Smith Barney
INVESTMENT TRUST
388 Greenwich Street
New York, New York 10013
(800) 451-2010
March 30, 1998
This Statement of Additional Information (the
"SAI")) supplements the information contained
in the current Prospectus of the Smith Barney
Large Capitalization Growth Fund (the Fund)
dated March 30, 1998, as amended or
supplemented from time to time, and should be
read in conjunction with the Prospectus. The
Prospectus may be obtained by contacting a
Smith Barney Financial Consultant, or by
writing or calling Smith Barney Investment
Trust (the "Trust"), of which the Large
Capitalization Fund is a series, at the address
or telephone number set forth above. This SAI,
although not in itself a prospectus, is
incorporated by reference into each Prospectus
in its entirety.
TABLE OF CONTENTS
For ease of reference, the section headings
used in this SAI 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 Policy
4
Purchase of Shares
8
Redemption of Shares
9
Distributor
10
Valuation of Shares
11
Exchange Privilege
12
Performance Data (See in the Prospectus
"Performance" )
12
Taxes (See in the Prospectus "Dividend,
Distribution and Taxes" )
15
Additional Information
16
Financial Statements
17
MANAGEMENT OF THE TRUST AND THE FUND
The executive officers of the Fund 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" or the
"Distributor")
Distributor
Mutual Management Corp. ("MMC" or the
"Manager")
Investment Manager
PNC Bank, National Association ("PNC" or the
"Custodian")
Custodian
First Data Investor Services Group, Inc.,
("First Data" or the " Custodian")
Transfer Agent
These organizations and the functions they
perform for the Fund are discussed in the
Prospectus and in this SAI.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The names of the Trustees of the Trust and
executive officers of the Fund, together with
information as to their principal business
occupations, are set forth below. The
executive officers of the Fund are employees of
organizations that provide services to the
Fund. 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 (Age 74). Private Investor.
His address is 273 Montgomery Avenue, Bala
Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 75).
Retired; formerly Senior Consultant to Dean
Witter Reynolds Inc. His address is 19 Circle
End Drive, Ramsey, New Jersey 07466.
Martin Brody, Trustee (Age 76).
Consultant, HMK Associates; Retired Vice
Chairman of the Board of Restaurant Associates
Corp. His address is c/o HMK Associates, 30
Columbia Turnpike, Florham Park, New Jersey
07932.
Dwight B. Crane, Trustee (Age 60).
Professor, Harvard Business School. His
address is c/o Harvard Business School,
Soldiers Field Road, Boston, Massachusetts
02163.
Burt N. Dorsett, Trustee (Age 67).
Managing Partner of Dorsett McCabe Management.
Inc., an investment counseling firm; Trustee of
Research Corporation Technologies, Inc., a
nonprofit patent clearing and licensing firm.
His address is 201 East 62nd Street, New York,
New York 10021.
Elliot S. Jaffe, Trustee (Age 71).
Chairman of the Board and President of The
Dress Barn, Inc. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman, Trustee (Age 66).
Attorney. His address is 277 Park Avenue, New
York, New York 10172.
Joseph J. McCann, Trustee (Age 67).
Financial Consultant; Retired Financial
Executive, Ryan Homes, Inc. His address is 200
Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board
and Investment Officer (Age 64). Managing
Director of Smith Barney, Chairman of the Board
of Smith Barney Strategy Advisers Inc. and
President of MMC and Travelers Investment
Adviser, Inc. ("TIA"); prior to July 1993,
Senior Executive Vice President of Shearson
Lehman Brothers Inc., Vice Chairman of Shearson
Asset Management. 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 64).
President, Cornelius C. Rose Associates, Inc.,
financial consultants, and Chairman and Trustee
of Performance Learning Systems, an educational
consultant. His address is Fair Oaks, Enfield,
New Hampshire 03748.
James J. Crisona, Trustee Emeritus.
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
Lewis E. Daidone, Senior Vice President
and Treasurer (Age 40). Managing Director of
Smith Barney, Chief Financial Officer of the
Smith Barney Mutual Funds; Director and Senior
Vice President of MMC and TIA. 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.
Alan Blake, Vice President and Investment
Officer (Age 48), Managing Director of Smith
Barney. His address is 388 Greenwich Street,
New York, New York 10013.
Christina T. Sydor, Secretary (Age 46),
Managing Director of Smith Barney. General
Counsel and Secretary of MMC and TIA. Ms.
Sydor serves as secretary of 42 Smith Barney
Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
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 Fund 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 $8,000 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 $4,000 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,
1997, the Trustees of the Fund were paid the
following compensation:
Name of Person
Aggregate
Compensation
from Fund #
Total
Pension or
Retirement
Benefits Accured
as part of
Fund Expenses
Compensation
from Fund
and Fund
Complex
Paid to Trustees
Number of
Funds for
Which Trustees
Serves Within
Fund Complex
Herbert Barg
$6,600
$0
$101,600
18
Alfred Bianchetti*
6,600
0
49,600
13
Martin Brody
6,000
0
119,814
21
Dwight B. Crane
6,600
0
133,850
24
Burt N. Dorsett
6,600
0
49,600
13
Elliot S. Jaffe
6,600
0
48,500
13
Stephen E. Kaufman
6,600
0
91,964
15
Joseph J. McCann
6,600
0
49,600
13
Heath B. McLendon *
- -
- -
- -
42
Cornelius C. Rose, Jr.
6,600
0
49,600
13
* Designates an "interested" Trustee.
# Upon attainment of age 80, Fund Trustees
are required to change to emeritus status.
Trustees Emeritus are entitled to serve in
emeritus status for a maximum of 10 years,
during which time they are paid 50% of the
annual retainer fee and meeting fees otherwise
applicable to Fund Trustees, together with
reasonable out-of-pocket expenses for each
meeting attended. Mr. Crisona is a Trustee
Emeritus and as such may attend meetings but
has no voting rights. During the Funds last
fiscal year, aggregate compensation paid by
the Fund to Trustees achieving emeritus status
totaled $11,423
Investment Manager - MMC
MMC serves as investment manager to the Fund
pursuant to an investment management agreement
(the "Investment Management Agreement") with
the Trust which was approved by the Board of
Trustees, including a majority of Trustees who
are not "interested persons" of the Trust or
the Manager. The Manager is a wholly owned
subsidiary of Salomon Smith Barney Holdings
Inc. ("Holdings"), which in turn, is a wholly
owned subsidiary of Travelers Group Inc.
("Travelers"). The services provided by the
Manager under the Investment Management
Agreement are described in the prospectus under
"Management of the Trust and the Fund." The
Manager pays the salary of any officer and
employee who is employed by both it and the
Trust. The Manager bears all expenses in
connection with the performance of its
services.
As compensation for investment management
services, the Fund pays the Manager a fee
computed daily and paid monthly at the annual
rate of 0.75% of the Fund's average daily net
assets.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal
counsel to the Trust. The Trustees who are not
"interested persons" of the Trust have
selected Stroock & Stroock & Lavan LLP as their
counsel.
KPMG Peat Marwick LLP, independent auditors,
345 Park Avenue, New York, New York 10154, have
been selected to serve as auditors of the Trust
and to render opinions on the Funds financial
statements for the fiscal year ended November
30, 1998.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment
objective and the policies it employs to
achieve its objective. This section contains
supplemental information concerning the types
of securities and other instruments in which
the Fund may invest, the investment policies
and portfolio strategies that the Fund may
utilize and certain risks attendant to such
investments, policies and strategies.
Money Market Instruments. As stated in the
Prospectus, the Fund may invest for temporary
defensive purposes in corporate and government
bonds and notes and money market instruments.
Money market instruments in which the Fund may
invest include: obligations issued or
guaranteed by the United States government, its
agencies or instrumentalities ("U.S. government
securities"); certificates of deposit, time
deposits and bankers' acceptances issued by
domestic banks (including their branches
located outside the United States and
subsidiaries located in Canada), domestic
branches of foreign banks, savings and loan
associations and similar institutions; high
grade commercial paper; and repurchase
agreements with respect to the foregoing types
of instruments. The following is a more
detailed description of such money market
instruments.
Certificates of deposit ("CDs") are short-
term, negotiable obligations of commercial
banks. Time deposits ("TDs") are non-
negotiable deposits maintained in banking
institutions for specified periods of time at
stated interest rates. Bankers' acceptances
are time drafts drawn on commercial banks by
borrowers, usually in connection with
international transactions.
Domestic commercial banks organized under
Federal law are supervised and examined by the
Comptroller of the Currency and are required to
be members of the Federal Reserve System and to
be insured by the Federal Deposit Insurance
Corporation the ("FDIC"). Domestic banks
organized under state law are supervised and
examined by state banking authorities but are
members of the Federal Reserve System only if
they elect to join. Most state banks are
insured by the FDIC (although such insurance
may not be of material benefit to the Fund,
depending upon the principal amount of CDs of
each bank held by the Fund) and are subject to
Federal examination and to a substantial body
of Federal law and regulation. As a result of
governmental regulations, domestic branches of
domestic banks are, among other things,
generally required to maintain specialized
levels of reserves, and are subject to other
supervision and regulation designed to promote
financial soundness.
Obligations of foreign branches of domestic
banks, such as CDs and TDs, may be general
obligations of the parent bank in addition to
the issuing branch, or may be limited by the
terms of a specific obligation and governmental
regulation. Such obligations are subject to
different risks than are those of domestic
banks or domestic branches of foreign banks.
These risks include foreign economic and
political developments, foreign governmental
restrictions that may adversely affect payment
of principal and interest on the obligations,
foreign exchange controls and foreign
withholding and other taxes on interest income.
Foreign branches of domestic banks are not
necessarily subject to the same or similar
regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements,
loan limitations, and accounting, auditing and
financial recordkeeping requirements. In
addition, less information may be publicly
available about a foreign branch of a domestic
bank than about a domestic bank. CDs issued by
wholly owned Canadian subsidiaries of domestic
banks are guaranteed as to repayment of
principal and interest (but not as to sovereign
risk) by the domestic parent bank.
Obligations of domestic branches of foreign
banks may be general obligations of the parent
bank in addition to the issuing branch, or may
be limited by the terms of a specific
obligation and by Federal and state regulation
as well as governmental action in the country
in which the foreign bank has its head office.
A domestic branch of a foreign bank with assets
in excess of $1 billion may or may not be
subject to reserve requirements imposed by the
Federal Reserve System or by the state in which
the branch is located if the branch is licensed
in that state. In addition, branches licensed
by the Comptroller of the Currency and branches
licensed by certain states ("State Branches")
may or may not be required: (a) to pledge to
the regulator by depositing assets with a
designated bank within the state, an amount of
its assets equal to 5% of its total
liabilities; and (b) to maintain assets within
the state in an amount equal to a specified
percentage of the aggregate amount of
liabilities of the foreign bank payable at or
through all of its agencies or branches within
the state. The deposits of State Branches may
not necessarily be insured by the FDIC. In
addition, there may be less publicly available
information about a domestic branch of a
foreign bank than about a domestic bank.
In view of the foregoing factors associated
with the purchase of CDs and TDs issued by
foreign branches of domestic banks or by
domestic branches of foreign banks, the Manager
will carefully evaluate such investments on a
case-by-case basis. Savings and loans
associations whose CDs may be purchased by the
Fund are supervised by the Office of Thrift
Supervision and are insured by the Savings
Association Insurance Fund. As a result, such
savings and loan associations are subject to
regulation and examination.
American, European and Continental Depository
Receipts. The Fund may invest in the
securities of foreign and domestic issuers in
the form of American Depository Receipts
("ADRs") and European Depository Receipts
("EDRs"). These securities may not
necessarily be denominated in the same currency
as the securities into which they may be
converted. ADRs are receipts typically issued
by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a
foreign corporation. EDRs, which sometimes are
referred to as Continental Depository Receipts
("CDRs"), are receipts issued in Europe
typically by foreign banks and trust companies
that evidence ownership of either foreign or
domestic securities. Generally, ADRs, in
registered form, are designed for use in U.S.
securities markets and EDRs and CDRs, in bearer
form, are designed for use in European
securities markets.
Miscellaneous Investment Policies
The 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.
Investment Restrictions
The investment restrictions numbered 1 through
7 below have been adopted by the Trust as
fundamental policies of the Fund. 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 8 through 13
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 Fund: The Fund
will not
1. Invest in a manner that would cause it to
fail to be a "diversified company" under the
1940 Act and the rules, regulations and orders
thereunder.
2. Invest more than 25% of its total assets in
securities, the issuers of which conduct their
business activities in the same industry. For
purposes of this limitation, securities of the
U.S. government (including its agencies and
instrumentalities) and securities of state or
municipal governments and their political
subdivisions are not considered to be issued by
members of any industry.
3. Borrow money, except that (a) the Fund may
borrow from banks for temporary or emergency
(not leveraging) purposes, including the
meeting of redemption requests which might
otherwise require the untimely disposition of
securities, and (b) the Fund may, to the extent
consistent with its investment policies, enter
into reverse repurchase agreements, forward
roll transactions and similar investment
strategies and techniques. To the extent that
it engages in transactions described in (a) and
(b), the Fund will be limited so that no more
than 331/3% of the value of its total assets
(including the amount borrowed), valued at the
lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the
time the borrowing is made, is derived from
such transactions.
4. Issue "senior securities" as defined in the
1940 Act and the rules, regulations and orders
thereunder, except as permitted under the 1940
Act and the rules, regulations and orders
thereunder
5. Make loans. This restriction does not apply
to: (a) the purchase of debt obligations in
which the Fund may invest consistent with its
investment objectives and policies; (b)
repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent
permitted under the 1940 Act.
6. Purchase or sell real estate, real estate
mortgages, commodities or commodity contracts,
but this restriction shall not prevent the Fund
from (a) investing in securities of issuers
engaged in the real estate business or the
business of investing in real estate (including
interests in limited partnerships owning or
otherwise engaging in the real estate business
or the business of investing in real estate)
and securities which are secured by real estate
or interests therein; (b) holding or selling
real estate received in connection with
securities it holds or held; (c) trading in
futures contracts and options on futures
contracts (including options on currencies to
the extent consistent with the Funds investment
objective and policies); or (d) investing in
real estate investment trust securities.
7. Engage in the business of underwriting
securities issued by other persons, except to
the extent that the Fund may technically be
deemed to be an underwriter under the
Securities Act of 1933, as amended, in
disposing of portfolio securities.
8. Purchase any securities on margin (except
for such short-term credits as are necessary
for the clearance of purchases and sales of
portfolio securities) or sell any securities
short (except "against the box"). For
purposes of this restriction, the deposit or
payment by the Fund of underlying securities
and other assets in escrow and collateral
agreements with respect to initial or
maintenance margin in connection with futures
contracts and related options and options on
securities, indexes or similar items is not
considered to be the purchase of a security on
margin.
9. Invest in oil, gas or other mineral leases
or exploration or development programs.
10. Write or sell puts, calls, straddles,
spreads or combinations of those transactions,
except as permitted under the Funds investment
objective and policies.
11. 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.
12. 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.
13. Make investments for the purpose of
exercising control of management.
Portfolio Transactions
Decisions to buy and sell securities for the
Fund are made by the Manager, subject to the
overall review of the Trusts Board of Trustees.
Although investment decisions for the Fund are
made independently from those of the other
accounts managed by the Manager, investments of
the type that the Fund may make also may be
made by those other accounts. When the Fund
and one or more other accounts managed by the
Manager 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 the Manager
to be equitable to each. In some cases, this
procedure may adversely affect the price paid
or received by the Fund or the size of the
position obtained or disposed of by the Fund.
The Trust has paid no brokerage commissions
since its commencement of operations.
Allocation of transactions on behalf of the
Fund, including their frequency, to various
dealers is determined by the Manager in its
best judgment and in a manner deemed fair and
reasonable to the Funds shareholders. The
primary considerations of the Manager 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 the Manager
may receive orders for portfolio transactions
by the Fund. Information so received is in
addition to, and not in lieu of, services
required to be performed by the Manager, and
the fees of the Manager are not reduced as a
consequence of their receipt of the
supplemental information. The information may
be useful to the Manager in serving both the
Fund and other clients, and conversely,
supplemental information obtained by the
placement of business of other clients may be
useful to the Manager in carrying out its
obligations to the Fund.
The Fund will not purchase securities during
the existence of any underwriting or selling
group relating to the securities, of which the
Manager is a member, except to the extent
permitted by the SEC. Under certain
circumstances, the Fund may be at a
disadvantage because of this limitation in
comparison with other funds that have similar
investment objectives but that are not subject
to a similar limitation.
Portfolio Turnover
While the 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%. The
rate of turnover will not be a limiting factor,
however, when the Fund deems it desirable to
sell or purchase securities. This policy
should not result in higher brokerage
commissions to the Fund, as purchases and sales
of portfolio securities are usually effected as
principal transactions. Securities may be sold
in anticipation of a rise in interest rates
(market decline) or purchased in anticipation
of a 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 rate for the period
ended November 30, 1997 was 1%.
PURCHASE OF SHARES
Volume Discounts
The schedules of sales charges described in the
Prospectus apply to purchases of shares of the
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 Prospectus, 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 Fund offers its 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 SAI.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of
the Fund is included in the Prospectus. The
right of redemption of shares of the 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, the
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 the 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 (the Distribution Agreement"), which
was approved by the Trusts Board of Trustees.
For the fiscal year ended November 30, 1997,
the Distributor received approximately
$3,023,000 in sales charges for the sale of the
Funds Class A shares, and did not reallow any
portion thereof to dealers.
For the fiscal year ended November 30, 1997,
the Distributor received approximately $28,000
representing CDSC on redemption of the Funds
Class B shares.
For the fiscal year ended November 30, 1997,
the Distributor received approximately $3,000
representing CDSC on redemption of the Funds
Class C shares.
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
Investment Management and Distribution
Agreements for continuance.
For the fiscal year ended November 30, 1997,
the Distributor incurred distribution expenses
totaling approximately $10,736,062, consisting
of approximately $373,258 for advertising,
$4,583 for printing and mailing of
prospectuses, $1,811,797 for support services,
$8,177,797 to Smith Barney Financial
Consultants, and $368,627 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.
For the fiscal year ended November 30, 1997,
the Distributor, received $551,254 in the
aggregate from the Plan.
Under its terms, the Plan continues from year
to year, provided such continuance is approved
annually by vote of the Board of Trustees,
including a majority of the Trustees who are
not interested persons of the Trust and who
have no direct or indirect financial interest
in the operation of the Plan or in the
Distribution Agreement (the "Independent
Trustees"). The Plan may not be amended to
increase the amount of the service and
distribution fees without shareholder approval,
and all amendments of the Plan also must be
approved by the Trustees including all of the
Independent Trustees in the manner described
above. The Plan may be terminated with respect
to a Class at any time, without penalty, by
vote of a majority of the Independent Trustees
or, with respect to any Fund, by vote of a
majority of the outstanding voting securities
of a Fund (as defined in the 1940 Act).
Pursuant to the Plan, Smith Barney will provide
the Board of Trustees with periodic reports of
amounts expended under the Plan and the purpose
for which such expenditures were made.
Distribution Arrangements
To compensate Smith Barney for the services it
provides and for the expense it bears under the
Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, the Fund pays Smith Barney a
service fee, accrued daily and paid monthly,
calculated at the annual rate of 0.25% of the
value of the Fund's average daily net assets
attributable to the Class A, Class B and Class
C shares. In addition, the Fund pays Smith
Barney a distribution fee with respect to the
Class B and Class C shares primarily intended
to compensate Smith Barney for its initial
expense of paying Financial Consultants a
commission upon sales of those shares. The
Class B and Class C distribution fee is
calculated at the annual rate of 0.75% of the
value of the Fund's average daily net assets
attributable to the shares of the respective
Class.
SERVICE FEES
Year Ended
11/30/97
Class A
$ 64,109
Class B
101,125
Class C
20,661
DISTRIBUTION FEES
Year Ended
11/30/97
Class B
$303,375
Class C
61,984
VALUATION OF SHARES
The net asset value per share of the 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, Martin Luther King,
Jr. 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.
Securities listed on a national securities
exchange will be valued on the basis of the
last sale on the date on which the valuation is
made or, in the absence of sales, at the mean
between the closing bid and asked prices.
Over-the-counter securities will be valued at
the mean between the closing bid and asked
prices on each day, or, if market quotations
for those securities are not readily available,
at fair value, as determined in good faith by
the Fund's Board of Trustees. Short-term
obligations with maturities of 60 days or less
are valued at amortized cost, which constitutes
fair value as determined by the Fund's Board of
Trustees. Amortized cost involves valuing an
instrument at its original cost to the Fund and
thereafter assuming a constant amortization to
maturity of any discount or premium, regardless
of the effect of fluctuating interest rates on
the market value of the instrument. All other
securities and other assets of the Fund will be
valued at fair value as determined in good
faith by the Fund'
" 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 the 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.
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.
Class A shares average annual total return was
as follows for the period indicated:
(1.84)% for the period from inception (July 14,
1997) through November 30, 1997.
The average annual total return figure assumes
that the maximum 5.00% sales charge has been
deducted from the investment at the time of
purchase. If the maximum sales charge had not
been deducted, the average annual total return
for Class A shares for the same period would
have been 3.37%.
Class B shares average annual total return was
as follows for the period indicated:
(1.80)% for the period from inception (July 14,
1997) through November 30, 1997.
The average annual total return figure assumes
that the maximum applicable CDSC has been
deducted from the investment at the time of
redemption. If the maximum CDSC had not been
deducted, the average annual total return for
Class B shares for the same period would have
been 3.20%.
Class C shares average annual total return was
as follows for the period indicated:
2.2% for the period from inception (July 14,
1997) through November 30, 1997.
The average annual total return figure assumes
that the maximum applicable CDSC has been
deducted from the investment at the time of
redemption. If the maximum CDSC had not been
deducted, the average annual total return for
Class C shares for the same period would have
been 3.20%.
Class Y shares average annual total return was
as follows for the period indicated:
(2.92)% for the period from inception (July 14,
1997) through November 30, 1997.
Class Y shares do not incur sales charges nor
CDSCs.
Aggregate Total Return
The 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.
Class A shares aggregate total return was as
follows for the period indicated:
(1.84)% for the period from inception (July 14,
1997) through November 30, 1997.
The aggregate total returns figures assume that
the maximum 5.00% sales charge has been
deducted from the investment at the time of
purchase. If the maximum sales charge had not
been deducted, the aggregate total return for
Class A shares for the same period would have
been 3.37%.
Class B shares aggregate total return was as
follows for the period indicated:
(1.80)% for the period from inception (July 14,
1997) through November 30, 1997.
The aggregate total returns figures assume that
the maximum applicable CDSC has been deducted
from the investment at the time of redemption.
If the maximum CDSC had not been deducted, the
aggregate total return for Class B shares for
the same period would have been 3.20%.
Class C shares average annual total return was
as follows for the period indicated:
2.20% for the period from inception (July 14,
1997) through November 30, 1997.
The aggregate total returns figures assume that
the maximum applicable CDSC has been deducted
from the investment at the time of redemption.
If the maximum CDSC had not been deducted, the
aggregate total return for Class C shares for
the same period would have been 3.20%.
Class Y shares aggregate total return was as
follows for the period indicated:
(2.92)% for the period from inception (July 14,
1997) through November 30, 1997.
Class Y shares do not incur sales charges nor
CDSCs.
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 certain Federal
income tax considerations that may affect the
Fund and its shareholders. The summary is not
intended as a substitute for individual tax
advice and investors are urged to consult their
own tax advisors as to the tax consequences of
an investment in the Fund.
The Fund has qualified and intends to continue
to qualify each year as a regulated investment
company under the Code. If the Fund (a)
qualifies as a regulated investment company and
(b) distributes to its shareholders at least
90% of its net investment income (including,
for this purpose, its net realized short-term
capital gains), the Fund will not be liable for
Federal income taxes to the extent that its net
investment income and its net realized long-
and short-term capital gains, if any, are
distributed to its shareholders.
Gains or losses on the sales of stock or
securities by the Fund generally will be long-
term capital gains or losses if the Fund has
held the stock or securities for more than one
year. Gains or losses on sales of stock or
securities held for not more than one year
generally will be short-term capital gains or
losses.
Any net long-term capital gains realized by the
Fund will be distributed annually as described
in the Prospectus. Such distributions
("capital gain dividends") will be taxable to
shareholders as long-term capital gains,
regardless of how long a shareholder has held
Fund shares, and will be designated as capital
gain dividends in a written notice mailed by
the Fund to shareholders after the close of the
Funds prior taxable year. If a shareholder
receives a capital gain dividend with respect
to any share and if the share has been held by
the shareholder for six months or less, then
any loss on the sale or exchange of such share
will be treated as a long-term capital loss to
the extent of the capital gain dividend.
The portion of the dividends received from the
Fund that qualifies for the dividends-received
deduction for corporations will be reduced to
the extent that the Fund holds dividend-paying
stock for less than 46 days (91 days for
certain preferred stocks). The Funds holding
period will not include any period during which
the Fund has reduced its risk of loss from
holding the stock by purchasing an option to
sell or entering into a short sale of
substantially identical stock or securities
convertible into the stock. The holding period
for stock may also be reduced if the Fund
diminishes its risk of loss by holding one or
more other positions with respect to
substantially similar or related properties.
Dividends-received deductions will be allowed
only with respect to shares that a corporate
shareholder has held for at least 46 days
within the meaning of the same holding period
rules applicable to the Fund.
If the Fund is the holder of record of any
stock on the record date for any dividends
payable with respect to such stock, such
dividends shall be included in the Funds gross
income as of the later of (a) the date that
such stock became ex-dividend with respect to
such dividends (that is, the date on which a
buyer of the stock would not be entitled to
receive the declared but unpaid, dividends) or
(b) the date that the Fund acquired such stock.
Accordingly, in order to satisfy its income
distribution requirements, the Fund may be
required to pay dividends based on anticipated
earnings and shareholders may receive dividends
in an earlier year than would otherwise be the
case.
If a shareholder incurs a sales charge in
acquiring shares of the Fund, disposes of those
shares within 90 days and then acquires shares
in a mutual fund for which the otherwise
applicable sales charge is reduced by reason of
a reinvestment right (that is an exchange
privilege), the original sales charge will not
be taken into account in computing gain/loss on
the original shares to the extent the
subsequent sales charge is reduced. Instead,
it will he added to the tax basis in the newly
acquired shares. Furthermore, the same rule
also applies to a disposition of the newly
acquired or redeemed shares made within 90 days
of the second acquisition. This provision
prevents a shareholder from immediately
deducting the sales charge by shifting his or
her investment in a family of mutual funds.
Investors considering buying shares of the Fund
on or just prior to a record date for a taxable
dividend or capital gain distribution should be
aware that, regardless of whether the price of
the Fund shares to be purchased reflects the
amount of the forthcoming dividend or
distribution payment, any such payment will be
a taxable dividend or distribution payment.
If a shareholder fails to furnish a correct
taxpayer identification number, fails fully to
report dividend and interest income, or fails
to certify that he or she has provided a
correct taxpayer identification number and that
he or she is not subject to "backup
withholding," then the shareholder may be
subject to a 31% backup withholding tax with
respect to (a) any taxable dividends and
distributions and (b) the proceeds of any
redemptions of Fund shares. An 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 shareholders regular
Federal income tax liability.
The foregoing is only a summary of certain tax
considerations generally affecting the Fund and
its shareholders and is not intended as a
substitute for careful tax planning.
Shareholders are urged to consult their tax
advisors with specific reference to their own
tax situations, including their state and local
tax liabilities.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated
business trust on October 17, 1991 under the
name Shearson Lehman Brothers Intermediate-Term
Trust. On November 20, 1991, July 30, 1993,
October 14, 1994 and August 16, 1995, the
Trusts name was changed to Shearson Lehman
Brothers Income Trust, Smith Barney Shearson
Income Trust, Smith Barney Income Trust and
Smith Barney Investment Trust, respectively.
PNC, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania, 19103, serves as
the custodian of the Fund. Under its custody
agreement with the Fund, PNC holds the Funds
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, located at Exchange Place, Boston,
Massachusetts 02109, 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 Report for the fiscal year
ended November 30, 1997 is incorporated herein
by reference in its entirety.
Smith Barney
Investment
Trust
SMITH BARNEY
INVESTMENT TRUST
388 Greenwich Street
New York, NY 10013
SMITH BARNEY
A Member of Travelers Group
U\LEGAL\SLIT\1998\SECDOCS\LCGSAI98.DOC.
21
Smith Barney
INVESTMENT TRUST
388 Greenwich Street
New York, New York 10013
(800) 451-2010
March 30, 1998
This Statement of Additional Information (the
"SAI") supplements the
information contained in the current
Prospectuses of the Smith Barney
Intermediate Maturity California Municipals
Fund (the "California Fund") and
the Smith Barney Intermediate Maturity New York
Municipals Fund (the "New
York Fund") dated March 30, 1998, 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 the California Fund
and the 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 SAI, 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 SAI are
identical to those used in each Prospectus
except as noted in parentheses
below:
Management of the Trust and the Funds
1
Investment Objectives and Management Policies
the New York &
California Fund
6
Purchase of Shares
24
Redemption of Shares
25
Distributor
26
Valuation of Shares
28
Exchange Privilege
29
Performance Data (See in the Prospectuses
"Performance ")
29
Taxes (See in the Prospectuses "Dividend,
Distribution and Taxes")
33
Additional Information
34
Financial Statements
35
Appendix
36
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" or the
" Distributor") )
Mutual Management Corp.
Distributor
("MMC" "Adviser" "Administrator")
Investment Adviser and
Administrator
PNC Bank, National Association ("PNC" or the
"Custodian)
Custodian
First Data Investor Services Group, Inc.,
("First Data" or the "Transfer Agent")
Transfer Agent
These organizations and the functions they
perform for the Funds are
discussed in the Prospectuses and in this SAI.
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 (Age 74). Private Investor.
His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 75).
Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His
address is 19 Circle End Drive,
Ramsey, New Jersey 07466.
Martin Brody, Trustee (Age 76).
Consultant, HMK Associates; Retired
Vice Chairman of the Board of Restaurant
Associates Corp. His address is c/o
HMK Associates, 30 Columbia Turnpike, Florham
Park, New Jersey 07932.
Dwight B. Crane, Trustee (Age 60).
Professor, Harvard Business School.
His address is c/o Harvard Business School,
Soldiers Field Road, Boston,
Massachusetts 02163.
Burt N. Dorsett, Trustee (Age 67).
Managing Partner of Dorsett McCabe
Management. Inc., an investment counseling
firm; Trustee of Research
Corporation Technologies, Inc., a nonprofit
patent clearing and licensing
firm. His address is 201 East 62nd Street, New
York, New York 10021.
Elliot S. Jaffe, Trustee (Age 71).
Chairman of the Board and President
of The Dress Barn, Inc. His address is 30
Dunnigan Drive, Suffern, New York
10901.
Stephen E. Kaufman, Trustee (Age 66).
Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 67).
Financial Consultant; Retired
Financial Executive, Ryan Homes, Inc. His
address is 200 Oak Park Place,
Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board
and Investment Officer (Age
64). Managing Director of Smith Barney,
Chairman of the Board of Smith
Barney Strategy Advisers Inc. and President of
MMC and Travelers Investment
Adviser, Inc. ("TIA"); prior to July 1993,
Senior Executive Vice President of
Shearson Lehman Brothers Inc., Vice Chairman of
Shearson Asset Management.
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 64).
President, Cornelius C. Rose
Associates, Inc., financial consultants, and
Chairman and Trustee of
Performance Learning Systems, an educational
consultant. His address is Fair
Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Trustee Emeritus.
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
Lewis E. Daidone, Senior Vice President
and Treasurer (Age 40).
Managing Director of Smith Barney, Chief
Financial Officer of the Smith
Barney Mutual Funds; Director and Senior Vice
President of MMC and TIA. 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 MMC; Managing Director of
Smith Barney; 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 MMC; Managing Director of
Smith Barney; 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 MMC
and TIA. Ms. Sydor serves as
secretary of 42 Smith Barney Mutual Funds. Her
address is 388 Greenwich
Street, New York, New York 10013.
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 $8,000 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 $4,000 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,
1997, the Trustees of the Fund
were paid the following compensation:
Name of Person
Aggregate
Compensat
ion
from Fund
#
Total
Pension or
Retirement
Benefits
Accured
as part of
Fund Expenses
Compensatio
n
from Fund
and Fund
Complex
Paid to
Trustees
Number of
Funds for
Which
Trustees
Serves
Within
Fund Complex
Herbert Barg
$6,600
$0
$101,600
18
Alfred
Bianchetti**
6,600
0
49,600
13
Martin Brody
6,000
0
119,814
21
Dwight B. Crane
6,600
0
133,850
24
Burt N. Dorsett
6,600
0
49,600
13
Elliot S. Jaffe
6,600
0
48,500
13
Stephen E.
Kaufman
6,600
0
91,964
15
Joseph J.
McCann
6,600
0
49,600
13
Heath B.
McLendon **
- -
- -
- -
42
Cornelius C.
Rose, Jr.
6,600
0
49,600
13
** Designates an "interested" Trustee.
# Upon attainment of age 80, Fund Trustees
are required to change to
emeritus status. Trustees Emeritus are
entitled to serve in emeritus
status for a maximum of 10 years, during which
time they are paid 50% of
the annual retainer fee and meeting fees
otherwise applicable to Fund
Trustees, together with reasonable out-of-
pocket expenses for each meeting
attended. Mr. Crisona is a Trustee Emeritus
and as such may attend
meetings but has no voting rights. During the
Funds last fiscal year,
aggregate compensation paid by the Fund to
Trustees achieving emeritus
status totaled $11,423
Investment Adviser and Administrator - MMC
The Adviser serves as investment adviser to
each of the Funds pursuant to an
investment advisory agreement (the "Investment
Advisory Agreement") with the
Trust that was approved by the Board of
Trustees, including a majority of
Trustees who are not "interested persons" of
the Trust or the Adviser. The
Adviser is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc.
("Holdings"), which, in turn, is a wholly
owned subsidiary of Travelers Group
Inc. ("Travelers"). The services provided by
the Adviser under the
Investment Advisory Agreement are described in
the Prospectuses under
"Management of the Trust and the Fund." The
Adviser pays the salary of any
officer and employee who is employed by both it
and the Trust. The Adviser
bears all expenses in connection with the
performance of its services.
As compensation for investment advisory
services, each Fund pays the Adviser
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, 1995,
the Funds paid the 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
$22,385
$65,910
New York Fund
82,898
115,831
For the fiscal year ended November 30, 1996,
the Funds paid the 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
$ 0
$128,361
New York Fund
32,306
122,796
For the fiscal year ended November 30, 1997,
the Funds paid the Adviser
investment advisory fees, and the investment
adviser waived fees and
reimbursed expenses as follows:
Fund
Fees Paid
Fees Waived
California Fund
$20,278
$63,087
New York Fund
59,523
90,299
MMC also serves as administrator to the New
York and California Funds
pursuant to a written agreement (the
"Administration Agreement"), which was
approved by the Trustees of the Trust,
including a majority of Trustees who
are not "interested persons" of the Trust or
the Administrator. The services
provided by the Administrator under the
Administration Agreement are
described in the Prospectuses under "Management
of the Trust and the Fund."
The Administrator 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, the
Administrator 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, 1995 the
Funds paid the Administrator
administration fees and the Administrator
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 the Administrator
administration fees and the Administrator
waived fees as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$ 0
$85,575
New York Fund
10,906
92,495
For the fiscal year ended November 30, 1997 the
Funds paid the Administrator
administration fees and the Administrator
waived fees as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$13,518
$42,058
New York Fund
33,023
66,858
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 MMC,
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.
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, 1998.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
FOR THE NEW YORK AND CALIFORNIA FUND
The Prospectuses discuss the investment
objective of each Fund and the
principal policies to be employed to achieve
that objective. Supplemental
information is set out below concerning the
types of securities and other
instruments in which the Funds may invest, the
investment policies and
strategies that the Funds may utilize and
certain risks attendant to those
investments, policies and strategies.
United States Government Securities
Securities issued or guaranteed by the United
States government or one of its
agencies, authorities or instrumentalities
("U.S. government securities") in
which each of the California Fund and the New
York Fund may invest include
debt obligations of varying maturities issued
by the United States Treasury
or issued or guaranteed by an agency or
instrumentality of the United States
government, including the Federal Housing
Administration, Export-Import Bank
of the United States, Small Business
Administration, Government National
Mortgage Association, General Services
Administration, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit
Banks, Federal National Mortgage Association,
Maritime Administration,
Tennessee Valley Authority, District of
Columbia Armory Board, Student Loan
Marketing Association, Resolution Trust
Corporation and various institutions
that previously were or currently are part of
the Farm Credit System (which
has been undergoing a reorganization since
1987). Direct obligations of the
United States Treasury include a variety of
securities that differ in their
interest rates, maturities and dates of
issuance. Because the United States
government is not obligated by law to provide
support to an instrumentality
that it sponsors, neither of the Funds will
invest in obligations issued by
an instrumentality of the United States
government unless the Adviser
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 SAI
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 "1995-96
Budget" 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 precession
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.
However, California has experienced recent
economic expansion, with growth in
employment and in early 1998 the state recorded
its lowest unemployment rate
since 1990. There can be no assurance this
growth trend will continue.
1995-96 Budget
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 $12.7 billion, an increase
from $12.1 billion projected in
1994-95.
The Department of Finance 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 in appropriated to the
1994-95 Proposition 98
entitlement. A significant component of this
amount is 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 comprise 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 increase 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 Budget Act contained 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 were 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 (General Fund)
and $1.65 billion total
above revised 1995-96 level periods. Almost
half of this money was
budgeted to fund class-size reduction in
kindergarten and grades 1-3.
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.
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. General Fund support for the Department of
Corrections was increased
by about 7 percent over the prior year,
reflecting estimates of
increased prison population.
5. 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 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.
1997-98 Budget
On January 9, 1997, the Governor announced his
proposed 1997-98 State budget
detailing plans to cut welfare, increase
education spending and provide
certain tax cuts to businesses and banks. The
total spending plan in the
amount of approximately $66.6 billion
represents an increase of approximately
4% from the 1996-97 State Budget, with an
increase in the State's General
Fund to approximately $50.3 billion. The
Governor announced a proposal to
restructure the State's welfare system, placing
strict time limits on the
provisions of assistance and introducing
penalties, and included a plan to
increase spending for elementary and secondary
schools.
On August 11, 1997, the State Legislature
approved a 1997-98 State Budget of
approximately $68 billion which included
approximately $32 billion for public
schools, an increase of approximately $4
billion over the prior year. The
Budget also included approximately $100 million
for local law enforcement and
approximately $75 million in spending to
subsidize hospitals that care for
large numbers of uninsured patients, as well as
approximately $40 million for
legal immigrants and an increase of
approximately $223 million in welfare
spending, including job training. The education
portion of the State Budget
approved by the Legislature for 1997-98
included approximately $850 million
to expand the class-size reduction program and
full statutory funding of the
Revenue Limit COLA comprising a 2.65% COLA,
consistent with the May Revision,
Revenue Limit Equalization is as funded in the
amount of approximately $261
million for the school district revenue limit
equalization for 1996-97.
The final State Budget was signed by the
Governor on August 18, 1997 after
using his line-item veto authority to veto,
with reservation until an
acceptable school testing bill is passed, a
significant amount of education
funding from the State Budget approved by the
Legislature. Vetoes which
would be restored if a testing bill acceptable
to the Governor is passed
include approximately $955,000 in Department of
Education spending, and
approximately $900 million in local assistance.
Vetoes not relating to the
testing issue, but which need legislation in
order to restore the vetoed
funds, included more than $20 million in
Department of Education spending.
The final State Budget also provided
approximately $377 million for child
care programs administered by the Department of
Education and the Department
of social Services, approximately $160 million
for welfare-to-work programs,
approximately $25 million in adult education
funding and approximately $50
million in California community colleges,
approximately $100 million to
cities and counties to enhance local law
enforcement, approximately $55
million in federal funds to local government
for the construction of
detention facilities and approximately $1.2
billion in deferred general fund
contributions to the Public Employees
Retirement System. The final State
Budget did not include the Governor's proposed
10% tax cut for bank and
corporations.
Proposed 1998-99 Budget
In 1997, California experienced employment
growth exceeding 3 percent -
approximately 400,000 new jobs - and income
rose by more than 7 percent. The
State's unemployment rate fell during 1997 to a
low of 5.8% in November. In
fiscal year 1996-97, the State General Fund
collections grew by over 6
percent to reach $49.2 billion, and revenue for
the 1997-98 and 1998-99
fiscal years is expected to reach $52.9 billion
and $55.4 billion
respectively. This represents an annual growth
of $3.7 billion (7.5 percent)
for 1997-98 and $2.5 billion (4.7 percent) for
1998-99.
The 1998-99 Governor's Budget provides $50
million in General Fund and $200
million in a proposed bond issue to capitalize
the Infrastructure and
Development Bank, which will provide capital to
local governments to help
businesses locate and expand in California, and
$3 million for the small
business loan guarantee program. The Budget
also includes an Early Childhood
Development Initiative, which is designed to
improve the health and
development of children from birth to age three
and provides additional funds
for anti-gang programs and for the apprehension
of sexual predators. The
Budget proposes an approximately $7 billion
investment plan to maintain and
build the State's system of schools, water
supply, prisons, natural
resources, and other Infrastructure.
In addition, the Budget includes approximately
$40 billion to be devoted to
California's 999 school districts and 58 county
offices of education,
resulting on estimated total per-pupil
expenditures from all sources of
$6,620 in fiscal year 1997-98 and $6,749 in
1998-99. Projected state
revenues will contribute to a 7 percent
increase in Proposition 98 General
Fund support for K-12 education in 1998-99.
This level of resources result
in K-12 Proposition 98 per-pupil expenditures
of $5,636 in 1998-99, up from
$5,114 in 1996-97 and $5,414 in 1997-98. In
addition, approximately $350
million has been allocated to lengthen the
school year to 180 days while
maintaining sufficient funds for staff
development days. The State Budget
included a 2.22% COLA for revenue limit,
special education, and child
development in an amount of $657.4 million
which includes school district and
county office of education apportionments
($470.6 million), summer school
($4.0 million), special education ($57.8
million), child development ($14.6
million), class size reduction ($33.6 million),
and categorical program COLA
and growth ($73.7 million); enrollment growth
funding of $564.4 million;
class size reduction funding in the amount of
$547 billion for all pupils in
grades K-3 at $818 per pupil; and approximately
$2 billion in state bonds for
the 1998 election and $2.0 billion for each two
years thereafter in 2000,
2002 and 2004 and an additional $135 million
for deferred maintenance to be
matched locally.
It cannot be predicted what actions will be
taken in the future by the State
Legislature and the Governor to deal with
changing State revenues and
expenditures. The State budget will be
affected by national and state
economic conditions and other factors.
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 September 1, 1997, the State had over
$17.6 billion aggregate amount of
its general obligation bonds outstanding.
General obligation bond
authorizations in an aggregate amount of
approximately $8.26 billion remained
unissued as of September 1, 1997. As of
September 1, 1997 the State Finance
Committee had authorized the issuance of
approximately $3.6 billion of
general obligation commercial paper notes, but
as of that date only $1.2
billion aggregate principal amount of which was
issued and outstanding. The
State also builds and acquires capital
facilities through the use of lease
purchase borrowing. As of September 1, 1997,
the State had approximately
$6.1 billion of outstanding General Fund-
supported Lease-Purchase Debt.
In addition to the general obligation bonds,
State agencies and authorities
had approximately $20.86 billion aggregate
principal amount of revenue bonds
and notes outstanding as of September 1, 1997.
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 revenues paid by private
users of facilities financed by
such revenue bonds. Such enterprises and
projects include transportation
projects, 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 its Budget Acts for certain fiscal
years. 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.
Any explanation of the
significance of such ratings may be obtained
only from the rating agency
furnishing such ratings. 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 Trust has
not independently verified this information, it
has no reason to believe that
such information is not correct in all material
respects.
California Taxes -
In the opinion of LeBoeuf, Lamb, Greene &
MacRae L.L.P., Los Angeles,
California, special counsel on California tax
matters, under existing law:
The California Trust is not taxable as
corporation for California tax
purposes. Interest on the underlying
Securities owned by the California
Trust that is exempt from personal income taxes
imposed by the State of
California will retain its status as interest
exempt from personal income tax
imposed by the State of California.
Each Unit Holder of the California Trust will
recognize gain or loss on the
sale, redemption or other disposition of
Securities within the California
Trust, or on the sale or other disposition of
Unit Holders interest in the
California Trust. As a result, a Unit Holder
may incur California tax
liability upon the sale, redemption or other
disposition of Securities within
the California Trust or upon the sale or other
disposition of his or her
Units.
Special Consideration Relating to New York
Exempt Obligations
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
thereafter improved during calendar year 1996,
reflecting improved securities
industry earnings and employment in other
sectors. The City's current four-
year financial plan assumes that moderate
economic growth will continue
through calendar year 2001, with moderating job
growth and wage increases.
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 has
been required to close
substantial budget gaps between forecast
revenues and forecast expenditures
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 additional
reductions in City services or entitlement
programs, 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 "Financial Emergency Act" or the
"Act"), the City prepares an
annual four-year financial plan, which is
reviewed and revised on 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 a surplus in the
1998 fiscal year (before discretionary
transfers) and substantial budget gaps
for each of the 1999, 2000 and 2001 fiscal
years. This pattern of current
year surplus and projected subsequent year
budget gaps has been consistent
through virtually the entire period since 1982,
during which the City has
achieved balanced operating results for each
fiscal year. 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
1995-96 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
delays 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 1998 through 2001 fiscal
years (the "1998-2001 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
ability to implement proposed reductions in
City personnel and other cost
reduction initiatives, the ability of the New
York City Health and Hospitals
Corporation ("HHC") and the Board of Education
("BOE") to take actions to
offset potential budget shortfalls, the ability
to complete revenue
generating transactions, provision of State and
Federal aid and mandate
relief and the impact on City revenues and
expenditures of Federal and State
welfare reform and any future legislation
affecting Medicare or other
entitlements. Despite these and similar risks
and uncertainties, the city
has achieved balanced operation results in each
of its sixteen years.
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 1998 through 2001 contemplates
the issuance of $4.9 billion
of general obligation bonds and $7.1 billion of
bonds to be issued by the
proposed New York City Infrastructure Finance
Authority ("Finance Authority")
to finance City capital projects. The Finance
Authority was created 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. 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, New York Municipal
Water Finance Authority ("Water Authority")
bonds and Finance Authority bonds
will be subject to prevailing market
conditions. The City's planned capital
and operation expenditures are dependent upon
the sale of its general
obligation bonds and notes, and the Water
Authority and Finance Authority
bonds. 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.
The City's operation results for the 1996
fiscal year were balanced in
accordance with GAAP, after taking into account
a discretionary transfer of
$224 million, the sixteen the consecutive year
of GAAP balanced results.
The most recent quarterly modification to the
City's financial plan for the
1997 fiscal year, which was submitted to the
Control Board on June 10, 1997
(the "1997 Modification"), projects a balanced
budget in accordance with GAAP
for the 1997 fiscal year, after taxing into
account an increase in projected
tax revenues of $1.2 billion during the 1997
fiscal year and a discretionary
prepayment in the 1997 fiscal of $1.3 billion
of debt service due in the 1998
and 1999 fiscal years.
On June 10, 1997, the City submitted to the
Control Board the financial Plan
for the 1998 through 2001 fiscal years, which
relates to the City, BOE and
the City University to New York ("CUNY") and
reflects the City's expense and
capital budgets for the 1998 fiscal year, which
were adopted on June 6, 1997.
The Financial Plan projects revenues and
expenditures for the 1998 fiscal
year balanced in accordance with GAAP. The
Financial Plan includes increased
tax revenue projections; reduced debt service
costs; the assumed restoration
of Federal funding for programs, assisting
certain legal aliens; additional
expenditures for textbooks, computers, improved
education programs and
welfare reform, law enforcement, immigrant
naturalization, initiative
proposed by the City Council and other
initiatives; and a proposed
discretionary transfer to the 1998 fiscal year
of $300 million of debt
service due in the 1999 fiscal year for budget
stabilization purposes. In
addition, the Financial Plan reflects the
discretionary transfer to the 1997
fiscal year of $1.3 billion of debt service due
in the 1998 and 199 fiscal
years, and includes actions to eliminate a
previously projected budget gap
for the 1998 fiscal year. These gap closing
actions include (I) additional
agency actions totaling $621 million; (ii) the
proposed sale of various
assets; (iii) additional State aid of $294
million, including a proposal that
the State accelerate a $142 million revenue
sharing payment to the City from
March 1999; and (iv) entitlement savings of
$128 million which would result
from certain of the reductions in Medicaid
spending proposed in the
Governor's 1997-1998 Executive Budget and the
State making available to the
City $77 million of additional Federal block
grant aid, as proposed in the
Governor's 1997-1998 Executive Budget. The
Financial Plan also sets forth
projections for the 1999 through 2001 fiscal
years and projects gaps of $1.8
billion, $2.8 billion for the 1999 through 2001
fiscal years, respectively.
The Financial Plan assumes approval by the
State Legislature and the Governor
of (i) a tax reduction program proposed by the
City totaling $272 million,
$435 million, $465 million and $481 million in
the 1998 through 2001 fiscal
years, respectively, which includes a proposed
elimination of the 4% City
sales tax on clothing items under $500 as of
December 1, 1997, and (ii) a
proposed State tax relief program, which would
reduce the City property tax
and personal income tax, and which the
Financial Plan assumes will be offset
by proposed increased State aid totaling $47
million, $254 million, $472
million and $722 million in the 1998 through
2001 fiscal years, respectively.
The Financial Plan also assumes (i) approval by
the Governor and the State
Legislature of the extension of the 14%
personal income tax surcharge, which
is scheduled to expire on December 31, 1999 and
the extension of which is
projected to provide revenue of $166 million
and $494 million in the 2000
and 2001 fiscal years, respectively, and of the
extension of the 12.5%
personal income tax surcharge, which is
scheduled to expire on December 31,
1998 and the extension of which is projected to
provide revenue of $188
million, $527 million and $554 million in the
1999 through 2001 fiscal years,
respectively; (ii) collection of the projected
rent payments for the City's
airports, totaling $385 million, $175 million,
and $170 million in the 1999,
2000, and 2001 fiscal years, respectively,
which may depend on the successful
completion of negotiation with the Port
Authority or the enforcement of the
City's rights under the existing leases through
pending legal actions; and
(iii) State approval of the cost containment
initiatives and State aid
proposed by the City for the 1998 fiscal year,
and $115 million in State aid
which is assumed in the Financial Plan but was
not provided for in the
Governor's 1997-1998 Executive Budget. The
Financial Plan reflects the
increased costs which the City is prepared to
incur as a result of welfare
legislation recently enacted by Congress. The
Financial Plan provides no
additional wage increases for City employees
after their contracts expire in
fiscal years 2000 and 2001. In addition, the
economic and financial
condition of the City may be affected by
various financial, social, economic
and political factors which could have material
effect on the City.
The City annually prepares a modification to
its financial plan in October or
November which amends the financial plan to
accommodate any revisions to
forecast revenues and expenditures and to
specify any additional gap-closing
initiatives to the extent required to offset
decreases in projected revenues
or increases in projected revenues or increases
in projected expenditures.
The Mayor is expected to publish the first
quarter modification (the
"Modification") for the 1998 fiscal year in
November. Since the preparation
of the Financial Plan, the State has adopted
its budget for the 1997-1998
fiscal year. The State budget enacted a
smaller sales tax reduction than the
tax reduction program assumed by the City in
the Financial Plan, which will
increase projected City sales tax revenues;
provided for State aid to the
City which was less than assumed in the
Financial Plan; and enacted a State
funded tax relief program which begins a year
later than reflected I the
Financial Plan. In addition, the net effect of
tax law changes made in the
Federal Balanced Budget Act of 1997 are
expected to increase tax revenues in
the 1998 fiscal year. These changes will be
reflected in the Modification.
The projections for the 1998 through 2001
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
("District Council 37"), 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. Subsequently, the City reached
settlements, through agreements to
statutory impasse procedures, with bargaining
units which, together with the
UFT and District Council 37, represent
approximately 86% of the City's
workforce.
In 1975, Standard & Poor's 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
Standard & Poor's. On July
2, 1985, Standard & Poor's revised its rating
of City bonds upward to BBB+
and on November 19, 1987, to A-. On July 10,
1995, Standard & Poor's revised
its rating of City bonds downward to BBB+.
Moody's rating of City bonds were revised in
November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in
December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1.
On July 17, 1997, Moody's
changed its outlook on City bonds to positive
from stable. Since July 15,
1993, Fitch has rated City bonds A-. since
July 8, 1997, IBCA Limited has
rated City bonds A.
New York State and its Authorities. The
State's budget for the State's 1997-
1998 fiscal year, commencing on April 1, 1997,
was adopted by the Legislature
on August 4, 1997. Prior to adoption of the
budget, the Legislature enacted
appropriations for disbursements for its 1997-
1998 fiscal year considered to
be necessary for State operations and other
purposes. The State Financial
Plan for the 1997-1998 fiscal year was
formulated on August 11, 1997 and is
based on the State's budget as enacted by the
Legislature, as well as actual
results for the first quarter of the current
fiscal year. The 1997-1998
State Financial Plan is expected to be updated
in October and January. The
1997-1998 State Financial Plan is projected to
be balanced on a cash basis.
Total General Fund receipts and transfers from
other funds are projected to
be $35.09 billion, while total General Fund
disbursements and transfers to
other funds are projected to be $34.60 billion.
The adopted 1997-1998 budget
projects a year-over-year increase in General
Fund disbursements of 5.2
percent. As compared to the Governor's
proposed budget amended in February
1997, the State's adopted budget for 1997-1998
increases General fund
spending by $1.7 billion, primarily due to
increase for local assistance
($1.3 billion). Resources used to fund these
additional expenditures include
increased revenues projected for the 1997-1998
fiscal year, increases
resources produced in the 1996-1997 fiscal year
that will be utilized in
1997-1998, reestimates of social service,
fringe benefit and other spending,
and certain non-recurring resources.
the 1997-1998 adopted budget includes multi-
year tax reductions, including a
State funded property and local income tax
reduction program, estate tax
relief, utility gross receipts tax reductions,
permanent reduction in the
State sales tax on clothing, and elimination of
assessments on medical
providers. The various elements of the State
and local tax and assessment
reductions have little or no impact on the
1997-1998 Financial Plan, and do
not begin to materially affect the out-year
projections until the State's
1999-2000 fiscal year.
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. In
addition, the State Financial
Plan is based upon forecasts of national and
State economic activity.
Economic forecasts have frequently failed to
predict accurately the timing
and magnitude of changes in the national and
the State economics. Actual
results could differ materially and adversely
from projections and those
projections may be changed materially and
adversely from time to time.
The State closed projected budget gaps of $5.0
billion, $3.9 billion and $2.3
billion for its 1995-1996, 1996-1997 and 1997-
1998 fiscal years,
respectively. The 1998-1999 budget gap was
projected at $1.68 billion
(before the application of any assumed
efficiencies) in the out-year
projections submitted to the Legislature in
February 1997. As a result of
changes made in the adopted budget, the 1998-
1999 gap is now expected by the
State to be about the same or smaller than the
amount previously projected,
after application of the $530 million reserve
for future needs. 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
revised expectations for the
1998-199 fiscal year reflect the loss of $1.4
billion in surplus resources
from 1996-1997 operations that are being
utilized to finance current year
spending, an incremental effect of
approximately $300 million in legislated
State and local tax reductions in the out-year
and other factors.
In recent years, State actions affecting the
level of receipts and
disbursements, the relative strength of the
State and regional economy,
actions of the Federal government and other
factors have created structural
budget gaps for the State. These gaps resulted
from a significant disparity
between recurrent revenues and the costs of
maintaining or increasing the
level of support for State programs. To address
a potential imbalance in any
given fiscal year, the State would be required
to take actions to increase
receipts and/or reduce disbursements as it
enacts the budget for that year,
and under the State Constitution, the Governor
is required to propose a
balanced budget each year. There can be no
assurance, however, that the
Legislature will enact the Governor's proposals
or that the State's actions
will be sufficient to preserve budgetary
balance in a given fiscal year or to
align recurring receipts and disbursements in
future fiscal years.
Other actions taken in the 1997-1998 adopted
budget add further pressure to
future State budget balance. For example, the
fiscal effects of tax
reductions adopted in the 1997-1998 budget are
projected to grow more
substantially beyond the 1998-1999 fiscal year.
The full annual cost of the
enacted tax reduction package is estimated by
the State at approximately $4.8
billion when fully effective in State fiscal
year 2001-2002. In addition,
the 1997-1998 budget included multi-year
commitments for school aid pre-
kindergarten early learning programs which
could add as much as $1.4 billion
in costs when fully annualized in fiscal year
2001-2002. These spending
commitments are subject to annual
appropriation.
On September 11, 1997, the New York State
Comptroller issued a report which
noted that the ability to deal with future
budget gaps could become a
significant issue in the State's 2000-2001
fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report
contained projections that, based
on current economic conditions and current law
for taxes and spending, showed
a gap in the 2000-2001 State fiscal year of
$5.6 billion and of $7.4 billion
in the 2001-2001 State fiscal year. The report
noted that these gaps would
be smaller if recurring spending reductions
produce savings in earlier years.
The State Comptroller has also state that if
Wall Street earnings moderate
and the State experiences a moderate recession,
the gap for the 2001-2002
State fiscal year could grow to nearly $12
billion.
In recent years, the State has failed to adopt
a budget prior to the
beginning of its fiscal year. A prolonged
delay in the adoption of the
State's budget beyond the statutory April 1
deadline without interim
appropriations could delay the projected
receipt by the City of State aid,
and there can be no assurance that State
budgets in future fiscal years will
be adopted by the April 1 statutory deadline.
On August 28, 1997, Standard & Poor's revised
its ratings on the State's
general obligation bonds from A- to A and, in
addition, revised its ratings
on the State's moral obligation, lease
purchase, guaranteed and contractual
obligation debt. On January 6, 1992, Moody's
reduced its ratings on
outstanding limited-liability State lease
purchase and contractual
obligations from A to Baa1. On February 10,
1997, Moody's confirmed its A2
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
1997-98 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 constitutional
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 1998-2001 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.
New York Taxes -
Under the income tax laws of the State and City
of New York, the Trust is not
an association taxable as a corporation and
income received by the Trust will
be treated as the income of the Holders in the
same manner as for Federal
income tax purposes. Accordingly, each Holder
will be considered to have
received the interest on his pro rata portion
of each Bond when interest will
be exempt from New York State and City personal
income taxes except where
such interest is subject to Federal income
taxes (see Taxes). A noncorporate
Holder who is not a New York State resident
will not be subject to New York
State or City personal income taxes on any such
gain unless such Units are
attributable to a business, trade, profession
or occupation carried on in New
York. A New York State (and City) resident
should determine his tax
purposes. Interest income on, as well as any
gain recognized on the
disposition of, a Holder's pro rata portion of
the Bonds is generally not
excludable from income in computing New York
State and City corporate
franchise taxes.
Ratings as Investment Criteria
In general, the ratings of Moodys, S&P and
Fitch IBCA, Inc. ("Fitch")
represent the opinions of those agencies as to
the quality of debt
obligations that they rate. These ratings,
however, are relative and
subjective, are not absolute standards of
quality and do not evaluate the
market risk of securities. Ratings will be
used with respect to the Funds as
initial criteria for the selection of portfolio
securities; the Funds will
also rely upon the independent advice of the
Adviser to evaluate potential
investments. Among the factors that will be
considered by the Adviser are
the long-term ability of the issuer to pay
principal and interest and general
economic trends. The Appendix to this SAI
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 the Adviser 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, the
Adviser 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.
Repurchase Agreements
Both the Funds may engage in repurchase
agreement transactions with banks
which are the issuers of instruments acceptable
for purchase by the Fund and
certain dealers on the Federal Reserve Bank of
New Yorks list of reporting
dealers. A repurchase agreement is a contract
under which the buyer of a
security simultaneously commits to resell the
security to the seller at an
agreed-upon price on an agreed-upon date.
Under the terms of a typical repurchase
agreement, a Fund would acquire an
underlying debt obligation for a relatively
short period subject to an
obligation of the seller to repurchase, and the
Fund to resell, the
obligation at an agreed-upon price and time,
thereby determining the yield
during the Funds holding period. This
arrangement results in a fixed rate of
return that is not subject to market
fluctuations during the Funds holding
period. Under each repurchase agreement, the
selling institution will be
required to maintain the value of the
securities subject to the repurchase
agreement at not less than their repurchase
price. Although the amount of a
Funds assets that may be invested in purchase
agreements terminable in less
than seven days is not limited, repurchase
agreements maturing in more than
seven days, together with other securities
lacking readily available markets
held by the Fund, will not exceed 10% of the
Funds net assets.
The value of the securities underlying a
repurchase agreement of a Fund will
be monitored on an ongoing basis by the Adviser
to ensure that the value is
at least equal at all times to the total amount
of the repurchase obligation,
including interest. The Adviser 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 -
Both Funds
When a Fund engages in when-issued or delayed-
delivery securities
transactions, it will rely on the other party
to consummate the trade.
Failure of the seller to do so may result in a
Funds incurring a loss or
missing an opportunity to obtain a price
considered to be advantageous.
Investment Restrictions
The investment restrictions numbered 1 through
7 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: No Fund will
1. Purchase securities other than Municipal
Obligations and Taxable
Investments as those terms are defined in the
Prospectuses or this SAI.
2. Invest more than 25% of its total assets in
securities, the issuers of
which conduct their principal business
activities in the same industry. For
purposes of this limitation, securities of the
U.S. government (including its
agencies and instrumentalities) and securities
of state or municipal
governments and their political subdivisions
are not considered to be issued
by members of any industry.
3. Borrow money, except that (a) the Fund may
borrow from banks for temporary
or emergency (not leveraging) purposes,
including the meeting of redemption
requests which might otherwise require the
untimely disposition of securities,
and (b) the Fund may, to the extent consistent
with its investment policies,
enter into reverse repurchase agreements,
forward roll transactions and
similar investment strategies and techniques.
To the extent that it engages
in transactions described in (a) and (b), the
Fund will be limited so that no
more than 33 1/3% of the value of its total
assets (including the amount
borrowed), valued at the lesser of cost or
market, less liabilities (not
including the amount borrowed) valued at the
time the borrowing is made, is
derived from such transactions.
4. Issue "senior securities" as defined in the
1940 Act and the rules,
regulations and orders thereunder, except as
permitted under the 1940 Act and
the rules, regulations and orders thereunder
5. Make loans. This restriction does not apply
to: (a) the purchase of debt
obligations in which the Fund may invest
consistent with its investment
objectives and policies; (b) repurchase
agreements; and (c) loans of its
portfolio securities, to the fullest extent
permitted under the 1940 Act.
6. Purchase or sell real estate, real estate
mortgages, commodities or
commodity contracts, but this restriction shall
not prevent the Fund from (a)
investing in securities of issuers engaged in
the real estate business or the
business of investing in real estate (including
interests in limited
partnerships owning or otherwise engaging in
the real estate business or the
business of investing in real estate) and
securities which are secured by real
estate or interests therein; (b) holding or
selling real estate received in
connection with securities it holds or held;
(c) trading in futures contracts
and options on futures contracts (including
options on currencies to the
extent consistent with the Funds investment
objective and policies); or (d)
investing in real estate investment trust
securities.
7. Engage in the business of underwriting
securities issued by other persons,
except to the extent that the Fund may
technically be deemed to be an
underwriter under the Securities Act of 1933,
as amended, in disposing of
portfolio securities.
8. Purchase any securities on margin (except
for such short-term credits as
are necessary for the clearance of purchases
and sales of portfolio
securities) or sell any securities short
(except "against the box"). For
purposes of this restriction, the deposit or
payment by the Fund of underlying
securities and other assets in escrow and
collateral agreements with respect
to initial or maintenance margin in connection
with futures contracts and
related options and options on securities,
indexes or similar items is not
considered to be the purchase of a security on
margin.
9. No Fund will invest in oil, gas or other
mineral leases or exploration or
development programs.
10. 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.
11. 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.
12. 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.
13. No Fund may make investments for the
purpose of exercising control of
management.
Portfolio Transactions
Decisions to buy and sell securities for each
Fund are made by the Adviser,
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 the Adviser,
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 the Adviser 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 the Adviser
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 the Adviser
in its best judgment and in a
manner deemed fair and reasonable to the Funds
shareholders. The primary
considerations of the Adviser 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 the Adviser 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 the
Adviser, and the fees of the Adviser
are not reduced as a consequence of their
receipt of the supplemental
information. The information may be useful to
the Adviser 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 the Adviser 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 the Adviser 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
11/30/97
11/30/96
California Fund
9%
15%
New York Fund
52%
67%
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) 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
SAI.
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 (the
"Distribution Agreement"), which was
approved by the Trusts Board of Trustees.
For the fiscal years ended November 30, 1995,
1996, and 1997, the Distributor
or its predecessor Shearson Lehman Brothers
received approximately 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
11/30/97
11/30/96
11/30/95
California Fund
$37,000
$39,000
$22,000
New York Fund
$46,000
48,000
32,000
For the fiscal years ended November 30, 1995,
1996, and 1997, the Distributor
or Shearson Lehman Brothers received
approximately the following representing
CDSC on redemption of each Funds Class A
shares:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/97
11/30/96
11/30/95
California Fund
$--
- --
$3,800
New York Fund
$1,000
2,000
8,000
For the fiscal years ended November 30, 1995,
1996, and 1997, the Distributor
or Shearson Lehman Brothers received
approximately the following representing
CDSC on redemption of each Funds Class C
shares:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/97
11/30/96
11/30/95
California Fund
$1,000
- --
$200
New York Fund
$1,000
- -
- -
* 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, 1997,
Smith Barney incurred
distribution expenses totaling approximately
$184,083 consisting of
approximately $16,558 for advertising, $26,243
for printing and mailing of
prospectuses, $56,767 for support services,
$83,151 to Smith Barney Financial
Consultants, and $1,334 in accruals for
interest on the excess of Smith
Barney expenses incurred in distribution of the
Funds shares over the sum of
the distribution fees and CDSC received by
Smith Barney from the Fund.
Distribution Arrangements for the New York and
California Fund
To compensate Smith Barney for the services it
provides and for the expense
it bears under the Distribution Agreement, the
Trust has adopted a services
and distribution plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act.
Under the Plan, both the New York and
California Fund pays Smith Barney a
service fee, accrued daily and paid monthly,
calculated at the annual rate of
0.15% of the value of the Funds average daily
net assets attributable to the
Funds Class A and Class C shares. In addition,
each Fund pays Smith Barney a
distribution fee with respect to the Class C
shares primarily intended to
compensate Smith Barney for its initial expense
of paying its Financial
Consultants a commission upon sales of those
shares. The Class C
distribution fee is calculated at the annual
rate of 0.20% of the value of
each Funds average net assets attributable to
the shares of the Class.
The following service and distribution fees
were incurred during the periods
indicated:
SERVICE FEES
California Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/97
11/30/96
11/30/95
Class A
37,151
$37,644
$36,511
Class C
4,112
3,583
1,017
New York Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/97
11/30/96
11/30/95
Class A
72,443
$76,380
$84,263
Class C*
2,468
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
11/30/97
11/30/96
11/30/95
Class C
5,484
$4,778
$1,356
New York Fund:
Year
Year
Ended
Ended
11/30/97
11/30/96
11/30/95*
Class C
$3,290
$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, 1995,
1996 and 1997 Smith Barney,
received $123,621, $125,117, and $124,948
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, Martin Luther
King, Jr. Day, Presidents Day, Good Friday,
Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or
subsequent Monday when one of these holidays
falls on a Saturday or Sunday,
respectively. Because of the differences in
distribution fees and Class-
specific expenses, the per share net asset
value of each Class may differ.
The following is a description of the
procedures used by the Trust in valuing
its assets.
In carrying out valuation policies adopted by
the Trusts Board of Trustees
for the New York and California Fund the
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
the Adviser 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, 1997 for California Funds
Class A, Class C and Class Y shares were 6.13
%, 5.92% and 6.52%,
respectively. The yields for the 30-day period
ended November 30, 1997 for
New York Funds Class A and Class C shares were
6.46% and 6.27%, respectively.
The equivalent taxable yields for the 30-day
period ended November 30, 1997
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: 4.65%, 4.54% and 4.62%,
respectively, and New York Funds
Class A and Class C shares: 4.61% and 4.5%,
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, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
6.13%
New York Fund
6.23%
The Funds average annual total return for Class
C shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
5.92%
New York Fund*
6.00%
* 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, 1997
Total Return
Fund
(Without Sales Charge)
California Fund
8.36%
New York Fund
7.83%
The Funds average annual total return for Class
Y shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales Charge)
California Fund*
6.20%
* For the period from September 8, 1995
(inception date) to November 30,
1997.
** As of November 30, 1997, 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, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
6.13%
New York Fund
6.23%
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(DECEMBER 31, l991)THROUGH NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
45.21%
New York Fund
45.73%
The Funds aggregate total return for Class C
shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
5.92%
New York Fund*
6.00%
* For the period from December 5, 1994
(inception date) to November 30, l997
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(NOVEMBER 8, 1994) THROUGH NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
27.90%
New York Fund
25.36%
The Funds aggregate total return for Class Y
shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales Charge)
California Fund
15.01%
* For the period from September 8, 1995
(inception date) to November 30,
l997.
** As of November 30, 1997, 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.
Each Fund has qualified and intends tocontinue
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 if the environment tax is reinstated
as proposed by President
Clinton. 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.
If a shareholder incurs a sales charge in
acquiring shares of the Fund,
disposes of those shares within 90 days and
then acquires shares in mutual
fund for which the otherwise applicable sales
charge is reduced by reason of
an reinvestment right (that is exchange
privilege), the original sales charge
will not be taken into account in computing
gain/loss on the original shares
to the extent the subsequent sales charge is
reduced. Instead, it will be
added to the tax basis in the newly acquired
shares. Furthermore, the same
rule also applies to disposition of the newly
acquired or redeemed shares
made within 90 days of the second acquisition.
This provision prevents a
shareholder from immediately deducting the
sales charge by shifting his or
her investment in a family of mutual funds.
Investors considering buying shares of 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 Funds 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 Report for the fiscal year
ended November 30, 1997 is
incorporated herein by reference in its
entirety.
APPENDIX
RATINGS ON DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moodys Investors Service, Inc.
Aaa - Bonds that are 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 edged. 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 that are 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 that 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 that suggest a
susceptibility to impairment sometime
in the future.
Baa - Bonds that are rated "Baa" are
considered as medium grade
obligations, i.e., 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.
Ba - Bonds which are rated Ba are judged
to have speculative elements;
their future cannot be considered as well
assured. Often the protection of
interest and principal payments may be very
moderate and thereby not well
safeguarded during both good and bad times over
the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally
lack characteristics of the
desirable investment. Assurance of interest and
principal payments or of
maintenance of other terms of the contract over
any long period of time may
be small.
Caa - Bonds which are rated Caa are of
poor standing. Such issues may
be in default or there may be present elements
of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent
obligations which are
speculative in a high degree. Such issues are
often in default or have other
marked shortcomings.
C - Bonds which are rated C are the
lowest class of bonds and issues so
rated can be regarded as having extremely poor
prospects of ever attaining
any real investment standing.
Note: 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.
Standard & Poors
AAA - Debt rated AAA has the highest
rating assigned by Standard &
Poors. Capacity to pay interest and repay
principal is extremely strong.
AA - Debt rated AA has a very strong
capacity to pay interest and
repay principal and differs from the highest
rated issues only in small
degree.
A - Debt rated A has a strong capacity
to pay interest and repay
principal although it is somewhat more
susceptible to the adverse effects of
changes in circumstances and economic
conditions than debt in higher rated
categories.
BBB - Debt rated "BBB" is regarded as
having an adequate capacity to
pay interest and repay principal. Whereas it
normally exhibits 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.
BB, B, CCC, CC, C - Debt rated `BB', `B',
`CCC', `CC' or `C' is
regarded, on balance, as predominantly
speculative with respect to capacity
to pay interest and repay principal in
accordance with the terms of the
obligation. `BB' indicates the lowest degree of
speculation and `C' the
highest degree of speculation. While such debt
will likely have some quality
and protective characteristics, these are
outweighed by large uncertainties
or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from
`AA' to `B' may be modified by
the addition of a plus or minus sign to show
relative standing within the
major rating categories.
Provisional Ratings: The letter "p"
indicates that the rating is
provisional. A provisional rating assumes the
successful completion of the
project being financed by the debt being rated
and indicates that payment of
debt service requirements is largely or
entirely dependent upon the
successful and timely completion of the
project. This rating, however, while
addressing credit quality subsequent to
completion of the project, makes no
comment on the likelihood of, or the risk of
default upon failure of, such
completion. The investor should exercise
judgment with respect to such
likelihood and risk.
L - The letter "L" indicates that the
rating pertains to the principal
amount of those bonds where the underlying
deposit collateral is fully
insured by the Federal Savings & Loan Insurance
Corp. or the Federal Deposit
Insurance Corp.
+ - Continuance of the rating is
contingent upon S&P's receipt of
closing documentation confirming investments
and cash flow.
* - Continuance of the rating is
contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been
requested, that there is insufficient
information on which to base a rating, or that
S&P does not rate a particular
type of obligation as a matter of policy.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the
lowest expectation of credit
risk. The obligor has an exceptionally strong
capacity for timely payment of
financial commitments which is highly unlikely
to be adversely affected by
foreseeable events.
AA - Bonds rated AA by Fitch have a very
low expectation of credit
risk. They indicate very strong capacity for
timely payment of financial
commitment. This capacity is not significantly
vulnerable to foreseeable
events.
A - Bonds rated A by Fitch are considered
to have a low expectation of
credit risk. The capacity for timely payment of
financial commitments is
considered to be strong, but may be more
vulnerable to changes in economic
conditions and circumstances than bonds with
higher ratings.
BBB - Bonds rated BBB by Fitch currently
have a low expectation of
credit risk. The capacity for timely payment of
financial commitments is
considered to be adequate. Adverse changes in
economic conditions and
circumstances, however, are more likely to
impair this capacity. This is the
lowest investment grade category assigned by
Fitch.
BB - Bonds rated BB by Fitch carry the
possibility of credit risk
developing, particularly as the result of
adverse economic change over time.
Business or financial alternatives may,
however, be available to allow
financial commitments to be met. Securities
rated in this category are not
considered by Fitch to be investment grade.
B - Bonds rated B by Fitch carry
significant credit risk, however, a
limited margin of safety remains. Although
financial commitments are
currently being met, capacity for continued
payment depends upon a sustained,
favorable business and economic environment.
CCC, CC, C - Default on bonds rated
CCC,CC, and C by Fitch is a real
possibility. The capacity to meet financial
commitments depends solely on a
sustained, favorable business and economic
environment. Default of some kind
on bonds rated CC appears probable, a C rating
indicates imminent default.
Plus and minus signs are used by Fitch to
indicate the relative
position of a credit within a rating category.
Plus and minus signs however,
are not used in the AAA category.
COMMERCIAL PAPER RATINGS
Moodys Investors Service, Inc.
Issuers rated "Prime-1" (or related
supporting institutions) have a
superior capacity for repayment of short-term
promissory obligations. Prime-1
repayment will normally be evidenced by the
following characteristics:
leading market positions in well-established
industries; high rates of return
on funds employed; conservative capitalization
structures with moderate
reliance on debt and ample asset protection;
broad margins in earnings
coverage of fixed financial changes and high
internal cash generation; well-
established access to a range of financial
markets and assured sources of
alternate liquidity.
Issuers rated "Prime-2" (or related
supporting institutions) have
strong capacity for repayment of short-term
promissory obligations. This will
normally be evidenced by many of the
characteristics cited above 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 alternate
liquidity is maintained.
Standard & Poor's
A-1 - This designation indicates that the
degree of safety regarding
timely payment is either overwhelming or very
strong. Those issuers
determined to possess overwhelming safety
characteristics will be denoted
with a plus (+) sign designation.
A-2 - Capacity for timely payment on
issues with this designation is
strong. However, the relative degree of safety
is not as high as for issues
designated A-1.
Fitch IBCA, Inc.
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
financial commitment in a
timely manner.
Fitchs short-term ratings are as
follows:
F1+ - Issues assigned this rating are
regarded as having the strongest
capacity for timely payments of financial
commitments. The + denotes an
exceptionally strong credit feature.
F1 - Issues assigned this rating are
regarded as having the strongest
capacity for timely payment of financial
commitments.
F2 - Issues assigned this rating have a
satisfactory capacity for
timely payment of financial commitments, but
the margin of safety is not as
great as in the case of the higher ratings.
F3 - The capacity for the timely payment
of financial commitments is
adequate; however, near-term adverse changes
could result in a reduction to
non investment grade.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty
of timely payment: short-term
liquidity is clearly outstanding, and safety is
just below risk-free United
States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of
timely payment.
Duff 2 - Indicates a good certainty of
timely payment: liquidity
factors and company fundamentals are sound.
The Thomson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of
likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - While the degree of safety
regarding timely repayment of
principal and interest is strong, the relative
degree of safety is not as
high as for issues rated TBW-1.
Smith Barney
Investment
Trust
SMITH BARNEY
INVESTMENT TRUST
388 Greenwich Street
New York, NY 10013
SMITH BARNEY
A Member of Travelers Group
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