to its function as custodian)
(5) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(Records relating to its function as Transfer Agent and Dividend
Paying Agent)
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of its shareholders of the
Series for the purpose of voting upon the question of removal of a trustee or
trustees of Registrant when requested in writing to do so by the holders of at
least 10% of Registrants outstanding shares. Registrant undertakes further,
in connection with the meeting, to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940, as amended, relating to communications
with the shareholders of certain common-law trusts.
485(b) Certification
The Registrant hereby certifies that it meets all of the requirements
for effectiveness pursuant to Rule 485(b) under the Securities Act of 1933.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY INVESTMENT TRUST,
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereto duly authorized in the City of New York, in the State of
New York on the 24th day of March, 1997.
SMITH BARNEY
INVESTMENT TRUST
/s/Heath B. McLendon
Heath B. McLendon, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature
Title
Date
/s/Heath B. McLendon
Heath B. McLendon
Chairman of the Board
(Chief Executive
Officer)
March 24, 1997
/s/Lewis E. Daidone
Lewis E. Daidone
Treasurer
(Chief Financial and
Accounting Officer)
March 24, 1997
/s/Herbert Barg
Herbert Barg
Trustee
March 24, 1997
/s/Alfred J.
Bianchetti
Alfred J. Bianchetti
Trustee
March 24, 1997
/s/Martin Brody
Martin Brody
Trustee
March 24, 1997
/s/Dwight B. Crane
Dwight B. Crane
Trustee
March 24, 1997
/s/Burt N. Dorsett
Burt N. Dorsett
Trustee
March 24, 1997
/s/Elliot S. Jaffe
Elliot S. Jaffe
Trustee
March 24, 1997
/s/Stephen E. Kaufman
Stephen E. Kaufman
Trustee
March 24, 1997
/s/Joseph J. McCann
Joseph J. McCann
Trustee
March 24, 1997
/s/Cornelius C. Rose,
Jr.
Cornelius C. Rose, Jr.
Trustee
March 24, 1997
g:boards/wed/1997/misc./invtrust.doc
1
g:\funds\slit\1997\secdocs\pea12.doc
Independent Auditors Consent
To the Shareholders and Board of Trustees of
Smith Barney Investment Trust:
We consent to the use of our report, as listed below, with respect to the
Funds Smith Barney Investment Trust incorporated herein by reference and to
the references to our Firm under the heading "Financial Highlights" in the
Prospectus and "Counsel and Auditors" in the Statement of Additional
Information.
Fund Date of Independent Auditors Report
Smith Barney Intermediate Maturity
California Municipals Fund January 13, 1997
Smith Barney Intermediate Maturity
New York Municipals Fund January 9, 1997
KPMG Peat Marwick LLP
New York, New York
March 24, 1997
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<AVERAGE-NET-ASSETS> 780,794
<PER-SHARE-NAV-BEGIN> 8.48
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> (0.01)
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.47
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
