As filed with the Securities and Exchange Commission on March 30, 1998
Securities Act Registration No. 33 -43446
Investment Company Act Registration No. 811-6444
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 18 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 18
__________________ [ ]
Smith Barney Investment Trust
(a Massachusetts Business Trust)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 816-6474
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Smith Barney Investment Trust
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
_______________
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate
box):
[X] Immediately upon filing pursuant to [ ] On (date) pursuant to
paragraph (b)
paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(2) paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates
a new effective date for a previously filed
post effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
SMITH BARNEY INVESTMENT TRUST
FORM N-1A
CONTENTS OF REGISTRATION STATEMENT
Front Cover
Contents Page
Cross Reference Sheet
Part A:
PROSPECTUS
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
SMITH BARNEY INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND
SMITH BARNEY LARGE CAPITALIZATION GROWTH FUND
Part B:
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
SMITH BARNEY INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND
SMITH BARNEY LARGE CAPITALIZATION GROWTH FUND
Part C: Other Information
SMITH BARNEY INVESTMENT TRUST
FORM N-1A
CROSS-REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and Management Policies;
Additional Information
5. Management of the Fund
Management of the Trust and the
Fund; Distributor; Additional
Information; Annual Report
6. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares; Valuation of
Shares; Exchange Privilege;
Redemption of Shares; Minimum
Account Size; Distributor;
Additional Information
8. Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Pending Legal Proceedings
Not applicable
Part B Item No.
Statement of Additional
Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Table of Contents
12. General Information and
History
Distributor; Additional
Information
13. Investment Objective and
Policies
Investment Objectives and
Management Policies
14. Management of the Fund
Management of the Trust and the
Funds; Distributor
15. Control Persons and Principal
Holders of Securities
Management of the Trust and the
Funds
16. Investment Advisory and Other
Services
Management of the Trust and the
Funds; Distributor
17. Brokerage Allocation and Other
Services
Investment Objectives and
Management Policies; Distributor
18. Capital Stock and Other
Securities
Investment Objectives and
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing of Securities Being Offered
Purchase of Shares; Redemption of
Shares; Valuation of Shares;
Distributor; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
PART A
PROSPECTUS
As filed with the Securities and Exchange Commission on March 30, 1998
Securities Act Registration No. 33 -43446
Investment Company Act Registration No. 811-6444
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 18 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 18
__________________ [ ]
Smith Barney Investment Trust
(a Massachusetts Business Trust)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 816-6474
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Smith Barney Investment Trust
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
_______________
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate
box):
[X] Immediately upon filing pursuant to [ ] On (date) pursuant to
paragraph (b)
paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(2) paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates
a new effective date for a previously filed
post effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
SMITH BARNEY INVESTMENT TRUST
FORM N-1A
CONTENTS OF REGISTRATION STATEMENT
Front Cover
Contents Page
Cross Reference Sheet
Part A:
PROSPECTUS
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
SMITH BARNEY INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND
SMITH BARNEY LARGE CAPITALIZATION GROWTH FUND
Part B:
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
SMITH BARNEY INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND
SMITH BARNEY
Part C: Other Information
SMITH BARNEY INVESTMENT TRUST
FORM N-1A
CROSS-REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and Management Policies;
Additional Information
5. Management of the Fund
Management of the Trust and the
Fund; Distributor; Additional
Information; Annual Report
6. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares; Valuation of
Shares; Exchange Privilege;
Redemption of Shares; Minimum
Account Size; Distributor;
Additional Information
8. Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Pending Legal Proceedings
Not applicable
Part B Item No.
Statement of Additional
Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Table of Contents
12. General Information and
History
Distributor; Additional
Information
13. Investment Objective and
Policies
Investment Objectives and
Management Policies
14. Management of the Fund
Management of the Trust and the
Funds; Distributor
15. Control Persons and Principal
Holders of Securities
Management of the Trust and the
Funds
16. Investment Advisory and Other
Services
Management of the Trust and the
Funds; Distributor
17. Brokerage Allocation and Other
Services
Investment Objectives and
Management Policies; Distributor
18. Capital Stock and Other
Securities
Investment Objectives and
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing of Securities Being Offered
Purchase of Shares; Redemption of
Shares; Valuation of Shares;
Distributor; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
PART A
PROSPECTUS
P R O S P E C T U S
SMITH BARNEY
Intermediate
Maturity
California
Municipals
Fund
MARCH 30, 1998
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE
EVERYDAY.
<PAGE>
PROSPECTUS MARCH 30, 1998
Smith Barney Intermediate Maturity
California Municipals Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Smith Barney Intermediate Maturity California Municipals Fund (the "Fund")
seeks to provide California investors with as high a level of current income
exempt from Federal income taxes and California State personal income taxes as
is consistent with the preservation of principal. The Fund invests primarily in
investment grade obligations issued by the State of California and its politi-
cal subdivisions, agencies and public authorities. The Fund is one of a number
of funds, each having distinct investment objectives and policies making up the
Smith Barney Investment Trust (the "Trust"). The Trust is an open-end manage-
ment investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of the other funds offered by the Trust are described
in separate prospectuses which may be obtained by calling or writing the Trust
at the telephone number or address set forth above or by contacting a Smith
Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information (the "SAI") dated March 30, 1998, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The SAI has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 12
- -------------------------------------------------
VALUATION OF SHARES 26
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 26
- -------------------------------------------------
PURCHASE OF SHARES 29
- -------------------------------------------------
EXCHANGE PRIVILEGE 35
- -------------------------------------------------
REDEMPTION OF SHARES 37
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 40
- -------------------------------------------------
PERFORMANCE 40
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 41
- -------------------------------------------------
DISTRIBUTOR 42
- -------------------------------------------------
ADDITIONAL INFORMATION 43
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentations in connection with this offering other than those contained in this
Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the distribu-
tor. This Prospectus does not constitute an offer by the Fund or the distribu-
tor to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such an
offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed informa-
tion appearing elsewhere in this Prospectus and in the SAI. Cross references
in this summary are to headings in this Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund seeks to provide California investors with as
high a level of current income exempt from Federal income taxes and California
State personal income taxes as is consistent with the preservation of princi-
pal. The Fund invests primarily in investment grade obligations issued by the
State of California and its political subdivisions, agencies and public
authorities. The weighted average maturity of the Fund's portfolio securities
will normally not be less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally invest
will be no greater than 20 years. See "Investment Objective and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which differ
principally in terms of sales charges and rates of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of $15,000,000. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of the
average daily net assets of the Class. The initial sales charge may be waived
for certain purchases. Purchases of Class A shares of $500,000 or more will be
made at net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within
12 months of purchase. See "Prospectus Summary--No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.20% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Fund shares, which, when
combined with current holdings of Class C shares of the Fund, equal or exceed
$500,000 in the aggregate should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net
asset value
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
with no initial sales charge or CDSC. They are not subject to any service or
distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charge and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class C shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any con-
version rights of the classes in the context of their own investment time
frame.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more, will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The $500,000 investment may be met by adding the
purchase to the net asset value of all Class A shares offered with a sales
charge held in funds sponsored by Smith Barney Inc. ("Smith Barney") listed
under "Exchange Privilege." See "Purchase of Shares." Because the ongoing
expenses of Class A shares may be lower than those for Class C shares, pur-
chasers eligible to purchase Class A shares at net asset value should consider
doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for each Class of shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences among the Classes of
shares.
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney. Shares may also be purchased through a broker that
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund through
the Fund's transfer agent, First Data Investor Services Group, Inc. ("First
Data"). See "'Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class C shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. The minimum investment requirements for purchases of Fund shares through
the Systematic Investment Plan are described below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A and Class C shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the
Systematic Investment Plan on a monthly basis is $25 and on a quarterly basis
is $50. See "Purchase of Shares."
REDEMPTION OF SHA 1998 as Accession Number 91155-98-000062.
Included in Part C:
Consent of Independent Accountants is filed herewith.
(b) Exhibits
Unless otherwise noted, all references are to the Registrants
Registration Statement on Form N-1A (the Registration Statement") as filed
with the Securities and Exchange Commission ("SEC") on October 21,
1991 (File Nos. 33-43446 and 811-6444).
(1)(a) Registrants Master Trust Agreement dated October 17, 1991 and
Amendments to the Master Trust Agredings is a wholly owned subsidiary
of Travelers Group Inc. ("Travelers"), a diversified financial services hold-
ing company engaged, through its subsidiaries, principally in four business
segments: Investment Services including Asset Management, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from net investment
income. Distributions of net realized capital gains, if any, are paid annual-
ly. See "Dividends, Distributions and Taxes."
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by reinvestments will not be subject to any sales charge or
CDSC. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund will achieve its investment objective. Shares of the Fund, unlike certain
bank deposit accounts, are not guaranteed or insured by any Federal or state
authority. Changes in interest rates generally will result in increases or
decreases in the market value of the obligations held by the Fund. The yield
of the Fund may not be as high as those of other funds that invest in lower
quality and/or longer term securities. The Fund is not a tax-exempt money mar-
ket fund and therefore its investment portfolio can be expected to experience
greater volatility than that of a tax-exempt money market fund. The net asset
value of the Fund will be subject to greater fluctuation to the extent that
the Fund invests in zero coupon securities. The Fund's net asset value per
share will fluctuate depending on a combination of factors such as current
market interest rates and the creditworthiness of the issuers in whose securi-
ties the Fund invests. The Fund will not invest in obligations that are rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB by Standard
& Poor's Ratings Group ("S&P") or BBB by Fitch IBCA, Inc. ("Fitch"), at the
time of purchase. The ratings of Moody's, S&P and Fitch represent their opin-
ions as to the quality of the obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
The Fund may invest up to 20% of its total assets in unrated securities that
the Adviser determines to be of comparable quality to the securities rated
investment grade in which the Fund may invest. Dealers may not maintain daily
markets in unrated securities and retail secondary markets for many of them
may not exist; lack of markets may affect the Fund's ability to sell these
securities when the Adviser deems it appropriate. The Fund has the right to
invest without limitation in state and local obligations that are "private
activity bonds," the income from which may be taxable as a specific preference
item for purposes of the Federal alternative minimum tax. Thus, the Fund may
not be a suitable investment for investors who are subject to the alternative
minimum tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks.
The instruments exposing the Fund to risks are municipal leases, zero coupon
securities, custodial receipts, municipal obligation components, floating and
variable rate demand notes and bonds, and participation interests. Entering
into securities transactions on a when-issued or delayed-delivery basis are
investment techniques involv- ing risks to the Fund. See "Investment Objective
and Management Policies--
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Investment Techniques--Risk Factors and Special Considerations" and "Dividends,
Distributions and Taxes."
Investment in the Fund which is classified as a non-diversified fund, may
present a greater risk than an investment in a diversified fund. See "Invest-
ment Objective and Management Policies--Risk Factors and Special Considera-
tions." Investment in the Fund involves risks and special considerations appli-
cable to the State of California. See "Investment Objective and Management Pol-
icies--Risk Factors and Special Considerations."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based upon the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and the Fund's operating expenses for its
most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND CLASS A CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) None* 1.00% None
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES***
(as a percentage of average net assets)
Management fees (after fee waivers) 0.12% 0.12% 0.12%
12b-1 fees** 0.15 0.35 --
Other expenses 0.48 0.49 0.44
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(after waivers) 0.75% 0.96% 0.56%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but may be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Class C shares are subject to an ongoing distribution fee and, as a result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
*** "Other expenses" have been restated to reflect the reimbursement
percentages currently in effect for the Fund. During the fiscal year ended
November 30, 1997, the Fund's investment adviser and administrator
voluntarily waived portions of its fees and reimbursed the Fund for other
expenses in the aggregate amount equal to 0.37% of the value of the Fund's
average daily net assets thereby decreasing the amount paid in respect of
management fees to 0.00% of the value of the Funds average daily net
assets. This had the effect of lowering the Fund's overall expenses and
increasing the returns available to investors. If MMC had elected not to
waive fees and reimburse expenses, the Fund's total operating expenses for
Class A, Class C and Class Y shares for the fiscal year ended November 30,
1997 would have been 1.12%, 1.33% and 0.94%, respectively, of the value of
the Fund's average daily net assets. As of November 17, 1995, the Fund's
investment advisory fee was decreased from 0.35% to 0.30% of the average
daily net assets of the Fund.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class A shares of the Fund purchased through the Smith Barney Asset One Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors actu-
ally may pay lower or no charges, depending on the amount purchased. See "Pur-
chase of Shares" and "Redemption of Shares." Smith Barney receives an annual
12b-1 service fee of 0.15% of the value of average daily net assets of Class A
shares. For Class C shares, Smith Barney receives an annual 12b-1 fee of 0.35%
of the value of average daily net assets of this Class, consisting of a 0.20%
distribution fee and a 0.15% service fee. "Other expenses" in the above table
includes fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each
time period:
Class A...................................... $28 $43 $61 $111
Class C...................................... 20 31 53 118
Class Y...................................... 6 18 31 70
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A...................................... $28 $43 $61 $111
Class C...................................... 10 31 53 118
Class Y...................................... 6 18 31 70
- ----------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report thereon appears in the Funds Annual Report
dated November 30, 1997. The following information for the period ended Novem-
ber 30, 1992 and for the fiscal years ended November 30, 1993 and November 30,
1994 has been audited by other auditors. This information should be read in
conjunction with the financial statements and related notes that also appear
in the Fund's Annual Report to shareholders, which is incorporated by refer-
ence into the SAI.
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS A SHARES 1997 1996 1995 1994 1993 1992(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $8.55 $8.53 $7.80 $8.50 $8.04 $7.90
- --------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income(1) 0.40 0.40 0.40 0.39 0.39 0.35
Net realized and
unrealized gain (loss) 0.11 0.02 0.73 (0.69) 0.46 0.14
- --------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.51 0.42 1.13 (0.30) 0.85 0.49
- --------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.40) (0.40) (0.40) (0.39) (0.39) (0.35)
Net realized gains -- -- -- (0.01) -- --
- --------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.40) (0.40) (0.40) (0.39) (0.35)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $8.66 $8.55 $8.53 $7.80 $8.50 $8.04
- --------------------------------------------------------------------------------------------
TOTAL RETURN(P) 6.13% 5.05% 14.84% (3.65)% 10.70% 6.33%++
- --------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $25,630 $24,537 $26,211 $25,359 $32,514 $10,667
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(2) 0.75% 0.77% 0.75% 0.75% 0.72% 0.65%+
Net investment income 4.65 4.69 4.89 4.73 4.45 4.81+
- --------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 9% 15% 8% 39% 16% 46%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from December 31, 1991 (inception date) to November 30,
1992.
(2) The investment adviser and administrator waived all or part of their fees
for the five years ended November 30, 1997. In addition, the investment
adviser reimbursed the Fund for $75,189 in expenses for the year ended
November 30, 1996. If such fees had not been waived and expenses had not
been reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES TO WITHOUT FEE WAIVERS
NET INVESTMENT INCOME AND REIMBURSEMENTS
----------------------------------- ------------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class
A $0.03 $0.07 $0.03 $0.04 $0.07 $0.11 1.12% 1.54% 1.16% 1.24% 1.49% 2.18%+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
(P)Total Return does not reflect deduction of any applicable sales charge.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS C SHARES 1997 1996 1995 1994(1)
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.54 $8.52 $7.80 $7.76
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.38 0.38 0.38 0.01
Net realized and unrealized gain 0.11 0.02 0.72 0.05**
- ---------------------------------------------------------------------
Total Income From Operations 0.49 0.40 1.10 0.06
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.38) (0.38) (0.38) (0.02)
- ---------------------------------------------------------------------
Total Distributions (0.38) (0.38) (0.38) (0.02)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.65 $8.54 $8.52 $7.80
- ---------------------------------------------------------------------
TOTAL RETURN(P) 5.92% 4.84% 14.36% 0.72%++
- ---------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $3,419 $2,607 $2,254 $45
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.96% 0.98% 0.98% 0.95%+
Net investment income 4.44 4.48 4.54 4.53+
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 9% 15% 8% 39%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from November 8, 1994 (inception date) to November 30,
1994.
(2) The investment adviser and administrator waived all or part of their fees
for the three years ended November 30, 1997 and the period ended November
30, 1994. In addition, the investment adviser reimbursed the Fund for
$75,189 in expenses for the year ended November 30, 1996. If such fees had
not been waived and expenses had not been reimbursed, the per share effect
on net investment income and the expense ratios would have been as
follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES TO WITHOUT FEE WAIVERS
NET INVESTMENT INCOME AND REIMBURSEMENTS
----------------------- ------------------------
1997 1996 1995 1994 1997 1996 1995 1994
----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class C $0.03 $0.07 $0.03 $0.00* 1.33% 1.75% 1.39% 1.44%+
</TABLE>
* Amount represents less than $0.01 per share.
** The amount in this caption for each share outstanding throughout the period
may not accord with the change in aggregate gains and losses in the
portfolio securities for the period because of the timing of purchases and
withdrawals of shares in relation to the fluctuating market values of the
portfolio.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
(P)Total Return does not reflect deduction of any applicable sales charge.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS Y SHARES 1997 1996 1995 (1)
- -----------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.56 $8.54 $8.39
- -----------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.41 0.41 0.09
Net realized and unrealized gain 0.11 0.02 0.15
- -----------------------------------------------------------
Total Income From Operations 0.52 0.43 0.24
- -----------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.42) (0.41) (0.09)
- -----------------------------------------------------------
Total Distributions (0.42) (0.41) (0.09)
- -----------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.66 $8.56 $8.54
- -----------------------------------------------------------
TOTAL RETURN 6.20% 5.22% 2.92%++
- -----------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $292 $274 $261
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.56% 0.59% 0.58%+
Net investment income 4.84 4.87 4.74+
- -----------------------------------------------------------
PORTFOLIO TURNOVER RATE 9% 15% 8%
- -----------------------------------------------------------
</TABLE>
(1) For the period from September 8, 1995 (inception date) to November 30,
1995.
(2) The investment adviser and administrator waived all or part of their fees
for the two years ended November 30, 1997 and the period ended November 30,
1995. In addition, the investment adviser reimbursed the Fund for $75,189
in expenses for the year ended November 30, 1996. If such fees had not been
waived and expenses had not been reimbursed, the per share effect on net
investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASE TO WITHOUT FEE WAIVERS
NET INVESTMENT INCOME AND REIMBURSEMENTS
----------------------- ---------------------
1997 1996 1995 1997 1996 1995
------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Class Y $0.03 $ 0.07 $0.03 0.94% 1.36% 0.99%+
</TABLE>
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is to provide California investors with as
high a level of current income exempt from Federal income taxes and California
State personal income taxes as is consistent with the preservation of princi-
pal. No assurance can be given that the Fund will be able to achieve its
investment objective, which may be changed only with the approval of a major-
ity (as defined in the Investment Company Act of 1940, as amended (the "1940
Act")) of the Fund's outstanding shares.
Under normal market conditions, the Fund attempts to invest 100% of its
assets in a portfolio of investment grade debt obligations issued by or on
behalf of the State of California and other states, territories and posses-
sions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political subdivisions ("Munici-
pal Obligations"). For purposes of this Prospectus, debt obligations issued by
the State of California and its political subdivisions, agencies and public
authorities (together with certain other governmental issuers such as the Com-
monwealth of Puerto Rico), the interest from which debt obligations is, in the
opinion of bond counsel to the issuer, excluded from gross income for Federal
income tax purposes and exempt from California State personal income tax, are
defined as "California Exempt Obligations." The Fund will operate subject to a
fundamental investment policy providing that, under normal market conditions,
the Fund will invest at least 80% of its net assets in California Exempt Obli-
gations rated investment grade.
The Fund is classified as a non-diversified fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax and California State franchise tax to the extent that its earnings
are distributed to shareholders. To qualify as a regulated investment company,
the Fund will, among other things, limit its investments so that, at the close
of each quarter of the taxable year (a) not more than 25% of the market value
of the Fund's total assets will be invested in the securities of a single
issuer and (b) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer.
The Fund will invest at least 80% of its total assets in California Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moodys, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20%
of the Fund's total assets may be invested in unrated securities that are
deemed by
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the Adviser to be of a quality comparable to investment grade. The Fund will
not invest in California Exempt Obligations that are rated lower than invest-
ment grade at the time of purchase. Although California Exempt Obligations
rated Baa by Moody's, BBB by S&P or BBB by Fitch are considered to be invest-
ment grade, they may be viewed as being subject to greater risks than other
investment grade securities. California Exempt Obligations rated Baa by
Moody's, for example, are considered medium grade obligations that lack out-
standing investment characteristics and have speculative characteristics as
well. California Exempt Obligations rated BBB by S&P are regarded as having an
adequate capacity to pay principal and interest. California Exempt Obligations
rated BBB by Fitch are deemed to be subject to a higher likelihood that their
rating will fall below investment grade than higher rated bonds.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the California Exempt Obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
The Adviser's judgment as to credit quality of a California Exempt Obligation,
thus, may differ from that suggested by the ratings published by a rating serv-
ice. A description of Moody's, S&P and Fitch ratings relevant to the Fund's
investments is included as an Appendix to the SAI. The policies of the Fund
described above as to ratings of portfolio investments will apply only at the
time of the purchase of a security, and the Fund will not be required to dis-
pose of a security in the event Moody's, S&P or Fitch downgrades its assessment
of the credit characteristics of the security's issuer.
California Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenue derived from a partic-
ular facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general tax-
ing power. Notes are short-term obligations of issuing municipalities or agen-
cies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. California Exempt Obligations bear fixed, floating
and variable rates of interest, and variations exist in the security of Cali-
fornia Exempt Obligations, both within a particular classification and between
classifications.
The yields on, and values of, California Exempt Obligations are dependent on
a variety of factors, including general economic and monetary conditions, con-
ditions in the California Exempt Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently,
California Exempt Obligations with the same maturity, coupon and rating may
have different yields or values, whereas obligations of the same maturity and
coupon with different ratings
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
may have the same yield or value. See "Risk Factors and Special Considera-
tions--California Exempt Obligations."
Issuers of California Exempt Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
the obligations or upon the ability of municipalities to levy taxes. The possi-
bility also exists that, as a result of litigation or other conditions, the
power or ability of any issuer to pay, when due, the principal of, and interest
on, its obligations may be materially affected.
MATURITY OF OBLIGATIONS HELD BY THE FUND
The Adviser believes that the Fund may offer an attractive investment oppor-
tunity for investors seeking a higher effective tax yield than a tax-exempt
money market fund or a tax-exempt short-term bond fund and less fluctuation in
net asset value than a longer term tax-exempt bond fund. The Fund will normally
invest in intermediate maturity securities; the weighted average maturity of
the Fund will normally be not less than three nor more than 10 years. The maxi-
mum remaining maturity of the securities in which the Fund will normally invest
will be no greater than 20 years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in California Exempt Obligations that are
"private activity bonds," as defined in the Code, which are in most cases reve-
nue bonds. Private activity bonds generally do not carry the pledge of the
credit of the issuing municipality, but are guaranteed by the corporate entity
on whose behalf they are issued. Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance non-governmental activi-
ties is a specific tax preference item for purposes of the Federal individual
and corporate alternative minimum taxes. Individual and corporate shareholders
may be subject to a Federal alternative minimum tax to the extent the Fund's
dividends are derived from interest on these bonds. Dividends derived from
interest income on California Exempt Obligations are a "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum tax.
See "Dividends, Distributions and Taxes." Private activity bonds held by the
Fund will be included in the term California Exempt Obligations for purposes of
determining compliance with the Fund's policy of investing at least 80% of its
total assets in California Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in California Exempt Obligations that are
repayable out of revenues generated from economically related projects or
facilities
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
or debt obligations whose issuers are located in the same state. Sizable
investments in these obligations could involve an increased risk to the Fund
should any of the related projects or facilities experience financial diffi-
culties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to 10% of its net assets in illiquid securities,
which term includes securities subject to contractual or other restrictions on
resale and other instruments that lack readily available markets. In addition,
up to 5% of the value of the Fund's assets may be invested in securities of
entities that have been in continuous operation for fewer than three years.
TYPES OF CALIFORNIA EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal leases."
Municipal leases may take the form of a lease or an installment purchase con-
tract issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. Interest payments on
qualifying municipal leases are exempt from Federal income taxes and state
income taxes within the state of issuance. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. In addition
to the "non-appropriation" risk, these securities represent a relatively new
type of financing that has not yet developed the depth of marketability asso-
ciated with more conventional bonds. Although "non-appropriation" lease obli-
gations are often secured by the underlying property, disposition of the prop-
erty in the event of foreclosure might prove difficult. The Fund may invest in
municipal leases without non-appropriation clauses only when the municipality
is required to continue the lease under all circumstances except bankruptcy.
There is no limitation on the percentage of the Fund's assets that may be
invested in municipal lease obligations. In evaluating municipal lease obliga-
tions, the Adviser will consider such factors as it deems appropriate, which
may include: (a) whether the lease can be canceled; (b) the ability of the
lease obligee to direct the sale of the underlying assets; (c) the general
creditworthiness of the lease obligor; (d) the likelihood that the municipal-
ity will discontinue appropriating funding for the leased property in the
event such property is no longer considered essential by the municipality; (e)
the legal recourse of the lease obligee in the event of such a failure to
appropriate funding; (f) whether the security is backed by a credit enhance-
ment such as insurance; and
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
(g) any limitations which are imposed on the lease obligor's ability to uti-
lize substitute property or services other than those covered by the lease
obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of investment or
those issued by issuers whose senior debt is rated investment grade at the
time of investment. The Fund may acquire unrated issues that the Adviser deems
to be comparable in quality to rated issues in which the Fund is authorized to
invest. A determination that an unrated lease obligation is comparable in
quality to a rated lease obligation will be subject to oversight and approval
by the Trust's Board of Trustees.
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that the
leases are readily marketable. An unrated municipal lease with a non-appropri-
ation risk that is backed by an irrevocable bank letter of credit or an insur-
ance policy issued by a bank or insurer deemed by the Adviser to be of high
quality and minimal credit risk, will not be deemed to be illiquid solely
because the underlying municipal lease is unrated, if the Adviser determines
that the lease is readily marketable because it is backed by the letter of
credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in zero
coupon California Exempt Obligations. Zero coupon California Exempt Obliga-
tions are generally divided into two categories: pure zero obligations, which
are those that pay no interest for their entire life and zero/fixed obliga-
tions, which pay no interest for some initial period and thereafter pay inter-
est currently. In the case of a pure zero obligation, the failure to pay
interest currently may result from the obligation's having no stated interest
rate, in which case the obligation pays only principal at maturity and is
issued at a discount from its stated principal amount. A pure zero obligation
may, in the alternative, provide for a stated interest rate, but provide that
no interest is payable until maturity, in which case accrued, unpaid interest
on the obligation may be capitalized as incremental principal. The value to
the investor of a zero coupon California Exempt Obligation consists of the
economic accretion either of the difference between the purchase price and the
nominal principal amount (if no interest is stated to accrue) or of accrued,
unpaid interest during the California Exempt Obligation's life or payment
deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on certain California Exempt
Obligations. The underwriter of these certificates or receipts typically pur-
chases California Exempt Obligations and deposits the obligations in an irrev-
ocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Custodial
receipts evidencing specific coupon or
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
principal payments have the same general attributes as zero coupon California
Exempt Obligations described above. Although under the terms of a custodial
receipt the Fund would be typically authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the under-
lying issuer. Thus, in the event the underlying issuer fails to pay principal
and/or interest when due, the Fund may be subject to delays, expenses and risks
that are greater than those that would have been involved if the Fund had pur-
chased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a non-
taxable entity, the yield on the underlying security would be reduced in recog-
nition of any taxes paid.
California Exempt Obligation Components. The Fund may invest in California
Exempt Obligations, the interest rate on which has been divided by the issuer
into two different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction Component")
pays an interest rate that is reset periodically through an auction process,
whereas the second of the components (the "Residual Component") pays a residual
interest rate based on the difference between the total interest paid by the
issuer on the California Exempt Obligation and the auction rate paid on the
Auction Component. The Fund may purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is generally
determined by subtracting the interest rate paid to the holders of Auction Com-
ponents from a fixed amount, the interest rate paid to Residual Component hold-
ers will decrease as the Auction Component's rate increases and increase as the
Auction Component's rate decreases. Moreover, the magnitude of the increases
and decreases in market value of Residual Components may be larger than compa-
rable changes in the market value of an equal principal amount of a fixed rate
California Exempt Obligation having similar credit quality, redemption provi-
sions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating and
variable rate demand notes and bonds, which are California Exempt Obligations
normally having a stated maturity in excess of one year, but which permit their
holder to demand payment of principal at any time, or at specified intervals.
The maturity of a floating or variable rate demand note or bond will be deemed
shortened by virtue of a demand feature for purposes of calculating the Fund's
net asset value or determining its weighted average maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the out-
standing principal amount of the obligations plus accrued interest upon a spec-
ified number of
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
days' notice to the holders of these obligations. The interest rate on a float-
ing rate demand obligation is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time that rate is adjusted. The
interest rate on a variable rate demand obligation is adjusted automatically at
specified intervals. Frequently, floating and variable rate obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Use of letters of credit or other credit support arrangements will not
adversely affect the tax-exempt status of these obligations. Because they are
direct lending arrangements between the lender and borrower, floating and vari-
able rate obligations will generally not be traded. In addition, no secondary
market generally exists for these obligations, although their holders may
demand their payment at face value. For these reasons, when floating and vari-
able rate obligations held by the Fund are not secured by letters of credit or
other credit support arrangements, the Fund's right to demand payment is depen-
dent on the ability of the borrower to pay principal and interest on demand.
The Adviser, on behalf of the Fund, will consider on an ongoing basis the cred-
itworthiness of the issuers of floating and variable rate demand obligations
held by the Fund.
Participation Interests. The Fund may purchase from financial institutions
tax-exempt participation interests in California Exempt Obligations. A partici-
pation interest gives the Fund an undivided interest in the California Exempt
Obligation in the proportion that the Fund's participation interest bears to
the total amount of the California Exempt Obligation. These instruments may
have floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Trust's Board of Trustees has determined meets certain quality
standards, or the payment obligation otherwise will be collateralized by obli-
gations of the United States government or its agencies and instrumentalities
("U.S. government securities"). The Fund will have the right, with respect to
certain participation interests, to demand payment, on a specified number of
days' notice, for all or any part of the Fund's interest in the California
Exempt Obligation, plus accrued interest. The Fund intends to exercise its
right with respect to these instruments to demand payment only upon a default
under the terms of the California Exempt Obligation or to maintain or improve
the quality of its investment portfolio.
Financial Futures and Options Transactions. To hedge against a decline in the
value of Municipal Bonds it owns or an increase in the price of Municipal Bonds
it proposes to purchase, the Fund may enter into financial futures contracts
and invest in options on financial futures contracts that are traded on a
domestic exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Bonds or relate to debt
securities the prices of which are anticipated by the Adviser to correlate with
the prices of the Municipal Bonds owned or to be purchased by the Fund.
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
In entering into a financial futures contract, the Fund will be required to
deposit with the broker through which it undertakes the transaction an amount
of cash or cash equivalents equal to approximately 5% of the contract amount.
This amount, which is known as "initial margin," is subject to change by the
exchange or board of trade on which the contract is traded, and members of the
exchange or board of trade may charge a higher amount. Initial margin is in
the nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. In accordance with a process
known as "marking-to-market," subsequent payments, known as "variation mar-
gin," to and from the broker will be made daily as the price of the index or
securities underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable. At any time
prior to the expiration of a futures contract, the Fund may elect to close the
position by taking an opposite position, which will operate to terminate the
Fund's existing position in the contract.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at
a specified price, date, time and place. Unlike the direct investment in a
futures contract, an option on a financial futures contract gives the pur-
chaser the right, in return for the premium paid, to assume a position in the
financial futures contract at a specified exercise price at any time prior to
the expiration date of the option. Upon exercise of an option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account, which represents the amount by which the market price
of the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of an option on financial futures
contracts is limited to the premium paid for the option (plus transaction
costs). The value of the option may change daily and that change would be
reflected in the net asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options
on financial futures contracts be engaged in for bona fide hedging purposes,
or if the Fund enters into futures contracts for speculative purposes, that
the aggregate initial margin deposits and premiums paid by the Fund will not
exceed 5% of the market value of its assets. In addition, the Fund will, with
respect to its purchases of financial futures contracts, establish a segre-
gated account consisting of cash or cash equivalents in an amount equal to the
total market value of the futures contracts, less the amount of initial margin
on deposit for the contracts. The Fund's ability to trade in financial futures
contracts and options on financial futures contracts may be limited to some
extent by the requirements of the Internal Revenue Code of 1986,
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
as amended (the "Code"), applicable to a regulated investment company that are
described below under "Dividends, Distributions and Taxes."
Although the Fund intends to enter into financial futures contracts and
options on financial futures contracts that are traded on a domestic exchange
or board of trade only if an active market exists for those instruments, no
assurance can be given that an active market will exist for them at any partic-
ular time. If closing a futures position in anticipation of adverse price move-
ments is not possible, the Fund would be required to make daily cash payments
of variation margin. In those circumstances, an increase in the value of the
portion of the Fund's investments being hedged, if any, may offset partially or
completely losses on the futures contract. No assurance can be given, however,
that the price of the securities being hedged will correlate with the price
movements in a futures contract and, thus, provide an offset to losses on the
futures contract or option on the futures contract. In addition, in light of
the risk of an imperfect correlation between securities held by the Fund that
are the subject of a hedging transaction and the futures or options used as a
hedging device, the hedge may not be fully effective because, for example,
losses on the securities held by the Fund may be in excess of gains on the
futures contract or losses on the futures contract may be in excess of gains on
the securities held by the Fund that were the subject of the hedge. In an
effort to compensate for the imperfect correlation of movements in the price of
the securities being hedged and movements in the price of futures contracts,
the Fund may enter into financial futures contracts or options on financial
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures con-
tract has been less or greater than that of the securities. This "over hedging"
or "under hedging" may adversely affect the Fund's net investment results if
market movements are not as anticipated when the hedge is established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities it holds and rates decrease
instead, the Fund will lose part or all of the benefit of the increased value
of securities that it has hedged because it will have offsetting losses in its
futures or options positions. In addition, in those situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation mar-
gin requirements on the futures contracts at a time when it may be disadvanta-
geous to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, when the Adviser believes
that market conditions warrant, the Fund may take a temporary defensive posture
and
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
invest without limitation in short-term California Exempt Obligations and Tax-
able Investments. To the extent the Fund holds Taxable Investments and, under
certain market conditions, certain floating and variable rate demand obliga-
tions or Auction Components, the Fund may not achieve its investment objective.
Money market instruments in which the Fund may invest include: U.S. govern-
ment securities; tax-exempt notes of municipal issuers rated, at the time of
purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch or, if
not rated, by issuers having outstanding, unsecured debt then rated within the
three highest rating categories; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks, domestic
savings and loan associations and similar institutions); commercial paper rated
no lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch or the equivalent from
another major rating service or, if unrated, of an issuer having an outstand-
ing, unsecured debt issue then rated within the three highest rating catego-
ries; and repurchase agreements. At no time will the Fund's investments in bank
obligations, including time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct obli-
gations of the United States and obligations issued by U.S. government agencies
and instrumentalities. Included among direct obligations of the United States
are Treasury Bills, Treasury Notes and Treasury Bonds, which differ principally
in terms of their maturities. Included among the securities issued by U.S. gov-
ernment agencies and instrumentalities are: securities that are supported by
the full faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported by the right
of the issuer to borrow from the United States Treasury (such as securities of
Federal Home Loan Banks); and securities that are supported by the credit of
the instrumentality (such as Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described below,
which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis. When-issued or delayed-
delivery transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. The Fund's Custodian will maintain, in a segre-
gated account of the Fund, cash, U.S. government securities or other liquid,
high-grade debt obligations having a value equal to or greater than the Fund's
purchase commitments; the Custodian will likewise segregate securities sold on
a delayed basis. The payment obli-
21
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
gations and the interest rates that will be received are each fixed at the time
the Fund enters into the commitment and no interest accrues to the Fund until
settlement. Thus, it is possible that the market value at the time of settle-
ment could be higher or lower than the purchase price if the general level of
interest rates has changed.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to California Exempt Obligations held in its portfolio. Under a stand-
by commitment, a broker, dealer or bank is obligated to repurchase at the
Fund's option specified securities at a specified price and, in this way,
stand-by commitments are comparable to put options. Each exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise the rights afforded by the
commitments for trading purposes. The Fund anticipates that stand-by commit-
ments will be available from brokers, dealers and banks without the payment of
any direct or indirect consideration. The Fund may pay for stand-by commitments
if payment is deemed necessary, thus increasing to a degree the cost of the
underlying California Exempt Obligation and similarly decreasing the security's
yield to investors.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations, such
as those described below:
California Exempt Obligations. Even though California Exempt Obligations are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of California
Exempt Obligations with longer remaining maturities typically fluctuate more
than those of similarly rated California Exempt Obligations with shorter
remaining maturities such as the Fund intends to hold. The values of fixed-
income securities also may be affected by changes in the credit rating or
financial condition of the issuing entities.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest on them from Federal income taxes (and, with respect to Cali-
fornia Exempt Obligations, to the exemption of interest on them from California
state personal income taxes) are rendered by bond counsel to the respective
issuers at the time of issuance. Neither the Fund nor the Adviser will review
the proceedings relating to the issuance of California Exempt Obligations or
the basis for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemp-
tion on various types of Municipal Obligations and may enact other similar laws
in the future. If any such laws are enacted that would reduce the availability
of California
22
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Exempt Obligations for investment by the Fund so as to affect the Fund's share-
holders adversely, the Trust will reevaluate the Fund's investment objective
and policies and might submit possible changes in the Fund's structure to
shareholders for their consideration. If legislation were enacted that would
treat a type of California Exempt Obligation as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible Taxable Investment
within the applicable limits set forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that the
Adviser determines to be of comparable quality to the rated securities in which
the Fund may invest. Dealers may not maintain daily markets in unrated securi-
ties and retail secondary markets for many of such securities may not exist. As
a result, the Fund's ability to sell these securities when the Adviser deems it
appropriate may be diminished.
Municipal Leases. Municipal leases in which the Fund may invest have special
risks not normally associated with Municipal Obligations. These obligations
frequently contain non-appropriation clauses that provide that the governmental
issuer of the obligation need not make future payments under the lease or con-
tract unless money is appropriated for that purpose by a legislative body annu-
ally or on another periodic basis. Municipal leases have additional risks
because they represent a type of financing that has not yet developed the depth
of marketability generally associated with other Municipal Obligations. More-
over, although a municipal lease will be secured by financed equipment or
facilities, the disposition of the equipment or facilities in the event of
foreclosure might prove difficult. In addition, in certain instances the tax-
exempt status of the municipal lease will not be subject to the legal opinion
of a nationally recognized bond counsel, although in all cases the Fund will
require that a municipal lease purchased by the Fund be covered by a legal
opinion to the effect that, as of each effective date of the municipal lease,
the lease is the valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability of
issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost bur-
dens are allocated and reallocated among Federal, state and local governmental
units. Such non-payment would result in a reduction of income to the Fund, and
could result in a reduction in the value of the municipal lease experiencing
non-payment and a decrease in the net asset value of the Fund. Issuers of
municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays and
limitations with respect to the collection of principal and interest on such
municipal leases and the Fund may not, in all circumstances, be able to collect
all principal and interest to which it is entitled. To enforce its rights in
the event of a default in the lease payments, the Fund may take possession of
and manage the assets securing the issuer's obligations on
23
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
such securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. Any income derived from the Fund's own-
ership or operation of such assets may not be tax-exempt. In addition, the
Fund's intention to qualify as a "regulated investment company" under the Code
may limit the extent to which the Fund may exercise its rights by taking pos-
session of such assets, because as a regulated investment company the Fund is
subject to certain limitations on its investments and on the nature of its
income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from time
to time, invest a portion of its assets in non-publicly traded California
Exempt Obligations. Non-publicly traded securities may be less liquid than pub-
licly traded securities. Although non-publicly traded securities may be resold
in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by the Fund.
When-Issued and Delayed-Delivery Transactions. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery. Pur-
chasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Non-Diversified Classification. Investment in the Fund, which is classified
as a non-diversified fund under the 1940 Act, may present greater risks to
investors than an investment in a diversified fund. The investment return on a
non-diversified fund typically is dependent upon the performance of a smaller
number of securities relative to the number of securities held in a diversified
fund. The Fund's assumption of large positions in the obligations of a small
number of issuers will affect the value of its portfolio to a greater extent
than that of a diversified fund in the event of changes in the financial condi-
tion, or in the market's assessment, of the issuers.
Special Considerations. In seeking to achieve its objective, the Fund may
invest without limit in Municipal Obligations which are private activity bonds.
Moreover, although the Fund does not currently intend to do so on a regular
basis, it may invest more than 20% of its assets in Municipal Obligations which
are repayable out of revenue streams generated from economically related pro-
jects or facilities, if such investment is deemed necessary or appropriate by
the Adviser. To the extent the Fund's assets are concentrated in Municipal
Obligations payable from revenues on economically related projects and facili-
ties, the Fund will be subject to the particular risks presented by such pro-
jects to a greater extent than it would be if the Fund's assets were not so
concentrated.
The payment of principal and interest on most securities purchased by the
Fund will depend on the ability of the issuers to meet their obligations. The
Fund's portfolio will be affected by general changes in interest rates, which
will result in
24
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
increases or decreases in the value of the obligations held by the Fund. The
market value of the obligations in the Fund's portfolio can be expected to vary
inversely to changes in prevailing interest rates. During 1996, the ratings of
California general obligations bonds was upgraded. S&P Ratings Group upgraded
its rating to A+; the same rating has been assigned to such debt by Fitch.
Moody's has assigned such debt an A1 rating.
Investors should be aware that certain California constitutional amendments,
legislative measures, executive orders, administrative regulations and voter
initiatives could result in certain adverse consequences affecting California
Exempt Obligations. For instance, certain provisions of the California Consti-
tution and statutes that limit the taxing and spending authority of California
governmental entities may impair the ability of the issuers of some California
Exempt Obligations to maintain debt service on their obligations. Other mea-
sures affecting the taxing or spending authority of California or its political
sub-divisions may be approved or enacted in the future. Some of the significant
financial considerations relating to the Fund's investments in California
Exempt Obligations are summarized in the SAI.
Year 2000. The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Smith Barney, the Fund's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact on the Fund's
operations, including the handling of securities trades, pricing and account
services. The Adviser and Smith Barney have advised the Fund that they have
been reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Adviser has been
advised by the Fund's custodian, transfer agent and accounting service agent
that they are also in the process of modifying their systems with the same
goal. There can, however, be no assurance that the Adviser, Smith Barney or any
other service provider will be successful, or that interaction with other non-
complying computer systems will not impair Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through principal
transactions, although the price paid usually includes an undisclosed compensa-
tion to the dealer acting as agent.
25
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund cannot accurately predict its portfolio turnover rate, but antici-
pates that the annual turnover will not exceed 100%. An annual turnover rate of
100% would occur if all of the securities held by the Fund are replaced once
during a period of one year. The Adviser will not consider turnover rate a lim-
iting factor in making investment decisions consistent with the investment
objective and policies of the Fund.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Short-
term investments that mature in 60 days or less are valued at amortized cost.
Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Funds valuation
policies is contained in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net investment income (that is, income
other than net realized capital gains) monthly; dividends ordinarily will be
paid on the last Friday of each calendar month to shareholders of record as of
three business days prior thereto. The Fund's net realized capital gains, if
any, are declared and distributed annually, normally at the end of the calendar
year in which earned or at the beginning of the subsequent year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make a distribution
shortly before December 31 of each year of any undistributed ordinary income or
capital gains and expects to pay any other distributions as are necessary to
avoid the application of this tax.
26
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The per share dividends on Class C shares of the Fund may be lower than the
per share dividends on Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per share divi-
dends on Class Y shares principally as a result of the service fee applicable
to Class A shares. Distributions of capital gains, if any, will be in the same
amount for Class A, Class C and Class Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from the Fund's
net investment income (other than dividends derived from interest earned on
qualifying tax-exempt obligations as described below) and distributions of the
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, regardless of how long shareholders in the Fund have held
their shares and whether the dividends or distributions are received in cash
or reinvested in additional shares of the Fund. Distributions of the Fund's
net realized long-term capital gains will be taxable to shareholders as long-
term capital gains, regardless of how long shareholders have held their shares
of the Fund and whether the distributions are received in cash or are rein-
vested in additional Fund shares. In addition, as a general rule, a sharehold-
er's gain or loss on a sale or redemption of shares of the Fund will be a
long-term capital gain or loss if the shareholder has held the shares for more
than one year and will be a short-term capital gain or loss if the shareholder
has held the shares for one year or less.
Dividends paid by the Fund that are derived from interest earned on qualify-
ing tax-exempt obligations are expected to be "exempt-interest" dividends that
shareholders may exclude from their gross incomes for Federal income tax pur-
poses if the Fund satisfies certain asset percentage requirements. Any exempt-
interest dividends of the Fund derived from interest on Municipal Obligations,
the interest on which is a specific tax preference item for Federal income tax
purposes, will be a specific tax preference item for purposes of the Federal
individual and corporate alternative minimum taxes. In addition, all exempt-
interest dividends will be a component of the "current earnings" adjustment
item for purposes of the Federal corporate alternative minimum income tax and
corporate shareholders may incur a larger Federal environmental tax liability
through the receipt of dividends and distributions from the Fund if the envi-
ronmental tax is reinstated as proposed by President Clinton. Dividends of the
Fund derived from interest on California Exempt Obligations will be exempt
from California State personal income (but not corporate franchise or income)
taxes.
Statements as to the tax status of the dividends and distributions received
by shareholders of the Fund are mailed annually. These statements set forth
the dollar amount of income excluded from Federal income taxes and the dollar
amount, if
27
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
any, subject to Federal income taxes. Statements from the Fund will also show
the dollar amount of income excluded or exempted from California State personal
income taxes and the dollar amount, if any, subject to these taxes. These
statements will also designate the amount of exempt-interest dividends that are
a specific preference item for purposes of the Federal individual and corporate
alternative minimum taxes.
Shareholders of the Fund should consult their tax advisors with specific ref-
erence to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows California taxpayers who are individuals how to trans-
late Federal and California State tax savings from investments such as the Fund
into an equivalent return from a taxable investment. To the extent that the
equivalent taxable yields illustrated in this table are based on an effective
tax rate which combines the Federal and California marginal income tax rates,
the table is not applicable to individuals who do not pay California State per-
sonal income taxes. The yields used below are for illustration only and are not
intended to represent current or future yields for the Fund, which may be
higher or lower than those shown.
<TABLE>
<CAPTION>
1997
TAXABLE INCOME* CALIFORNIA FEDERAL COMBINED CALIFORNIA TAX-EXEMPT EQUIVALENT YIELDS
SINGLE JOINT RATE*** RATE RATE** 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,650 0-41,200 6.00% 15.00% 20.10% 2.50% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 11.26% 12.52%
24,651-59,750 41,201-99,600 9.30 28.00 34.70 3.06 4.59 6.13 7.66 9.19 10.72 12.25 13.78 15.31
59,751-124,650 99,601-151,750 9.30 31.00 37.42 3.20 4.79 6.39 7.99 9.59 11.19 12.78 14.38 15.98
124,651-271,050 151,751-271,050 9.30 36.00 41.95 3.45 5.17 6.89 8.61 10.34 12.06 13.78 15.50 17.23
over 271,150 over 271,150 9.30 39.60 45.22 3.65 5.48 7.30 9.13 10.95 12.78 14.60 16.43 18.25
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Code. It is assumed
that taxable income as defined in the Code is the same as under the
California personal income tax law; however, California taxable income may
differ due to differences in exemptions, itemized deductions and other
items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates and rate brackets for 1997, including indexing the rate
bracket for inflation. These rates include the effect of deducting state
and city taxes on your Federal return.
*** These rates represent the highest California personal income tax rates
within the applicable Federal income tax brackets for 1997. Where there is
a difference between the California personal income tax rates for single
and married filing joint, an average rate was used.
28
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Federal tax rates and California tax rates shown are those in effect for
1997 and are subject to change. The calculations reflected in the table assume
that no income will be subject to the Federal alternative minimum taxes.
PURCHASE OF SHARES
GENERAL
The Fund currently offers three Classes of shares. Class A shares are sold
to investors with an initial sales charge and Class C shares are sold without
an initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $15,000,000 (except, for
purchases of Class Y shares by Smith Barney Concert Allocation Series, Inc.
for which there is no minimum purchase amount). See "Prospectus Summary--
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the sell-
ing group. In addition, certain investors, including certain institutional
investors, may purchase shares directly from the Fund through First Data. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class C or Class Y shares. Smith Barney and other broker/dealers
may charge their customers an annual account maintenance fee in connection
with a brokerage account through which an investor purchases or holds shares.
Accounts held directly at the Transfer Agent are not subject to a maintenance
fee.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Fund. Investors
in Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A and Class C shares and the subsequent investment requirement for
all Classes is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a quarterly basis, the minimum initial invest-
ment requirement for Class A and Class C shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment require-
ments in Class A shares for employees of Travelers and its subsidiaries,
including Smith Barney, Directors or Trustees of any of the Smith Barney
Mutual Funds, and their immediate family. The Fund reserves the right to waive
or change minimums, to decline any order to purchase its shares and to suspend
the offering of shares from time to time. Shares purchased will be held
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First
Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day (the "trade
date"). Orders received by dealers Introducing Brokers prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day, pro-
vided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Fund shares
is due on the third business day (the "settlement date") after the trade date.
In all other cases, payments must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder, to provide systematic additions to
the shareholder's Fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
the Transfer Agent. The Systematic Investment Plan also authorizes Smith Bar-
ney to apply cash held in the shareholders' Smith Barney brokerage account or
redeem the shareholder's shares of a Smith Barney money market fund to make
additions to the account. Additional information is available from the Fund or
a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
AMOUNT OF INVESTMENT % OF OFFERING PRICE % OF AMOUNT INVESTED % OF OFFERING PRICE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
- --------------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class C shares is waived. See "Deferred Sales Charge
Alternatives" and "Waivers of CDSC."
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an indi-
vidual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and/or any of the Smith Barney
Mutual Funds (including retired Board members and employees); the immediate
families of such persons (including the surviving spouse of a deceased Board
Member or employee); and to a pension, profit-sharing or other benefit plan
for such persons and (ii) employees of members of the National Association of
Securities Dealers, Inc., provided such sales are made upon the assurance of
the purchaser that the purchase is made for investment purposes and that the
securities will not be resold except through redemption or repurchase; (b)
offers of Class A shares to any other investment company to effect the combi-
nation of such company with the Fund by merger, acquisition of assets or oth-
erwise; (c) purchases of Class A shares by any client of a newly employed
Smith Barney Financial Consultant (for a period up to 90 days from the com-
mencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial Con-
sultant and (iii) was subject to a sales charge; (d) purchases by shareholders
who have redeemed Class A shares in the Fund (or Class A shares of another
fund of the Smith Barney Mutual Funds that are offered with a sales charge)
and who wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) purchases
by accounts managed by registered investment advisory subsidiaries of Travel-
ers; and (f) purchases by investors participating in a Smith Barney fee-based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
a sales charge listed under "Exchange Privilege" then held by such person and
applying the sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time of pur-
chase to permit verification that the purchase qualifies for the reduced sales
charge. The right of accumulation is subject to modification or discontinuance
at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An individ-
ual who is a member of a qualified group may also purchase Class A shares at
the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enables Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the pur-
chaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to purchase shares at net asset value by aggregat-
ing the
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge over a 13 month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13 month period starting up
to 90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the sales charge applicable to the total amount
of the investment goal. If the goal is not achieved within the period, the
investor must pay the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. Please contact a Smith Barney Financial Con-
sultant or First Data to obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $5,000,000 in Class Y shares of the Fund
and agree to purchase a total of $15,000,000 of Class Y shares of the Fund
within thirteen months from the date of the Letter. If a total investment of
$15,000,000 is not made within the thirteen-month period, all Class Y shares
purchased to date will be transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further informa-
tion.
DEFERRED SALES CHARGE ALTERNATIVE
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and (b)
Class A shares that were purchased without an initial sales charge but subject
to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; or
(c) shares redeemed more than 12 months after their purchase. CDSC Shares are
subject to a 1.00% CDSC if redeemed within 12 months of purchase.
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distribu-
tions, and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged therefor were initially acquired in one of the other Smith Barney
Mutual Funds, and Fund shares being redeemed will be considered to represent,
as applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any CDSC will be paid to
Smith Barney.
To provide an example, assume an investor purchased 100 Class C shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the tenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which repre-
sents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 1.00% (the applicable rate for Class C shares) for a
total deferred sales charge of $2.40.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, automatic
cash withdrawals in amounts equal to or less than 2.00% per month of the value
of the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within
twelve months following the death or disability of the shareholder; (d) invol-
untary redemptions; and (e) redemptions of shares to effect a combination of
the Fund with any investment company by merger, acquisition of assets or oth-
erwise. In addition, a shareholder who has redeemed shares from other funds of
the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
34
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to the other requirements of
the fund into which exchanges are made.
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable-Fixed Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds--Florida Portfolio
35
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Global Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
+++Smith Barney Muni Funds--California Money Market Portfolio
+++Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the Fund.
** Available for exchange with Class A, shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
36
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive Class in any of the funds identified above may do so without imposition of
any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. The Adviser may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may,
at its discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would expect to maintain for a sig-
nificant period of time. All relevant factors will be considered in determining
what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See Redemp-
tion of Shares--Telephone Redemption and Exchange Program. Exchanges will be
processed at the net asset value next determined. Redemption procedures dis-
cussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
37
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and
Smith Barney will benefit from the use of temporarily uninvested funds. Redemp-
tion proceeds for shares purchased by check, other than a certified or official
bank check, will be remitted upon clearance of the check, which may take up to
ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Intermediate Maturity California Municipals Fund
Class A, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or redemp-
tion request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in a 10-day period. First Data may require additional supporting docu-
ments for redemptions made by corporations, executors, administrators, trustees
or guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.
38
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM.
Shareholders who do not have a Smith Barney Brokerage Account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization form, including a signature guaran-
tee, that will be provided by First Data upon request. (Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's signature guarantee when making his/her initial investment
in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the fund being acquired is identical to the registra-
tion of the shares of the fund exchanged. Such exchange requests may be made by
calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m. (New York
City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund and
its agents will employ procedures designed to verify the identity of the caller
and legitimacy of instructions (for example, a shareholder's name and account
number will be required and phone calls may be recorded). The Fund reserves the
right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven (7) days' prior notice to shareholders.
39
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of a shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
PERFORMANCE
From time to time, the Fund may advertise its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include its current dividend return. These figures are
computed separately for Class A, Class C and Class Y shares of the Fund. These
figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified period of time
assuming deduction of the maximum sales charge, if any, from the initial amount
invested and reinvestment of all income dividends and capital gain distribu-
tions on the reinvestment dates at prices calculated as stated in this Prospec-
tus, then dividing the value of the investment at the end of the period so cal-
culated by the initial amount invested and subtracting 100%. The standard aver-
age annual total return, as prescribed by the SEC, is derived from this total
return, which provides the ending redeemable value. Such
40
<PAGE>
PERFORMANCE (CONTINUED)
standard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account. The
yield of a Fund class refers to the net investment income earned by investments
in the Class over a thirty-day period. This net investment income is then
annualized; i.e., the amount of income earned by the investments during that
30-day period is assumed to be earned each 30-day period for twelve periods and
is expressed as a percentage of the investments. The yield is calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The Fund calculates current divi-
dend return for each Class by annualizing the most recent monthly distribution
and dividing by the net asset value or the maximum public offering price (in-
cluding sales charge) on the last day of the period for which current dividend
return for a Fund Class is presented. The current dividend return for each
Class may vary from time to time depending on market conditions, the composi-
tion of its investment fund and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should
be considered when comparing a Class' current return to yields published for
other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all signif-
icant agreements between the Trust and the persons and companies that furnish
services to the Fund, including agreements with the Fund's investment adviser
and administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Fund have been delegated to the Fund's investment adviser and
administrator. The SAI contains background information regarding each Trustee
of the Trust and the executive officers of the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR -- MMC
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment adviser pursuant to an investment advisory agreement approved
by the Trust's Board of Trustees. The Adviser (through predecessor entities)
has been in the investment counseling business since 1934 and is a registered
investment adviser. The Adviser renders investment advice to investment compa-
nies that had aggregate assets under management as of January 31, 1998 in
excess of $94 billion.
41
<PAGE>
MANAGEMENT OF THE TRUST FUND (CONTINUED)
Subject to the supervision and direction of the Trust's Board of Trustees,
the Adviser manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfo-
lio managers and securities analysts who provide research services to the Fund.
For investment advisory services rendered to the Fund, the Fund pays the
Adviser a fee at the annual rate of 0.30% of the value of the Fund's average
daily net assets. Prior to November 17, 1995, the Fund paid the Adviser an
investment advisory fee at the annual rate of 0.35% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1997, the Fund
paid investment advisory fees to the Adviser in an amount equal to 0.7% of the
Fund's average daily net assets. During the same period, the Fund's investment
adviser waived investment advisory fees in an amount equal to 0.23% of the
value of the Fund's average daily net assets.
ADMINISTRATOR -- MMC
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1997, the Fund
paid an administration fee of 0.6% of the value of its average daily net assets
and the administrator voluntarily waived administration fees in an amount equal
to 0.14% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Joseph P. Deane is Vice President and Investment Officer of the Fund and has
been the portfolio manager of the Fund since it commenced operations on Decem-
ber 31, 1991. He manages the day-to-day operations of the Fund, including mak-
ing all investment decisions.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended November 30, 1997, is included
in the Annual Report dated November 30, 1997. A copy of the Annual Report may
be obtained upon request without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed on
page one of this Prospectus.
DISTRIBUTOR
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A
42
<PAGE>
DISTRIBUTOR (CONTINUED)
and Class C shares of the Fund at the annual rate of 0.15% of the average daily
net assets of the respective Class. Smith Barney is also paid a distribution
fee with respect to Class C shares at the annual rate of 0.20% of the average
daily net assets attributable to that Class. The fees are used by Smith Barney
to pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class C shares, to cover expenses primarily intended to result in the
sale of those shares. These expenses include: advertising expenses; the cost of
printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A and Class C shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a
holder of that Class. Smith Barney Financial Consultants may receive different
levels of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class C shares are not tied exclu-
sively to the shareholder distribution and service expenses actually incurred
by Smith Barney and the payments may exceed distributed expenses actually
incurred. The Trust's Board of Trustees will evaluate the appropriateness of
the Plan and its payment terms on a continuing basis and in so doing will con-
sider all relevant factors, including expenses borne by Smith Barney, amounts
received under the Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Trust was organized on October 17, 1991 under the laws of the Common-
wealth of Massachusetts and is a business entity commonly known as a "Massachu-
setts business trust."
Each Class of the Fund represents an identical interest in the Fund's invest-
ment portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class pursuant to the Plan; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; and (f) the exchange privilege of each Class. The
Trust's Board of Trustees does not anticipate that there will be any conflicts
among the interests of the holders of the different Classes. The Trustees, on
an ongoing basis, will consider whether any such conflict exists and, if so,
take appropriate action.
43
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the Fund
will be voted on a Fund-wide basis on all matters except matters affecting only
the interests of one Class, in which case only shares of the affected Class
would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees.
Shareholders of record of not less than two-thirds of the outstanding shares
of the Trust may remove a Trustee through a declaration in writing or by vote
cast in person or by proxy at a meeting called for that purpose. The Trustees
will call a meeting for any purpose upon written request of shareholders hold-
ing at least 10% of the Trust's outstanding shares and the Trust will assist
shareholders in calling such a meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's Transfer Agent.
The Fund sends shareholders a semi-annual report and an audited annual report
which includes a listing of investment securities held by the Fund at the end
of the reporting period. In an effort to reduce the Fund's printing and mailing
costs, the Fund plans to consolidate the mailing of its semi-annual and annual
reports by household. This consolidation means that a household having multiple
accounts with the identical address of record will receive a single copy of
each report. In addition, the Fund also plans to consolidate the mailing of its
Prospectus so that a shareholder having multiple accounts (that is, individual,
IRA and/or Self-Employed Retirement Plan accounts) will receive a single Pro-
spectus annually. Shareholders who do not want this consolidation to apply to
their accounts should contact their Smith Barney Financial Consultant or the
Fund's Transfer Agent.
44
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [LOGO]
SMITH BARNEY
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS
FUND
388 Greenwich Street
New York, New York 10013
FD0248 3/98
PROSPECTUS
SMITH BARNEY
Intermediate
Maturity
New York
Municipals
Fund
MARCH 30, 1998
Prospectus begins on page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus March 30, 1998
- --------------------------------------------------------------------------------
Smith Barney Intermediate Maturity
New York Municipals Fund
388 Greenwich Street
New York, New York 10013
1 800-451-2010
Smith Barney Intermediate Maturity New York Municipals Fund (the "Fund")
seeks to provide New York investors with as high a level of current income
exempt from Federal income taxes and New York State and New York City personal
income tax as is consistent with preservation of principal. The Fund invests
primarily in investment grade obligations issued by the State of New York and
its political subdivisions, agencies and public authorities. The Fund is one of
a number of funds, each having distinct investment objectives and policies
making up the Smith Barney Investment Trust (the "Trust"). The Trust is an
open-end management investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of the other funds offered by the Trust are described
in separate prospectuses which may be obtained by calling or writing the Trust
at the telephone number or address set forth above or by contacting a Smith
Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information (the "SAI") dated March 30, 1998, as amended
or supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The SAI has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
Smith Barney Inc.
Distributor
Mutual Management Corp.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 11
- --------------------------------------------------------------------------------
Valuation of Shares 25
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 25
- --------------------------------------------------------------------------------
Purchase of Shares 28
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Exchange Privilege 33
- --------------------------------------------------------------------------------
Redemption of Shares 36
- --------------------------------------------------------------------------------
Minimum Account Size 39
- --------------------------------------------------------------------------------
Performance 39
- --------------------------------------------------------------------------------
Management of the Trust and the Fund 40
- --------------------------------------------------------------------------------
Distributor 42
- --------------------------------------------------------------------------------
Additional Information 42
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in this Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE. The Fund is a non-diversified intermediate-term municipal
bond fund that seeks to provide New York investors with as high a level of
current income exempt from Federal income taxes and New York State and New York
City personal income tax as is consistent with the preservation of principal.
The Fund invests primarily in investment-grade obligations issued by the State
of New York and its political subdivisions, agencies and public authorities. The
weighted average maturity of the Fund's portfolio securities will normally not
be less than three nor more than 10 years. The maximum remaining maturity of the
securities in which the Fund will normally invest will be no greater than 20
years. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS. The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which differ
principally in terms of sales charges and rates of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of $15,000,000. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of the
average daily net assets of the Class. The initial sales charge may be waived
for certain purchases. Purchases of Class A shares of $500,000 or more, will be
made at net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See "Prospectus Summary -- No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.20% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
C shares are sold without any initial sales charge so the entire purchase price
is immediately invested in the Fund. Any investment return on these additional
invested amounts may partially or wholly offset the higher annual expenses of
this Class. Because the Fund's future return cannot be predicted, however, there
can be no assurance that this would be the case. Finally, investors should
consider the effect of the CDSC period and any conversion rights of the classes
in the context of their own investment time frame.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price would be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more, will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class C shares, purchasers eligible to
purchase Class A shares at net asset value should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
PURCHASE OF SHARES. Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund through the
Fund's transfer agent, First Data Investor Services Group, Inc. ("First Data").
See Purchase of Shares."
INVESTMENT MINIMUMS. Investors in Class A and Class C shares may open an account
by making an initial investment of at least $1,000 for each account. Investors
in Class Y shares may open an account for an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. The minimum
investment requirements for purchases of Fund shares through the Systematic
Investment Plan are described below. See "Purchase of Shares.
SYSTEMATIC INVESTMENT PLAN. The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment
requirement for Class A and Class C shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the
Systematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$50. See "Purchase of Shares."
REDEMPTION OF SHARES. Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND. Mutual Management Corp. ("MMC"or the
"Adviser") formerly known as Smith Barney Mutual Funds Management Inc. serves as
the Fund's investment adviser and administrator. The Adviser is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc, ("Holdings"), formerly known as
Smith Barney Holdings. Holdings is a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services including Asset Management, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Trust and the Fund."
EXCHANGE PRIVILEGE. Shares of a Class may be exchanged for shares of the same
Class of certain other Smith Barney Mutual Funds at the respective net asset
values next determined. See "Exchange Privilege."
VALUATION OF SHARES. Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and also is available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS. Dividends are paid monthly from net
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
investment income. Distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS. Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by reinvestments will not be subject to any sales charge or
CDSC. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS. There can be no assurance that the Fund
will achieve its investment objective. Shares of the Fund, unlike certain bank
deposit accounts, are not guaranteed or insured by any Federal or state
authority. Changes in interest rates generally will result in increases or
decreases in the market value of the obligations held by the Fund. The yield of
the Fund may not be as high as those of other funds that invest in lower quality
and/or longer term securities. The Fund is not a tax-exempt money market fund
and therefore its investment portfolio can be expected to experience greater
volatility than that of a tax-exempt money market fund. The net asset value of
the Fund will be subject to greater fluctuation to the extent that the Fund
invests in zero coupon securities. The Fund's net asset value per share will
fluctuate depending on a combination of factors such as current market interest
rates and the creditworthiness of the issuers in whose securities the Fund
invests. The Fund will not invest in obligations that are rated lower than Baa
by Moody's Investors Service, Inc. ("Moody's"), BBB by Standard & Poor's Ratings
Group ("S&P") or BBB by Fitch IBCA, Inc. ("Fitch"), at the time of purchase. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the obligations that they undertake to rate; the ratings are relative and
subjective and are not absolute standards of quality.
The Fund may invest up to 20% of its total assets in unrated securities
that the Adviser determines to be of comparable quality to the securities rated
investment grade in which the Fund may invest. Dealers may not maintain daily
markets in unrated securities and retail secondary markets for many of them may
not exist; lack of markets may affect the Fund's ability to sell these
securities when the Adviser deems it appropriate. The Fund has the right to
invest without limitation in state and local obligations that are "private
activity bonds," the income from which may be taxable as a specific preference
item for purposes of the Federal alternative minimum tax. Thus, the Fund may not
be a suitable investment for investors who are subject to the alternative
minimum tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks. The
instruments presenting the Fund with risks are municipal leases, zero coupon
securities, custodial receipts, municipal obligation components, floating and
variable rate demand notes and bonds, and participation interests. Entering into
securities transactions on a when-issued or delayed-delivery basis are
investment
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
techniques involving risks to the Fund. See "Investment Objective and Management
Policies -- Investment Techniques -- Risk Factors and Special Considerations"
and "Dividends, Distributions and Taxes."
Investment in the Fund, which is classified as a non-diversified fund, may
present a greater risk than an investment in a diversified fund. See "Investment
Objective and Management Policies -- Risk Factors and Special Considerations."
Investment in the Fund involves risks and special considerations applicable to
the State of New York. See "Investment Objective and Management Policies -- Risk
Factors and Special Considerations."
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
Intermediate Maturity New York Municipals Fund Class A Class C Class Y
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds,
whichever is lower) None* 1.00% None
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses***
(as a percentage of average net assets)
Management fees (net of fee waivers) 0.19% 0.19% 0.19%
12b-1 fees** 0.15 0.35 --
Other expenses+ 0.36 0.37 0.36
- --------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES
(after waivers) 0.70% 0.91% 0.55%
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but may be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Class C shares are subject to an ongoing distribution fee and, as a result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
*** "Management fees" have been restated to reflect the management fee waiver
currently in effect for the Fund. During the fiscal year ended November 30,
1997, the Fund's investment adviser and administrator voluntarily waived
portions of its fees in the aggregate amount equal to 0.31% of the value of
the Fund's average daily net assets thereby decreasing the amount paid by
the Fund in respect of management fees to 0.19% of the value of the Fund's
average daily net assets. This had the effect of lowering the Fund's overall
expenses and increasing the returns available to investors. If MMC had not
elected to waive fees and reimburse expenses, the Fund's total operating
expenses for Class A shares and Class C shares for the fiscal year ended
November 30, 1997, would have been 0.98% and 1.20%, respectively, of the
value of the Fund's average daily net assets. As of November 17, 1995, the
Fund's investment advisory fee was reduced from 0.35% to 0.30% of the
average daily net assets of the Fund.
+ For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because prior to November 30, 1997 no Class Y
shares were sold.
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased. See
"Purchase of Shares" and "Redemption of Shares." Smith Barney receives an annual
12b-1 service fee of 0.15% of the value of average daily net assets of Class A
shares. For Class C shares, Smith Barney receives an annual 12b-1 fee of 0.35%
of the value of average daily net assets of this Class, consisting of a 0.20%
distribution fee and a 0.15% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
Intermediate Maturity New York Municipals Fund 1 year 3 years 5 years 10 years
================================================================================
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and (2)
redemption at the end of each time
period:
Class A $27 $42 $58 $105
Class C 19 33 50 112
Class Y 6 18 31 69
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A $27 $42 58 $105
Class C 9 29 50 112
Class Y 6 19 32 69
================================================================================
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
8
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's Annual Report
dated November 30, 1997. The following information for the period ended November
30, 1992 and for the fiscal years ended November 30, 1993 and November 30, 1994
has been audited by other auditors. This information should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to shareholders, which is incorporated by reference
into the SAI.
<TABLE>
<CAPTION>
For a share of beneficial interest outstanding throughout each year:
Smith Barney
Intermediate Maturity
New York Municipals Fund Year Ended November 30,
-----------------------
Class A Shares 1997 1996 1995 1994 1993 1992(1)
=======================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $8.47 $8.48 $7.80 $8.54 $8.18 $7.90
- ---------------------------------------------------------------------------------------
Income (Loss) From Operations
Net investment income(1) 0.41 0.41 0.41 0.40 0.40 0.38
Net realized and
unrealized gain (loss) 0.10 (0.01) 0.68 (0.72) 0.38 0.28
- ---------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.51 0.40 1.09 (0.32) 0.78 0.66
- ---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.41) (0.41) (0.41) (0.40) (0.40) (0.38)
Net realized gains -- -- -- (0.02) (0.02) --
- ---------------------------------------------------------------------------------------
Total Distributions (0.41) (0.41) (0.41) (0.42) (0.42) (0.38)
- ---------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.57 $8.47 $8.48 $7.80 $8.54 $8.18
- ---------------------------------------------------------------------------------------
Total ReturnP. 6.23% 4.85% 14.31% (3.97)% 9.76% 8.59%++
- ---------------------------------------------------------------------------------------
Net Assets,
End of Year (in 000s) $47,759 $49,355 $52,568 $62,090 $67,230 $24,543
- ---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.67% 0.66% 0.65% 0.65% 0.65% 0.65%+
Net investment income 4.83 4.86 5.01 4.77 4.59 4.95+
- ---------------------------------------------------------------------------------------
Portfolio Turnover Rate 52% 67% -- 68% 22% 68%
=======================================================================================
</TABLE>
(1) For the period from December 31, 1991 (inception date) to November 30, 1992.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(2) The investment adviser has waived all or part of its fees for the five years
ended November 30, 1997 and the period ended November 30, 1992. If such fees
had not been waived, the per share decreases in net investment income, and
the expense ratios, would have been as follows:
P. Total return does not include deduction of the applicable sales charge.
<TABLE>
<CAPTION>
Per Share Decrease Expense Ratio
In Net Investment Income Without Fee Waivers
---------------------------------------- ----------------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.03 $0.04 $0.03 $0.03 $0.04 $0.06 0.98% 1.08% 0.97% 0.98% 1.10% 1.45%+
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout the year:
<TABLE>
<CAPTION>
Intermediate Maturity New York Municipals Fund
Class C Shares 1997 1996 1995(1)
======================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $8.47 $8.48 $7.87
- --------------------------------------------------------------------------------------
Income From Operations
Net investment income(2) 0.39 0.39 0.38
Net realized and unrealized gain (loss) 0.10 (0.01) 0.61
- --------------------------------------------------------------------------------------
Total Income From Operations 0.49 0.38 0.99
- --------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.39) (0.38)
- --------------------------------------------------------------------------------------
Total Distributions (0.39) (0.39) (0.38)
- --------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.57 $8.47 $8.48
- --------------------------------------------------------------------------------------
Total ReturnP. 6.00% 4.64% 13.01%++
- --------------------------------------------------------------------------------------
Net Assets, End of Year (in 000s) $2,283 $1,192 $393
- --------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.89% 0.88% 0.86%+
Ratio of Net Investment Income 4.61 4.64 4.74+
- --------------------------------------------------------------------------------------
Portfolio Turnover Rate 52% 67% --
======================================================================================
</TABLE>
(1) For the period from December 5, 1994 (inception date) to November 30, 1995.
(2) The investment adviser has waived a part of its fees for the two-year period
ended November 30, 1997 and for the period ended November 30, 1995. If such
fees had not been not waived, the per share effect on net investment income,
and expense ratios, would have been as follows:
Per Share Decreases to Expense Ratios
Net Investment Income Without Fee Waivers
---------------------- -------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Class C $0.03 $0.02 $0.03 1.20% 1.30%+ 1.19%+
++ Total return is not annualized, as it may not be representative of the total
for the year.
+ Annualized.
P. Total return does not include deduction of the applicable sales charge.
As of November 30, 1997, the Fund had not sold any Class Y shares, and
accordingly, no comparable financial information is available at this time for
that Class.
10
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide New York investors with as
high a level of current income exempt from Federal income taxes and New York
State and New York City personal income taxes as is consistent with preservation
of principal. No assurance can be given that the Fund will be able to achieve
its investment objective, which may be changed only with the approval of a
majority (as defined by the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Fund's outstanding shares.
Under normal market conditions, the Fund attempts to invest 100% in a
portfolio of investment grade debt obligations issued by or on behalf of the
State of New York and other states, territories and possessions of the United
States, the District of Columbia and their respective authorities, agencies,
instrumentalities and political subdivisions ("Municipal Obligations"). For
purposes of this Prospectus, debt obligations issued by the State of New York
and its political subdivisions, agencies and public authorities (together with
certain other governmental issuers such as the Commonwealth of Puerto Rico), the
interest from which debt obligations is, in the opinion of bond counsel to the
issuer, excluded from gross income for Federal income tax purposes and exempt
from New York State personal income tax are defined as "New York Exempt
Obligations." The Fund will operate subject to a fundamental investment policy
providing that, under normal market conditions, the Fund will invest at least
80% of its net assets in New York Exempt Obligations.
The Fund will invest at least 80% of its total assets in New York Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20% of
the Fund's total assets may be invested in unrated securities that are deemed by
the Adviser to be of a quality comparable to investment grade. The Fund will not
invest in New York Exempt Obligations that are rated lower than Baa by Moody's,
BBB by S&P or BBB by Fitch, at the time of purchase.
The Fund is classified as a non-diversified fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax and New York State franchise tax to the extent that its earnings are
distributed to shareholders. To qualify as a regulated investment company, the
Fund will, among other things, limit its investments so that, at the close of
each quarter of the taxable year (a) not more than 25% of the market value of
the Fund's total assets will be invested in the securities of a single issuer
and (b) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the Fund will not own more than 10% of the
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
outstanding voting securities of a single issuer.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the New York Exempt Obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
The Adviser's judgment as to credit quality of a New York Exempt Obligation,
thus, may differ from that suggested by the ratings published by a rating
service. A description of Moody's, S&P and Fitch ratings relevant to the Fund's
investments is included as an appendix to the SAI. The policies of the Fund
described above as to ratings of portfolio investments will apply only at the
time of the purchase of a security, and the Fund will not be required to dispose
of a security in the event Moody's, S&P or Fitch downgrades its assessment of
the credit characteristics of the security's issuer.
New York Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenue derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. New York Exempt Obligations bear fixed, floating and
variable rates of interest, and variations exist in the security of New York
Exempt Obligations, both within a particular classification and between
classifications.
The yields on, and values of, New York Exempt Obligations are dependent on
a variety of factors, including general economic and monetary conditions,
conditions in the New York Exempt Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently, New
York Exempt Obligations with the same maturity, coupon and rating may have
different yields or values, whereas obligations of the same maturity and coupon
with different ratings may have the same yield or value. See "Risk Factors and
Special Considerations -- New York Exempt Obligations."
Issuers of New York Exempt Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future by
Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of the
obligations or upon the ability of municipalities to levy taxes. The possibility
also exists that, as a result of litigation or other conditions, the power or
ability of any issuer to pay, when due, the principal of, and interest on, its
obligations may be materially affected.
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
MATURITY OF OBLIGATIONS HELD BY THE FUND
The Adviser believes that the Fund may offer an attractive investment
opportunity for investors seeking a higher effective tax yield than a tax-exempt
money market fund or a tax-exempt short-term bond fund and less fluctuation in
net asset value than a longer term tax-exempt bond fund. The Fund will normally
invest in intermediate maturity securities; the weighted average maturity of the
Fund will normally be not less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally invest will
be no greater than 20 years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in New York Exempt Obligations that are
"private activity bonds," as defined in the Code, which are in most cases
revenue bonds. Private activity bonds generally do not carry the pledge of the
credit of the issuing municipality, but are guaranteed by the corporate entity
on whose behalf they are issued. Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance nongovernmental activities
is a specific tax preference item for purposes of the Federal individual and
corporate alternative minimum taxes. Individual and corporate shareholders may
be subject to a Federal alternative minimum tax to the extent the Fund's
dividends are derived from interest on these bonds. Dividends derived from
interest income on New York Exempt Obligations are a "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum tax.
See "Dividends, Distributions and Taxes." Private activity bonds held by the
Fund will be included in the term New York Exempt Obligations for purposes of
determining compliance with the Fund's policy of investing at least 80% of its
total assets in New York Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in New York Exempt Obligations that are
repayable out of revenues generated from economically related projects or
facilities or debt obligations whose issuers are located in the same state.
Sizable investments in these obligations could involve an increased risk to the
Fund should any of the related projects or facilities experience financial
difficulties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to an aggregate amount equal to 10% of its net
assets in illiquid securities, which term includes securities subject to
contractual or other restrictions on resale and other instruments that lack
readily available markets. In addition, up to 5% of the value of the Fund's
assets may be invested in securities of entities that have been in continuous
operation for fewer than three years.
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
TYPES OF NEW YORK EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal leases."
Municipal leases may take the form of a lease or an installment purchase
contract issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. Interest payments on
qualifying municipal leases are exempt from Federal income taxes and state
income taxes within the state of issuance. Although lease obligations do not
constitute general obligations of the municipality for which the municipality's
taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In addition to the
"non-appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated with
more conventional bonds. Although "non-appropriation" lease obligations are
often secured by the underlying property, disposition of the property in the
event of foreclosure might prove difficult. The Fund may invest in municipal
leases without non-appropriation clauses only when the municipality is required
to continue the lease under all circumstances except bankruptcy. There is no
limitation on the percentage of the Fund's assets that may be invested in
municipal lease obligations. In evaluating municipal lease obligations, the
Adviser will consider such factors as it deems appropriate, which may include:
(a) whether the lease can be canceled; (b) the ability of the lease obligee to
direct the sale of the underlying assets; (c) the general creditworthiness of
the lease obligor; (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality; (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding; (f) whether
the security is backed by a credit enhancement such as insurance; and (g) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services other than those covered by the lease
obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of investment or
those issued by issuers whose senior debt is rated investment grade at the time
of investment. The Fund may acquire unrated issues that the Adviser deems to be
comparable in quality to rated issues in which the Fund is authorized to invest.
A determination that an unrated lease obligation is comparable in quality to a
rated lease obligation will be subject to oversight and approval by the Trust's
Board of Trustees.
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that the
leases are readily marketable. An unrated municipal lease with a
non-appropriation risk that is backed by an irrevocable bank letter of credit or
an insurance policy issued by a bank or insurer deemed by the Adviser to be of
high quality and minimal credit risk, will not be deemed to be illiquid solely
because the underlying municipal lease is unrated, if the Adviser determines
that the lease is readily marketable because it is backed by the letter of
credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in zero
coupon New York Exempt Obligations. Zero coupon New York Exempt Obligations are
generally divided into two categories: pure zero obligations, which pay no
interest for their entire life and zero/fixed obligations, which pay no interest
for some initial period and thereafter pay interest currently. In the case of a
pure zero obligation, the failure to pay interest currently may result from the
obligation's having no stated interest rate, in which case the obligation pays
only principal at maturity and is issued at a discount from its stated principal
amount. A pure zero obligation may, in the alternative, provide for a stated
interest rate, but provide that no interest is payable until maturity, in which
case accrued, unpaid interest on the obligation may be capitalized as
incremental principal. The value to the investor of a zero coupon New York
Exempt Obligation consists of the economic accretion either of the difference
between the purchase price and the nominal principal amount (if no interest is
stated to accrue) or of accrued, unpaid interest during the New York Exempt
Obligation's life or payment deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on certain New York Exempt
Obligations. The underwriter of these certificates or receipts typically
purchases New York Exempt Obligations and deposits the obligations in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon New York Exempt Obligations described above. Although
under the terms of a custodial receipt the Fund would be typically authorized to
assert its rights directly against the issuer of the underlying obligation, the
Fund could be required to assert through the custodian bank those rights as may
exist against the underlying issuer. Thus, in the event the underlying issuer
fails to pay principal and/or interest when due, the Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
would be reduced in recognition of any taxes paid.
New York Exempt Obligation Components. The Fund may invest in New York
Exempt Obligations, the interest rate on which has been divided by the issuer
into two different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction Component")
pays an interest rate that is reset periodically through an auction process,
whereas the second of the components (the "Residual Component") pays a residual
interest rate based on the difference between the total interest paid by the
issuer on the New York Exempt Obligation and the auction rate paid on the
Auction Component. The Fund may purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
Component holders will decrease as the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the magnitude of
the increases and decreases in market value of Residual Components may be larger
than comparable changes in the market value of an equal principal amount of a
fixed rate New York Exempt Obligation having similar credit quality, redemption
provisions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating and
variable rate demand notes and bonds, which are New York Exempt Obligations
normally having a stated maturity in excess of one year, but which permit their
holder to demand payment of principal at any time, or at specified intervals.
The maturity of a floating or variable rate demand note or bond will be deemed
shortened by virtue of a demand feature for purposes of calculating the Fund's
net asset value or determining its weighted average maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of these obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time that
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, floating and variable
rate obligations are secured by letters of credit or other credit support
arrangements provided by banks. Use of letters of credit or other credit support
arrangements will not adversely affect the tax-exempt status of these
obligations. Because they are direct lending arrangements between the lender and
borrower, floating and variable rate obligations will generally not be traded.
In addition, no secondary market generally exists for these obligations,
although their holders may demand their payment at face value. For these
reasons, when floating and variable rate obligations held by the Fund are not
secured by letters of credit or
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
other credit support arrangements, the Fund's right to demand payment is
dependent on the ability of the borrower to pay principal and interest on
demand. the Adviser, on behalf of the Fund, will consider the creditworthiness
of the issuers of floating and variable rate demand obligations in the Fund on
an ongoing basis.
Participation Interests. The Fund may purchase from financial institutions
tax-exempt participation interests in New York Exempt Obligations. A
participation interest gives the Fund an undivided interest in the New York
Exempt Obligation in the proportion that the Fund's participation interest bears
to the total amount of the New York Exempt Obligation. These instruments may
have floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Trust's Board of Trustees has determined meets certain quality
standards or the payment obligation otherwise will be collateralized by
obligations of the United States government or its agencies and
instrumentalities ("U.S. government securities"). The Fund will have the right,
with respect to certain participation interests, to demand payment, on a
specified number of days' notice, for all or any part of the Fund's interest in
the New York Exempt Obligation, plus accrued interest. The Fund intends to
exercise its right with respect to these instruments to demand payment only upon
a default under the terms of the New York Exempt Obligation or to maintain or
improve the quality of its investment portfolio.
Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Bonds it owns or an increase in the price of Municipal
Bonds it proposes to purchase, the Fund may enter into financial futures
contracts and invest in options on financial futures contracts that are traded
on a domestic exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Bonds or relate to debt
securities the prices of which are anticipated by the Adviser to correlate with
the prices of the Municipal Bonds owned or to be purchased by the Fund.
In entering into a financial futures contract, the Fund will be required to
deposit with the broker through which it undertakes the transaction an amount of
cash or cash equivalents equal to approximately 5% of the contract amount. This
amount, which is known as "initial margin," is subject to change by the exchange
or board of trade on which the contract is traded, and members of the exchange
or board of trade may charge a higher amount. Initial margin is in the nature of
a performance bond or good faith deposit on the contract that is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. In accordance with a process known as
"marking-to-market," subsequent payments, known as "variation margin," to and
from the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable. At
17
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
any time prior to the expiration of a futures contract, the Fund may elect to
close the position by taking an opposite position, which will operate to
terminate the Fund's existing position in the contract.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at a
specified price, date, time and place. Unlike the direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the futures contract. The potential
loss related to the purchase of an option on financial futures contracts is
limited to the premium paid for the option (plus transaction costs). The value
of the option may change daily and that change would be reflected in the net
asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options on
financial futures contracts be engaged in for bona fide hedging purposes, or if
the Fund enters into futures contracts for speculative purposes, that the
aggregate initial margin deposits and premiums paid by the Fund will not exceed
5% of the market value of its assets. In addition, the Fund will, with respect
to its purchases of financial futures contracts, establish a segregated account
consisting of cash or cash equivalents in an amount equal to the total market
value of the futures contracts, less the amount of initial margin on deposit for
the contracts. The Fund's ability to trade in financial futures contracts and
options on financial futures contracts may be limited to some extent by the
requirements of the Code, applicable to a regulated investment company that are
described below under "Dividends, Distributions and Taxes."
Although the Fund intends to enter into financial futures contracts and
options on financial futures contracts that are traded on a domestic exchange or
board of trade only if an active market exists for those instruments, no
assurance can be given that an active market will exist for them at any
particular time. If closing a futures position in anticipation of adverse price
movements is not possible, the Fund would be required to make daily cash
payments of variation margin. In those circumstances, an increase in the value
of the portion of the Fund's investments being hedged, if any, may offset
partially or completely losses on the futures contract. No assurance can be
given, however, that the price of the securities being hedged will correlate
with the price movements in a futures contract and, thus,
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
provide an offset to losses on the futures contract or option on the futures
contract. In addition, in light of the risk of an imperfect correlation between
securities held by the Fund that are the subject of a hedging transaction and
the futures or options used as a hedging device, the hedge may not be fully
effective because, for example, losses on the securities held by the Fund may be
in excess of gains on the futures contract or losses on the futures contract may
be in excess of gains on the securities held by the Fund that were the subject
of the hedge. In an effort to compensate for the imperfect correlation of
movements in the price of the securities being hedged and movements in the price
of futures contracts, the Fund may enter into financial futures contracts or
options on financial futures contracts in a greater or lesser dollar amount than
the dollar amount of the securities being hedged if the historical volatility of
the futures contract has been less or greater than that of the securities. This
"over hedging" or "under hedging" may adversely affect the Fund's net investment
results if market movements are not as anticipated when the hedge is
established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities it holds and rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures or options positions. In addition, in those situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements on the futures contracts at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, when the Adviser believes
that market conditions warrant, the Fund may take a temporary defensive posture
and invest without limitation in short-term New York Exempt Obligations and
Taxable Investments. To the extent the Fund holds Taxable Investments and, under
certain market conditions, certain floating and variable rate demand obligations
or Auction Components, the Fund may not achieve its investment objective.
Money market instruments in which the Fund may invest include: U.S.
government securities; tax-exempt notes of municipal issuers rated, at the time
of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch or, if
not rated, by issuers having outstanding, unsecured debt then rated within the
three highest rating categories; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks, domestic
savings and loan associations and similar institutions); commercial paper rated
no lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch or the equivalent from
another major rating
19
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
service or, if unrated, of an issuer having an outstanding, unsecured debt issue
then rated within the three highest rating categories; and repurchase
agreements. At no time will the Fund's investments in bank obligations,
including time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct
obligations of the United States and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the United
States are Treasury Bills, Treasury Notes and Treasury Bonds, which differ
principally in terms of their maturities. Included among the securities issued
by U.S. government agencies and instrumentalities are: securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association certificates); securities that are supported by
the right of the issuer to borrow from the United States Treasury (such as
securities of Federal Home Loan Banks); and securities that are supported by the
credit of the instrumentality (such as Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis. When-issued or
delayed-delivery transactions arise when securities are purchased or sold by the
Fund with payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield to the Fund at the time
of entering into the transaction. The Fund's Custodian will maintain, in a
segregated account of the Fund, cash, debt securities or any grade or equity
securities having a value equal to or greater than the Fund's purchase
commitments; the Custodian will likewise segregate securities sold on a delayed
basis. The payment obligations and the interest rates that will be received are
each fixed at the time the Fund enters into the commitment and no interest
accrues to the Fund until settlement. Thus, it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to New York Exempt Obligations held in its portfolio. Under a stand-by
commitment, a broker, dealer or bank is obligated to repurchase at the Fund's
option specified securities at a specified price and, in this way, stand-by
commitments are comparable to put options. Each exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise the rights afforded by the
commitments for
20
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
trading purposes. The Fund anticipates that stand-by commitments will be
available from brokers, dealers and banks without the payment of any direct or
indirect consideration. The Fund may pay for stand-by commitments if payment is
deemed necessary, thus increasing to a degree the cost of the underlying New
York Exempt Obligation and similarly decreasing the security's yield to
investors.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
New York Exempt Obligations. Even though New York Exempt Obligations are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of New York Exempt
Obligations with longer remaining maturities typically fluctuate more than those
of similarly rated New York Exempt Obligations with shorter remaining maturities
such as the Fund intends to hold. The values of fixed-income securities also may
be affected by changes in the credit rating or financial condition of the
issuing entities.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal income taxes (and, with respect to
New York Exempt Obligations, to the exemption of interest on them from New York
state personal income taxes) are rendered by bond counsel to the respective
issuers at the time of issuance. Neither the Fund nor the Adviser will review
the proceedings relating to the issuance of New York Exempt Obligations or the
basis for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemption
on various types of Municipal Obligations and may enact other similar laws in
the future. If any such laws are enacted that would reduce the availability of
New York Exempt Obligations for investment by the Fund so as to affect the
Fund's shareholders adversely, the Trust will reevaluate the Fund's investment
objective and policies and might submit possible changes in the Fund's structure
to shareholders for their consideration. If legislation were enacted that would
treat a type of New York Exempt Obligation as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible Taxable Investment
within the applicable limits set forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that the
Adviser determines to be of comparable quality to the rated securities in which
the Fund may invest. Dealers may not maintain daily markets in unrated
securities and retail secondary markets for many of them may not exist. As a
result, the Fund's ability to sell these securities when the Adviser deems it
appropriate may be diminished.
21
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
Municipal Leases. Municipal leases in which the Fund may invest have
special risks not normally associated with Municipal Obligations. These
obligations frequently contain non-appropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under the
lease or contract unless money is appropriated for that purpose by a legislative
body annually or on another periodic basis. Municipal leases have additional
risks because they represent a type of financing that has not yet developed the
depth of marketability generally associated with other Municipal Obligations.
Moreover, although a municipal lease will be secured by financed equipment or
facilities, the disposition of the equipment or facilities in the event of
foreclosure might prove difficult. In addition, in certain instances the
tax-exempt status of the municipal lease will not be subject to the legal
opinion of a nationally recognized bond counsel, although in all cases the Fund
will require that a municipal lease purchased by the Fund be covered by a legal
opinion to the effect that, as of each effective date of the municipal lease,
the lease is the valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability
of issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost burdens
are allocated and reallocated among Federal, state and local governmental units.
Such non-payment would result in a reduction of income to the Fund, and could
result in a reduction in the value of the municipal lease experiencing
non-payment and a potential decrease in the net asset value of the Fund. Issuers
of municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays and
limitations with respect to the collection of principal and interest on such
municipal leases and the Fund may not, in all circumstances, be able to collect
all principal and interest to which it is entitled. To enforce its rights in the
event of a default in the lease payments, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Code may limit the extent to which
the Fund may exercise its rights by taking possession of such assets, because as
a regulated investment company the Fund is subject to certain limitations on its
investments and on the nature of its income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from time
to time, invest a portion of its assets in non-publicly traded New York Exempt
Obligations. Non-publicly traded securities may be less liquid than publicly
traded securities. Although non-publicly traded securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by the Fund.
22
<PAGE>
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Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
When-Issued and Delayed-Delivery Transactions. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery.
Purchasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Non-Diversified Classification. Investment in the Fund, which is classified
as a non-diversified fund under the 1940 Act, may present greater risks to
investors than an investment in a diversified fund. The investment return on a
non-diversified fund typically is dependent upon the performance of a smaller
number of securities relative to the number of securities held in a diversified
fund. The Fund's assumption of large positions in the obligations of a small
number of issuers will affect the value of its portfolio to a greater extent
than that of a diversified fund in the event of changes in the financial
condition, or in the market's assessment, of the issuers.
Special Considerations. In seeking to achieve its objective, the Fund may
invest without limit in Municipal Obligations which are private activity bonds.
Moreover, although the Fund does not currently intend to do so on a regular
basis, it may invest more than 20% of its assets in Municipal Obligations which
are repayable out of revenue streams generated from economically related
projects or facilities, if such investment is deemed necessary or appropriate by
the Adviser. To the extent the Fund's assets are concentrated in Municipal
Obligations payable from revenues on economically related projects and
facilities, the Fund will be subject to the particular risks presented by such
projects to a greater extent than it would be if the Fund's assets were not so
concentrated.
Certain substantial issuers of New York Exempt Obligations (including
issuers whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowing and fewer markets for their outstanding debt obligations. In recent
years, several different issues of municipal securities of New York State and
its agencies and instrumentalities and of New York City have been downgraded by
S&P and Moody's. On July 10, 1995, S&P downgraded its rating of New York City's
$23 billion of outstanding general obligation bonds to "BBB+" from "A-", citing
the City's chronic structural budget problems and weak economic outlook. S&P
stated that New York City's reliance on one-time revenue measures to close
annual budget gaps, a dependence on unrealized labor savings, overly optimistic
estimates of revenues and state and federal aid and City's continued high debt
levels also contributed to its decision to lower the ratings. On the other hand,
strong demand for New York Exempt Obligations has more recently had the effect
of permitting New York Exempt Obligations to be issued with yields relatively
lower, and after issuance, to trade in
23
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
the market at prices relatively higher, than comparably rated municipal
obligations issued by other jurisdictions. Moody's ratings of City bonds were
revised in November 1981 from B (in effect since 1977) to Ba1, in November 1983
to Baa, in December 1985 to Baa1, in May 1988 to A and again in February 1991 to
Baa1. On July 17, 1997, Moody's changed its outlook on City bonds to positive
from stable. Since July 8, 1997, Fitch has rated City bonds A.
Other considerations affecting the Fund's investment in New York Exempt
Obligations are summarized in the SAI.
Year 2000. The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Smith Barney, the Fund's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the Fund's
operations, including the handling of securities trades, pricing and account
services. The Adviser and Smith Barney have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Adviser has been
advised by the Fund's custodian, transfer agent and accounting service agent
that they are also in the process of modifying their systems with the same goal.
There can, however, be no assurance that the Adviser, Smith Barney or any other
service provider will be successful, or that interaction with other
non-complying computer systems will not impair Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer acting as agent.
The Fund cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur if all of the securities held by the Fund are replaced
once during a period of one year. The Adviser will not consider turnover rate a
limiting factor in making investment decisions consistent with the investment
objective and policies of the Fund.
24
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees.
Short-term investments that mature in 60 days or less are valued at amortized
cost. Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the SAI.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund declares dividends from its net investment income (that is, income
other than net realized capital gains) monthly; dividends ordinarily will be
paid on the last Friday of each calendar month to shareholders of record as of
the three business days prior thereto. The Fund's net realized capital gains, if
any, are declared and distributed annually, normally at the end of the calendar
year in which earned or at the beginning of the subsequent year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make a distribution
shortly before December 31 of each year of any undistributed ordinary income or
capital gains and expects to pay any other distributions as are necessary to
avoid the application of this tax.
The per share dividends on Class C shares of the Fund may be lower than the
per share dividends on Class A and Class Y shares principally as a result of the
distribution fee applicable with respect to Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per share
dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be in
the same amount for Class A, Class C and Class Y shares.
25
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
Taxes
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from the Fund's net
investment income (other than dividends derived from interest earned on
qualifying tax-exempt obligations as described below) and distributions of the
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, regardless of how long shareholders in the Fund have held their
shares and whether the dividends or distributions are received in cash or
reinvested in additional shares of the Fund. Distributions of the Fund's net
realized long-term capital gains will be taxable to shareholders as long-term
capital gains, regardless of how long shareholders have held their shares of the
Fund and whether the distributions are received in cash or are reinvested in
additional Fund shares. In addition, as a general rule, a shareholder's gain or
loss on a sale or redemption of shares of the Fund will be a long-term capital
gain or loss if the shareholder has held the shares for more than one year and
will be a short-term capital gain or loss if the shareholder has held the shares
for one year or less.
Dividends paid by the Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross incomes for Federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of the Fund derived from interest on Municipal
Obligations, the interest on which is a specific tax preference item for Federal
income tax purposes, will be a specific tax preference item for purposes of the
Federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum income
tax and corporate shareholders may incur a larger Federal environmental tax
liability through the receipt of dividends and distributions from the Fund if
the environmental tax is reinstated as proposed by President Clinton. Dividends
of the Fund derived from interest on New York Exempt Obligations will be exempt
from New York State personal income (but not corporate franchise or income)
taxes.
Statements as to the tax status of the dividends and distributions received
by shareholders of the Fund are mailed annually. These statements set forth the
dollar amount of income excluded from Federal income taxes and the dollar
amount, if any, subject to Federal income taxes. Statements from the Fund will
also show the dollar amount of income excluded or exempted from New York State
personal income taxes and the dollar amount, if any, subject to these taxes.
These statements will also designate the amount of exempt-interest dividends
that are a specific preference item for purposes of the Federal individual and
corporate alternative minimum taxes.
Shareholders of the Fund should consult their tax advisors with specific
26
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
reference to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows New York taxpayers who are individuals how to
translate Federal and New York State tax savings from investments such as the
Fund into an equivalent return from a taxable investment. To the extent that the
equivalent taxable yields illustrated in this table are based on an effective
tax rate which combines the Federal and New York marginal income tax rates, the
table is not applicable to individuals who do not pay New York State personal
income taxes. The yields used below are for illustration only and are not
intended to represent current or future yields for the Fund, which may be higher
or lower than those shown.
<TABLE>
<CAPTION>
New York,
Combined 1997 State, City New York Tax-Exempt
State Federal and Federal Equivalent Yields
Taxable Income and City Marginal Effective
Single Joint Rates**** Rates Rate** 2.00% 3.00% 4.00% 5.00% 6.00%
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-24,650 0-40,001 11.24% 15.00% 24.55% 2.65% 3.98% 5.30% 6.63% 7.95%
24,001-59,750 41,200-99,600 11.31 28.00 36.14 3.13 4.70 6.26 7.83 9.40
59,750-124,650 99,600-151,750 11.31 31.00 38.80 3.27 4.90 6.54 8.17 9.80
124,650-271,050 151,750-271,050 11.31 36.00 43.24 3.52 5.29 7.05 8.81 10.57
over 271,050 over 271,050 11.31 39.60 46.43 3.73 5.60 7.47 9.33 11.20
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
New York,
Combined 1997 State, City New York Tax-Exempt
State Federal and Federal Equivalent Yields
Taxable Income and City Marginal Effective
Single Joint Rates**** Rates Rate** 7.00% 8.00% 9.00% 10.00%
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-24,650 0-40,000 11.24% 15.00% 24.55% 9.28% 10.60% 11.93% 13.25%
24,650-59,750 41,200-99,600 11.31 28.00 36.14 10.96 12.53 14.09 15.66
59,750-124,650 99,600-151,750 11.31 31.00 38.80 11.44 13.07 14.71 16.34
124,650-271,050 151,750-271,050 11.31 36.00 43.24 12.33 14.09 15.86 17.62
over 271,050 over 271,050 11.31 39.60 46.43 13.07 14.93 16.80 18.67
- ------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Code. It is assumed
that taxable income as defined in the Code is the same as under the New
York State or City personal income tax law, however, New York State or City
taxable law may differ due to differences in exemptions, itemized
deductions, and other items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates and rate brackets for 1997, including indexing the rate
brackets for inflation. These rates include the effect of deducting state
and City taxes on your Federal return. For New York purposes, these
combined rates reflect the expected New York State and New York City tax
and surcharge rates for 1997.
*** These represent New York State, City and Federal Tax Equivalent Yields.
**** These rates represent the highest New York State and City personal income
tax rates within the applicable Federal income tax brackets for 1997.
The Federal tax rates and New York State and New York City tax rates shown
are those in effect for 1997 and are subject to change. The calculations
reflected in the table assume that no income will be subject to the Federal
alternative minimum taxes.
27
<PAGE>
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Purchase of Shares
- --------------------------------------------------------------------------------
General
The Fund offers three Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $15,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary-Alternate
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including certain
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class C or Class Y shares. Smith Barney and other
broker/dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at the Transfer Agent are not subject to a
maintenance fee.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For shareholders purchasing shares of the Fund through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A
and Class C shares and the subsequent investment requirement for all Classes is
$25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment requirement
for Class A and Class C shares and the subsequent investment requirement for all
Classes is $50. There are no minimum investment requirements in Class A shares
for employees of Travelers and its subsidiaries, including Smith Barney,
Directors or Trustees of any of the Smith Barney Mutual Funds, and their
immediate family. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's account by
the Fund's transfer agent, First Data. Share certificates are issued only upon a
shareholder's written request to First Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day (the "trade
date").
28
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Orders received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the Fund calculates its net asset value are
priced according to the net asset value determined on that day, provided the
order is received by the Fund or Smith Barney prior to Smith Barney's close of
business. For shares purchased through Smith Barney or Introducing Brokers
purchasing through Smith Barney, payment for Fund shares is due on the third
business day (the "settlement date") after the trade date. In all other cases,
payments must be made with the purchase order.
Systematic Investment Plan
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder, to provide systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to complete
the transfer will be charged a fee of up to $25 by Smith Barney or the Transfer
Agent. The Systematic Investment Plan also authorizes Smith Barney to apply cash
held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.
Initial Sales Charge Alternative -- Class A Shares
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
Sales
Charge as Sales Dealers
% of Charge as Reallowance
Offering % of as % of
Amount of Investment Price Amount Invested Offering Price
================================================================================
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class C shares is waived. See "Deferred Sales Charge
Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
29
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
Initial Sales Charge Waivers
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees or members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of such company
with the Fund by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a mutual
fund which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) purchases by shareholders who have redeemed Class A shares in
the Fund (or Class A shares of another fund of the Smith Barney Mutual Funds
that are offered with a sales charge) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) purchases by investors participating in
a Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
Right of Accumulation
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge, or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Fund and of funds sponsored by Smith Barney which
are offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In order
to obtain such discount, the purchaser must provide sufficient information at
the time of purchase
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
to permit verification that the purchase qualifies for the reduced sales charge.
The right of accumulation is subject to modification or discontinuance at any
time with respect to all shares purchased thereafter.
Group Purchases
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enables Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and its members,
and must agree to include sales and other materials related to the Fund in its
publications and mailing to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to purchase shares at net asset value by
aggregating the investments over a 13 month period, provided that the investor
refers to such Letter when placing orders. For purposes of a Letter of Intent,
the "Amount of
31
<PAGE>
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Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Fund and other funds of the Smith Barney
Mutual Funds offered with a sales charge over a 13 month period based on the
total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or the Transfer Agent to obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Fund and agree to purchase a total of $15,000,000 of Class Y shares of the Fund
within thirteen months from the date of the Letter. If a total investment of
$15,000,000 is not made with the thirteen-month period, all Class Y shares
purchased to date will the transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further
information.
Deferred Sales Charge Alternatives
CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and (b)
Class A shares that were purchased without an initial sales charge but subject
to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class C shares and Class A shares that are CDSC Shares, shares
redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase.
In determining the applicability of any CDSC, it will be assumed that a
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
Waivers of CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other funds of the Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part of
the redemption proceeds within 60 days and receive pro rata credit for any CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to other requirements of the
fund into which exchanges are made.
33
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
FUND NAME
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
34
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the Fund.
** Available for exchange with Class A shares of the Fund. In addition, Class C
shareholders who own Class C shares of the Fund may exchange Fund shares for
Class C shares of this Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class C shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
35
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Fund who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. The Adviser may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may, at
its discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Redemption of Shares
- --------------------------------------------------------------------------------
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which
36
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Class, or if the investor owns fewer shares of the Class than specified, the
redemption request will be delayed until the Fund's transfer agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Intermediate Maturity New York Municipals Fund
Class A, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution, such as domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
37
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Telephone Redemption and Exchange Program.
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization form, including a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/ Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for the following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and
38
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
exchange program or to impose a charge for this service at any time following at
least seven (7) days' prior notice to shareholders.
Automatic Cash Withdrawal Plan
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the value of a shareholder's shares subject to the CDSC.) For
further information regarding the automatic cash withdrawal plan, shareholders
should contact a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include the Fund's current dividend return. These
figures are computed separately for Class A, Class C and Class Y shares of the
Fund. These figures are based on historical earnings and are not intended to
indicate future performance. Total return is computed for a specified period of
time assuming deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and capital gain
distributions on the reinvestment dates at prices calculated as stated in this
Prospectus, then dividing the value of the investment at the end of the period
so calculated by the initial amount invested and
39
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
subtracting 100%. The standard average annual total return, as prescribed by the
SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The yield of a Fund Class refers to the net investment income earned by
investments in the Class over a thirty-day period. This net investment income is
then annualized; i.e., the amount of income earned by the investments during
that 30-day period is assumed to be earned each 30-day period for twelve periods
and is expressed as a percentage of the investments. The yield is calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The Fund calculates current
dividend return for each Class by annualizing the most recent monthly
distribution and dividing by the net asset value or the maximum public offering
price (including sales charge) on the last day of the period for which current
dividend return for a Fund Class is presented. The current dividend return for
each Class may vary from time to time depending on market conditions, the
composition of its investment portfolio and operating expenses. These factors
and possible differences in the methods used in calculating current dividend
return should be considered when comparing a Class' current return to yields
published for other investment companies and other investment vehicles. The Fund
may also include comparative performance information in advertising or marketing
its shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
- --------------------------------------------------------------------------------
Management of the Trust and the Fund
- --------------------------------------------------------------------------------
Board of Trustees
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the companies that furnish services
to the Fund, including agreements with the Fund's investment adviser,
administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's investment adviser and
administrator. The SAI contains background information regarding each Trustee of
the Trust and the executive officers of the Fund.
Investment Adviser and Administrator -- MMC
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to an investment advisory agreement,
approved by the Trust's Board of Trustees. The Adviser (through predecessor
40
<PAGE>
- --------------------------------------------------------------------------------
Management of the Trust and the Fund (continued)
- --------------------------------------------------------------------------------
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. The Adviser renders investment advice to
investment companies that had aggregate assets under management as of January
31, 1998, in excess of $94 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Adviser manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfolio
managers and securities analysts who provide research services to the Fund. For
investment advisory services rendered to the Fund, the Fund pays the Adviser a
fee at the annual rate of 0.30% of the value of the Fund's average daily net
assets. Prior to November 17, 1995, the Fund paid the Adviser an investment
advisory fee at the annual rate of 0.35% of the value of the Fund's average
daily net assets. For the fiscal year ended November 30, 1997, the Fund paid an
investment advisory fee to the Adviser in an amount equal to 0.11% of the Fund's
average daily net assets. During the same period, the Fund's investment adviser
waived investment advisory fees in an amount equal to 0.19% of the value of the
Fund's average daily net assets.
Administrator -- MMC
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1997, the Fund
paid an administration fee to MMC in an amount equal to 0.08% of the Fund's
average daily net assets and the administrator voluntarily waived administrative
fees in an amount equal to 0.12% of the value of the Fund's average daily net
assets.
Portfolio Management
Peter Coffe, Vice President and Investment Officer of the Fund, has been
the portfolio manager of the Fund since February 20, 1996. He manages the
day-to-day operations of the Fund, including making all investment decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended November 30, 1997,
is included in the Annual Report dated November 30, 1997. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
41
<PAGE>
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A and Class C shares of the Fund at the annual rate of 0.15% of
the average daily net assets of the respective Class. Smith Barney is also paid
a distribution fee with respect to Class C shares at the annual rate of 0.20% of
the average daily net assets attributable to that Class. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class C shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential investors;
payments to and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of shares;
interest and/or carrying charges; and indirect and overhead costs of Smith
Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A and Class C shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a holder
of that Class. Smith Barney Financial Consultants may receive different levels
of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class C shares are not tied
exclusively to the shareholder distribution and service expenses actually
incurred by Smith Barney, and the payments may exceed expenses actually incurred
by Smith Barney. The Trust's Board of Trustees will evaluate the appropriateness
of the Plan and its payment terms with respect to the Fund on a continuing basis
and in doing so will consider all relevant factors, including expenses borne by
Smith Barney and amounts received under the Plan and proceeds of the CDSC.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Trust was organized on October 17, 1991 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust."
Each Class of the Fund represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights, privileges
and preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges for each Class; (c) the distribution
and/or service fees
42
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
borne by each Class pursuant to the Plan; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; and (f) the exchange privilege of each Class. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take
appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the Fund
will be voted on a Fund-wide basis on all matters except matters affecting only
the interests of one Class, in which case only shares of the affected Class
would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the Trust's
outstanding shares and the Trust will assist shareholders in calling such a
meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
The Fund sends shareholders a semi-annual report and an audited annual
report, each of which includes a listing of investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Fund also plans to
consolidate the mailing of its Prospectus so that a shareholder having multiple
accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their
Financial Consultants or First Data.
43
<PAGE>
SMITH BARNEY
------------
A Member of TraverlersGroup[Logo]
Smith Barney
Intermediate
Maturity
New York
Municipals Fund
388 Greenwich Street
New York, New York 10013
FD 0247 3/98
As filed with the Securities and Exchange Commission on March 30, 1998
Securities Act Registration No. 33 -43446
Investment Company Act Registration No. 811-6444
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 18 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 18
__________________ [ ]
Smith Barney Investment Trust
(a Massachusetts Business Trust)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 816-6474
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Smith Barney Investment Trust
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
_______________
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate
box):
[X] Immediately upon filing pursuant to [ ] On (date) pursuant to
paragraph (b)
paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ]
On (date) pursuant to
paragraph (a)(2) paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates
a new effective date for a previously filed
post effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
SMITH BARNEY INVESTMENT TRUST
FORM N-1A
CONTENTS OF REGISTRATION STATEMENT
Front Cover
Contents Page
Cross Reference Sheet
Part A:
PROSPECTUS
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
SMITH BARNEY INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND
SMITH BARNEY LARGE CAPITALIZATION GROWTH FUND
Part B:
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS FUND
SMITH BARNEY INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND
SMITH BARNEY LARGE CAPITALIZATION GROWTH FUND
Part C: Other Information
SMITH BARNEY INVESTMENT TRUST
FORM N-1A
CROSS-REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and Management Policies;
Additional Information
5. Management of the Fund
Management of the Trust and the
Fund; Distributor; Additional
Information; Annual Report
6. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares; Valuation of
Shares; Exchange Privilege;
Redemption of Shares; Minimum
Account Size; Distributor;
Additional Information
8. Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Pending Legal Proceedings
Not applicable
Part B Item No.
Statement of Additional
Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Table of Contents
12. General Information and
History
Distributor; Additional
Information
13. Investment Objective and
Policies
Investment Objectives and
Management Policies
14. Management of the Fund
Management of the Trust and the
Funds; Distributor
15. Control Persons and Principal
Holders of Securities
Management of the Trust and the
Funds
16. Investment Advisory and Other
Services
Management of the Trust and the
Funds; Distributor
17. Brokerage Allocation and Other
Services
Investment Objectives and
Management Policies; Distributor
18. Capital Stock and Other
Securities
Investment Objectives and
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing of Securities Being Offered
Purchase of Shares; Redemption of
Shares; Valuation of Shares;
Distributor; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
PART A
PROSPECTUS
P R O S P E C T U S
SMITH BARNEY
Intermediate
Maturity
California
Municipals
Fund
MARCH 30, 1998
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE
EVERYDAY.
<PAGE>
PROSPECTUS MARCH 30, 1998
Smith Barney Intermediate Maturity
California Municipals Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Smith Barney Intermediate Maturity California Municipals Fund (the "Fund")
seeks to provide California investors with as high a level of current income
exempt from Federal income taxes and California State personal income taxes as
is consistent with the preservation of principal. The Fund invests primarily in
investment grade obligations issued by the State of California and its politi-
cal subdivisions, agencies and public authorities. The Fund is one of a number
of funds, each having distinct investment objectives and policies making up the
Smith Barney Investment Trust (the "Trust"). The Trust is an open-end manage-
ment investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of the other funds offered by the Trust are described
in separate prospectuses which may be obtained by calling or writing the Trust
at the telephone number or address set forth above or by contacting a Smith
Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a State-
ment of Additional Information (the "SAI") dated March 30, 1998, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The SAI has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 12
- -------------------------------------------------
VALUATION OF SHARES 26
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 26
- -------------------------------------------------
PURCHASE OF SHARES 29
- -------------------------------------------------
EXCHANGE PRIVILEGE 35
- -------------------------------------------------
REDEMPTION OF SHARES 37
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 40
- -------------------------------------------------
PERFORMANCE 40
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 41
- -------------------------------------------------
DISTRIBUTOR 42
- -------------------------------------------------
ADDITIONAL INFORMATION 43
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentations in connection with this offering other than those contained in this
Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the distribu-
tor. This Prospectus does not constitute an offer by the Fund or the distribu-
tor to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such an
offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed informa-
tion appearing elsewhere in this Prospectus and in the SAI. Cross references
in this summary are to headings in this Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund seeks to provide California investors with as
high a level of current income exempt from Federal income taxes and California
State personal income taxes as is consistent with the preservation of princi-
pal. The Fund invests primarily in investment grade obligations issued by the
State of California and its political subdivisions, agencies and public
authorities. The weighted average maturity of the Fund's portfolio securities
will normally not be less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally invest
will be no greater than 20 years. See "Investment Objective and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which differ
principally in terms of sales charges and rates of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of $15,000,000. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of the
average daily net assets of the Class. The initial sales charge may be waived
for certain purchases. Purchases of Class A shares of $500,000 or more will be
made at net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within
12 months of purchase. See "Prospectus Summary--No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.20% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Fund shares, which, when
combined with current holdings of Class C shares of the Fund, equal or exceed
$500,000 in the aggregate should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net
asset value
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
with no initial sales charge or CDSC. They are not subject to any service or
distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charge and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class C shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Fund. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of this Class. Because the Fund's future return cannot
be predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any con-
version rights of the classes in the context of their own investment time
frame.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more, will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The $500,000 investment may be met by adding the
purchase to the net asset value of all Class A shares offered with a sales
charge held in funds sponsored by Smith Barney Inc. ("Smith Barney") listed
under "Exchange Privilege." See "Purchase of Shares." Because the ongoing
expenses of Class A shares may be lower than those for Class C shares, pur-
chasers eligible to purchase Class A shares at net asset value should consider
doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for each Class of shares and "Valuation of Shares," "Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences among the Classes of
shares.
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney. Shares may also be purchased through a broker that
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund through
the Fund's transfer agent, First Data Investor Services Group, Inc. ("First
Data"). See "'Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class C shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. The minimum investment requirements for purchases of Fund shares through
the Systematic Investment Plan are described below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial investment
requirement for Class A and Class C shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the
Systematic Investment Plan on a monthly basis is $25 and on a quarterly basis
is $50. See "Purchase of Shares."
REDEMPTION OF SHA 1998 as Accession Number 91155-98-000062.
Included in Part C:
Consent of Independent Accountants is filed herewith.
(b) Exhibits
Unless otherwise noted, all references are to the Registrants
Registration Statement on Form N-1A (the Registration Statement") as filed
with the Securities and Exchange Commission ("SEC") on October 21,
1991 (File Nos. 33-43446 and 811-6444).
(1)(a) Registrants Master Trust Agreement dated October 17, 1991 and
Amendments to the Master Trust Agredings is a wholly owned subsidiary
of Travelers Group Inc. ("Travelers"), a diversified financial services hold-
ing company engaged, through its subsidiaries, principally in four business
segments: Investment Services including Asset Management, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respec-
tive net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from net investment
income. Distributions of net realized capital gains, if any, are paid annual-
ly. See "Dividends, Distributions and Taxes."
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by reinvestments will not be subject to any sales charge or
CDSC. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund will achieve its investment objective. Shares of the Fund, unlike certain
bank deposit accounts, are not guaranteed or insured by any Federal or state
authority. Changes in interest rates generally will result in increases or
decreases in the market value of the obligations held by the Fund. The yield
of the Fund may not be as high as those of other funds that invest in lower
quality and/or longer term securities. The Fund is not a tax-exempt money mar-
ket fund and therefore its investment portfolio can be expected to experience
greater volatility than that of a tax-exempt money market fund. The net asset
value of the Fund will be subject to greater fluctuation to the extent that
the Fund invests in zero coupon securities. The Fund's net asset value per
share will fluctuate depending on a combination of factors such as current
market interest rates and the creditworthiness of the issuers in whose securi-
ties the Fund invests. The Fund will not invest in obligations that are rated
lower than Baa by Moody's Investors Service, Inc. ("Moody's"), BBB by Standard
& Poor's Ratings Group ("S&P") or BBB by Fitch IBCA, Inc. ("Fitch"), at the
time of purchase. The ratings of Moody's, S&P and Fitch represent their opin-
ions as to the quality of the obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
The Fund may invest up to 20% of its total assets in unrated securities that
the Adviser determines to be of comparable quality to the securities rated
investment grade in which the Fund may invest. Dealers may not maintain daily
markets in unrated securities and retail secondary markets for many of them
may not exist; lack of markets may affect the Fund's ability to sell these
securities when the Adviser deems it appropriate. The Fund has the right to
invest without limitation in state and local obligations that are "private
activity bonds," the income from which may be taxable as a specific preference
item for purposes of the Federal alternative minimum tax. Thus, the Fund may
not be a suitable investment for investors who are subject to the alternative
minimum tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks.
The instruments exposing the Fund to risks are municipal leases, zero coupon
securities, custodial receipts, municipal obligation components, floating and
variable rate demand notes and bonds, and participation interests. Entering
into securities transactions on a when-issued or delayed-delivery basis are
investment techniques involv- ing risks to the Fund. See "Investment Objective
and Management Policies--
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Investment Techniques--Risk Factors and Special Considerations" and "Dividends,
Distributions and Taxes."
Investment in the Fund which is classified as a non-diversified fund, may
present a greater risk than an investment in a diversified fund. See "Invest-
ment Objective and Management Policies--Risk Factors and Special Considera-
tions." Investment in the Fund involves risks and special considerations appli-
cable to the State of California. See "Investment Objective and Management Pol-
icies--Risk Factors and Special Considerations."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based upon the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and the Fund's operating expenses for its
most recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND CLASS A CLASS C CLASS Y
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) None* 1.00% None
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES***
(as a percentage of average net assets)
Management fees (after fee waivers) 0.12% 0.12% 0.12%
12b-1 fees** 0.15 0.35 --
Other expenses 0.48 0.49 0.44
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES
(after waivers) 0.75% 0.96% 0.56%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but may be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Class C shares are subject to an ongoing distribution fee and, as a result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
*** "Other expenses" have been restated to reflect the reimbursement
percentages currently in effect for the Fund. During the fiscal year ended
November 30, 1997, the Fund's investment adviser and administrator
voluntarily waived portions of its fees and reimbursed the Fund for other
expenses in the aggregate amount equal to 0.37% of the value of the Fund's
average daily net assets thereby decreasing the amount paid in respect of
management fees to 0.00% of the value of the Funds average daily net
assets. This had the effect of lowering the Fund's overall expenses and
increasing the returns available to investors. If MMC had elected not to
waive fees and reimburse expenses, the Fund's total operating expenses for
Class A, Class C and Class Y shares for the fiscal year ended November 30,
1997 would have been 1.12%, 1.33% and 0.94%, respectively, of the value of
the Fund's average daily net assets. As of November 17, 1995, the Fund's
investment advisory fee was decreased from 0.35% to 0.30% of the average
daily net assets of the Fund.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class A shares of the Fund purchased through the Smith Barney Asset One Pro-
gram will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors actu-
ally may pay lower or no charges, depending on the amount purchased. See "Pur-
chase of Shares" and "Redemption of Shares." Smith Barney receives an annual
12b-1 service fee of 0.15% of the value of average daily net assets of Class A
shares. For Class C shares, Smith Barney receives an annual 12b-1 fee of 0.35%
of the value of average daily net assets of this Class, consisting of a 0.20%
distribution fee and a 0.15% service fee. "Other expenses" in the above table
includes fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each
time period:
Class A...................................... $28 $43 $61 $111
Class C...................................... 20 31 53 118
Class Y...................................... 6 18 31 70
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A...................................... $28 $43 $61 $111
Class C...................................... 10 31 53 118
Class Y...................................... 6 18 31 70
- ----------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report thereon appears in the Funds Annual Report
dated November 30, 1997. The following information for the period ended Novem-
ber 30, 1992 and for the fiscal years ended November 30, 1993 and November 30,
1994 has been audited by other auditors. This information should be read in
conjunction with the financial statements and related notes that also appear
in the Fund's Annual Report to shareholders, which is incorporated by refer-
ence into the SAI.
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS A SHARES 1997 1996 1995 1994 1993 1992(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $8.55 $8.53 $7.80 $8.50 $8.04 $7.90
- --------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income(1) 0.40 0.40 0.40 0.39 0.39 0.35
Net realized and
unrealized gain (loss) 0.11 0.02 0.73 (0.69) 0.46 0.14
- --------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.51 0.42 1.13 (0.30) 0.85 0.49
- --------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.40) (0.40) (0.40) (0.39) (0.39) (0.35)
Net realized gains -- -- -- (0.01) -- --
- --------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.40) (0.40) (0.40) (0.39) (0.35)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $8.66 $8.55 $8.53 $7.80 $8.50 $8.04
- --------------------------------------------------------------------------------------------
TOTAL RETURN(P) 6.13% 5.05% 14.84% (3.65)% 10.70% 6.33%++
- --------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $25,630 $24,537 $26,211 $25,359 $32,514 $10,667
- --------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses(2) 0.75% 0.77% 0.75% 0.75% 0.72% 0.65%+
Net investment income 4.65 4.69 4.89 4.73 4.45 4.81+
- --------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 9% 15% 8% 39% 16% 46%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from December 31, 1991 (inception date) to November 30,
1992.
(2) The investment adviser and administrator waived all or part of their fees
for the five years ended November 30, 1997. In addition, the investment
adviser reimbursed the Fund for $75,189 in expenses for the year ended
November 30, 1996. If such fees had not been waived and expenses had not
been reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES TO WITHOUT FEE WAIVERS
NET INVESTMENT INCOME AND REIMBURSEMENTS
----------------------------------- ------------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class
A $0.03 $0.07 $0.03 $0.04 $0.07 $0.11 1.12% 1.54% 1.16% 1.24% 1.49% 2.18%+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
(P)Total Return does not reflect deduction of any applicable sales charge.
9
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS C SHARES 1997 1996 1995 1994(1)
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.54 $8.52 $7.80 $7.76
- ---------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.38 0.38 0.38 0.01
Net realized and unrealized gain 0.11 0.02 0.72 0.05**
- ---------------------------------------------------------------------
Total Income From Operations 0.49 0.40 1.10 0.06
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.38) (0.38) (0.38) (0.02)
- ---------------------------------------------------------------------
Total Distributions (0.38) (0.38) (0.38) (0.02)
- ---------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.65 $8.54 $8.52 $7.80
- ---------------------------------------------------------------------
TOTAL RETURN(P) 5.92% 4.84% 14.36% 0.72%++
- ---------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $3,419 $2,607 $2,254 $45
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.96% 0.98% 0.98% 0.95%+
Net investment income 4.44 4.48 4.54 4.53+
- ---------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 9% 15% 8% 39%
- ---------------------------------------------------------------------
</TABLE>
(1) For the period from November 8, 1994 (inception date) to November 30,
1994.
(2) The investment adviser and administrator waived all or part of their fees
for the three years ended November 30, 1997 and the period ended November
30, 1994. In addition, the investment adviser reimbursed the Fund for
$75,189 in expenses for the year ended November 30, 1996. If such fees had
not been waived and expenses had not been reimbursed, the per share effect
on net investment income and the expense ratios would have been as
follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASES TO WITHOUT FEE WAIVERS
NET INVESTMENT INCOME AND REIMBURSEMENTS
----------------------- ------------------------
1997 1996 1995 1994 1997 1996 1995 1994
----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class C $0.03 $0.07 $0.03 $0.00* 1.33% 1.75% 1.39% 1.44%+
</TABLE>
* Amount represents less than $0.01 per share.
** The amount in this caption for each share outstanding throughout the period
may not accord with the change in aggregate gains and losses in the
portfolio securities for the period because of the timing of purchases and
withdrawals of shares in relation to the fluctuating market values of the
portfolio.
++Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
(P)Total Return does not reflect deduction of any applicable sales charge.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY INTERMEDIATE MATURITY
CALIFORNIA MUNICIPAL FUND
CLASS Y SHARES 1997 1996 1995 (1)
- -----------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.56 $8.54 $8.39
- -----------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.41 0.41 0.09
Net realized and unrealized gain 0.11 0.02 0.15
- -----------------------------------------------------------
Total Income From Operations 0.52 0.43 0.24
- -----------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.42) (0.41) (0.09)
- -----------------------------------------------------------
Total Distributions (0.42) (0.41) (0.09)
- -----------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.66 $8.56 $8.54
- -----------------------------------------------------------
TOTAL RETURN 6.20% 5.22% 2.92%++
- -----------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $292 $274 $261
- -----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.56% 0.59% 0.58%+
Net investment income 4.84 4.87 4.74+
- -----------------------------------------------------------
PORTFOLIO TURNOVER RATE 9% 15% 8%
- -----------------------------------------------------------
</TABLE>
(1) For the period from September 8, 1995 (inception date) to November 30,
1995.
(2) The investment adviser and administrator waived all or part of their fees
for the two years ended November 30, 1997 and the period ended November 30,
1995. In addition, the investment adviser reimbursed the Fund for $75,189
in expenses for the year ended November 30, 1996. If such fees had not been
waived and expenses had not been reimbursed, the per share effect on net
investment income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
EXPENSE RATIOS
PER SHARE DECREASE TO WITHOUT FEE WAIVERS
NET INVESTMENT INCOME AND REIMBURSEMENTS
----------------------- ---------------------
1997 1996 1995 1997 1996 1995
------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Class Y $0.03 $ 0.07 $0.03 0.94% 1.36% 0.99%+
</TABLE>
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is to provide California investors with as
high a level of current income exempt from Federal income taxes and California
State personal income taxes as is consistent with the preservation of princi-
pal. No assurance can be given that the Fund will be able to achieve its
investment objective, which may be changed only with the approval of a major-
ity (as defined in the Investment Company Act of 1940, as amended (the "1940
Act")) of the Fund's outstanding shares.
Under normal market conditions, the Fund attempts to invest 100% of its
assets in a portfolio of investment grade debt obligations issued by or on
behalf of the State of California and other states, territories and posses-
sions of the United States, the District of Columbia and their respective
authorities, agencies, instrumentalities and political subdivisions ("Munici-
pal Obligations"). For purposes of this Prospectus, debt obligations issued by
the State of California and its political subdivisions, agencies and public
authorities (together with certain other governmental issuers such as the Com-
monwealth of Puerto Rico), the interest from which debt obligations is, in the
opinion of bond counsel to the issuer, excluded from gross income for Federal
income tax purposes and exempt from California State personal income tax, are
defined as "California Exempt Obligations." The Fund will operate subject to a
fundamental investment policy providing that, under normal market conditions,
the Fund will invest at least 80% of its net assets in California Exempt Obli-
gations rated investment grade.
The Fund is classified as a non-diversified fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax and California State franchise tax to the extent that its earnings
are distributed to shareholders. To qualify as a regulated investment company,
the Fund will, among other things, limit its investments so that, at the close
of each quarter of the taxable year (a) not more than 25% of the market value
of the Fund's total assets will be invested in the securities of a single
issuer and (b) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer and the Fund will not own more than 10% of
the outstanding voting securities of a single issuer.
The Fund will invest at least 80% of its total assets in California Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moodys, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20%
of the Fund's total assets may be invested in unrated securities that are
deemed by
12
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the Adviser to be of a quality comparable to investment grade. The Fund will
not invest in California Exempt Obligations that are rated lower than invest-
ment grade at the time of purchase. Although California Exempt Obligations
rated Baa by Moody's, BBB by S&P or BBB by Fitch are considered to be invest-
ment grade, they may be viewed as being subject to greater risks than other
investment grade securities. California Exempt Obligations rated Baa by
Moody's, for example, are considered medium grade obligations that lack out-
standing investment characteristics and have speculative characteristics as
well. California Exempt Obligations rated BBB by S&P are regarded as having an
adequate capacity to pay principal and interest. California Exempt Obligations
rated BBB by Fitch are deemed to be subject to a higher likelihood that their
rating will fall below investment grade than higher rated bonds.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the California Exempt Obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
The Adviser's judgment as to credit quality of a California Exempt Obligation,
thus, may differ from that suggested by the ratings published by a rating serv-
ice. A description of Moody's, S&P and Fitch ratings relevant to the Fund's
investments is included as an Appendix to the SAI. The policies of the Fund
described above as to ratings of portfolio investments will apply only at the
time of the purchase of a security, and the Fund will not be required to dis-
pose of a security in the event Moody's, S&P or Fitch downgrades its assessment
of the credit characteristics of the security's issuer.
California Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenue derived from a partic-
ular facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general tax-
ing power. Notes are short-term obligations of issuing municipalities or agen-
cies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. California Exempt Obligations bear fixed, floating
and variable rates of interest, and variations exist in the security of Cali-
fornia Exempt Obligations, both within a particular classification and between
classifications.
The yields on, and values of, California Exempt Obligations are dependent on
a variety of factors, including general economic and monetary conditions, con-
ditions in the California Exempt Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently,
California Exempt Obligations with the same maturity, coupon and rating may
have different yields or values, whereas obligations of the same maturity and
coupon with different ratings
13
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
may have the same yield or value. See "Risk Factors and Special Considera-
tions--California Exempt Obligations."
Issuers of California Exempt Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of
the obligations or upon the ability of municipalities to levy taxes. The possi-
bility also exists that, as a result of litigation or other conditions, the
power or ability of any issuer to pay, when due, the principal of, and interest
on, its obligations may be materially affected.
MATURITY OF OBLIGATIONS HELD BY THE FUND
The Adviser believes that the Fund may offer an attractive investment oppor-
tunity for investors seeking a higher effective tax yield than a tax-exempt
money market fund or a tax-exempt short-term bond fund and less fluctuation in
net asset value than a longer term tax-exempt bond fund. The Fund will normally
invest in intermediate maturity securities; the weighted average maturity of
the Fund will normally be not less than three nor more than 10 years. The maxi-
mum remaining maturity of the securities in which the Fund will normally invest
will be no greater than 20 years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in California Exempt Obligations that are
"private activity bonds," as defined in the Code, which are in most cases reve-
nue bonds. Private activity bonds generally do not carry the pledge of the
credit of the issuing municipality, but are guaranteed by the corporate entity
on whose behalf they are issued. Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance non-governmental activi-
ties is a specific tax preference item for purposes of the Federal individual
and corporate alternative minimum taxes. Individual and corporate shareholders
may be subject to a Federal alternative minimum tax to the extent the Fund's
dividends are derived from interest on these bonds. Dividends derived from
interest income on California Exempt Obligations are a "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum tax.
See "Dividends, Distributions and Taxes." Private activity bonds held by the
Fund will be included in the term California Exempt Obligations for purposes of
determining compliance with the Fund's policy of investing at least 80% of its
total assets in California Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in California Exempt Obligations that are
repayable out of revenues generated from economically related projects or
facilities
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
or debt obligations whose issuers are located in the same state. Sizable
investments in these obligations could involve an increased risk to the Fund
should any of the related projects or facilities experience financial diffi-
culties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to 10% of its net assets in illiquid securities,
which term includes securities subject to contractual or other restrictions on
resale and other instruments that lack readily available markets. In addition,
up to 5% of the value of the Fund's assets may be invested in securities of
entities that have been in continuous operation for fewer than three years.
TYPES OF CALIFORNIA EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal leases."
Municipal leases may take the form of a lease or an installment purchase con-
tract issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. Interest payments on
qualifying municipal leases are exempt from Federal income taxes and state
income taxes within the state of issuance. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. In addition
to the "non-appropriation" risk, these securities represent a relatively new
type of financing that has not yet developed the depth of marketability asso-
ciated with more conventional bonds. Although "non-appropriation" lease obli-
gations are often secured by the underlying property, disposition of the prop-
erty in the event of foreclosure might prove difficult. The Fund may invest in
municipal leases without non-appropriation clauses only when the municipality
is required to continue the lease under all circumstances except bankruptcy.
There is no limitation on the percentage of the Fund's assets that may be
invested in municipal lease obligations. In evaluating municipal lease obliga-
tions, the Adviser will consider such factors as it deems appropriate, which
may include: (a) whether the lease can be canceled; (b) the ability of the
lease obligee to direct the sale of the underlying assets; (c) the general
creditworthiness of the lease obligor; (d) the likelihood that the municipal-
ity will discontinue appropriating funding for the leased property in the
event such property is no longer considered essential by the municipality; (e)
the legal recourse of the lease obligee in the event of such a failure to
appropriate funding; (f) whether the security is backed by a credit enhance-
ment such as insurance; and
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
(g) any limitations which are imposed on the lease obligor's ability to uti-
lize substitute property or services other than those covered by the lease
obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of investment or
those issued by issuers whose senior debt is rated investment grade at the
time of investment. The Fund may acquire unrated issues that the Adviser deems
to be comparable in quality to rated issues in which the Fund is authorized to
invest. A determination that an unrated lease obligation is comparable in
quality to a rated lease obligation will be subject to oversight and approval
by the Trust's Board of Trustees.
Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that the
leases are readily marketable. An unrated municipal lease with a non-appropri-
ation risk that is backed by an irrevocable bank letter of credit or an insur-
ance policy issued by a bank or insurer deemed by the Adviser to be of high
quality and minimal credit risk, will not be deemed to be illiquid solely
because the underlying municipal lease is unrated, if the Adviser determines
that the lease is readily marketable because it is backed by the letter of
credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in zero
coupon California Exempt Obligations. Zero coupon California Exempt Obliga-
tions are generally divided into two categories: pure zero obligations, which
are those that pay no interest for their entire life and zero/fixed obliga-
tions, which pay no interest for some initial period and thereafter pay inter-
est currently. In the case of a pure zero obligation, the failure to pay
interest currently may result from the obligation's having no stated interest
rate, in which case the obligation pays only principal at maturity and is
issued at a discount from its stated principal amount. A pure zero obligation
may, in the alternative, provide for a stated interest rate, but provide that
no interest is payable until maturity, in which case accrued, unpaid interest
on the obligation may be capitalized as incremental principal. The value to
the investor of a zero coupon California Exempt Obligation consists of the
economic accretion either of the difference between the purchase price and the
nominal principal amount (if no interest is stated to accrue) or of accrued,
unpaid interest during the California Exempt Obligation's life or payment
deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on certain California Exempt
Obligations. The underwriter of these certificates or receipts typically pur-
chases California Exempt Obligations and deposits the obligations in an irrev-
ocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Custodial
receipts evidencing specific coupon or
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
principal payments have the same general attributes as zero coupon California
Exempt Obligations described above. Although under the terms of a custodial
receipt the Fund would be typically authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the under-
lying issuer. Thus, in the event the underlying issuer fails to pay principal
and/or interest when due, the Fund may be subject to delays, expenses and risks
that are greater than those that would have been involved if the Fund had pur-
chased a direct obligation of the issuer. In addition, in the event that the
trust or custodial account in which the underlying security has been deposited
is determined to be an association taxable as a corporation, instead of a non-
taxable entity, the yield on the underlying security would be reduced in recog-
nition of any taxes paid.
California Exempt Obligation Components. The Fund may invest in California
Exempt Obligations, the interest rate on which has been divided by the issuer
into two different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction Component")
pays an interest rate that is reset periodically through an auction process,
whereas the second of the components (the "Residual Component") pays a residual
interest rate based on the difference between the total interest paid by the
issuer on the California Exempt Obligation and the auction rate paid on the
Auction Component. The Fund may purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is generally
determined by subtracting the interest rate paid to the holders of Auction Com-
ponents from a fixed amount, the interest rate paid to Residual Component hold-
ers will decrease as the Auction Component's rate increases and increase as the
Auction Component's rate decreases. Moreover, the magnitude of the increases
and decreases in market value of Residual Components may be larger than compa-
rable changes in the market value of an equal principal amount of a fixed rate
California Exempt Obligation having similar credit quality, redemption provi-
sions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating and
variable rate demand notes and bonds, which are California Exempt Obligations
normally having a stated maturity in excess of one year, but which permit their
holder to demand payment of principal at any time, or at specified intervals.
The maturity of a floating or variable rate demand note or bond will be deemed
shortened by virtue of a demand feature for purposes of calculating the Fund's
net asset value or determining its weighted average maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the out-
standing principal amount of the obligations plus accrued interest upon a spec-
ified number of
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
days' notice to the holders of these obligations. The interest rate on a float-
ing rate demand obligation is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time that rate is adjusted. The
interest rate on a variable rate demand obligation is adjusted automatically at
specified intervals. Frequently, floating and variable rate obligations are
secured by letters of credit or other credit support arrangements provided by
banks. Use of letters of credit or other credit support arrangements will not
adversely affect the tax-exempt status of these obligations. Because they are
direct lending arrangements between the lender and borrower, floating and vari-
able rate obligations will generally not be traded. In addition, no secondary
market generally exists for these obligations, although their holders may
demand their payment at face value. For these reasons, when floating and vari-
able rate obligations held by the Fund are not secured by letters of credit or
other credit support arrangements, the Fund's right to demand payment is depen-
dent on the ability of the borrower to pay principal and interest on demand.
The Adviser, on behalf of the Fund, will consider on an ongoing basis the cred-
itworthiness of the issuers of floating and variable rate demand obligations
held by the Fund.
Participation Interests. The Fund may purchase from financial institutions
tax-exempt participation interests in California Exempt Obligations. A partici-
pation interest gives the Fund an undivided interest in the California Exempt
Obligation in the proportion that the Fund's participation interest bears to
the total amount of the California Exempt Obligation. These instruments may
have floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Trust's Board of Trustees has determined meets certain quality
standards, or the payment obligation otherwise will be collateralized by obli-
gations of the United States government or its agencies and instrumentalities
("U.S. government securities"). The Fund will have the right, with respect to
certain participation interests, to demand payment, on a specified number of
days' notice, for all or any part of the Fund's interest in the California
Exempt Obligation, plus accrued interest. The Fund intends to exercise its
right with respect to these instruments to demand payment only upon a default
under the terms of the California Exempt Obligation or to maintain or improve
the quality of its investment portfolio.
Financial Futures and Options Transactions. To hedge against a decline in the
value of Municipal Bonds it owns or an increase in the price of Municipal Bonds
it proposes to purchase, the Fund may enter into financial futures contracts
and invest in options on financial futures contracts that are traded on a
domestic exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Bonds or relate to debt
securities the prices of which are anticipated by the Adviser to correlate with
the prices of the Municipal Bonds owned or to be purchased by the Fund.
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
In entering into a financial futures contract, the Fund will be required to
deposit with the broker through which it undertakes the transaction an amount
of cash or cash equivalents equal to approximately 5% of the contract amount.
This amount, which is known as "initial margin," is subject to change by the
exchange or board of trade on which the contract is traded, and members of the
exchange or board of trade may charge a higher amount. Initial margin is in
the nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. In accordance with a process
known as "marking-to-market," subsequent payments, known as "variation mar-
gin," to and from the broker will be made daily as the price of the index or
securities underlying the futures contract fluctuates, making the long and
short positions in the futures contract more or less valuable. At any time
prior to the expiration of a futures contract, the Fund may elect to close the
position by taking an opposite position, which will operate to terminate the
Fund's existing position in the contract.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at
a specified price, date, time and place. Unlike the direct investment in a
futures contract, an option on a financial futures contract gives the pur-
chaser the right, in return for the premium paid, to assume a position in the
financial futures contract at a specified exercise price at any time prior to
the expiration date of the option. Upon exercise of an option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account, which represents the amount by which the market price
of the futures contract exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of an option on financial futures
contracts is limited to the premium paid for the option (plus transaction
costs). The value of the option may change daily and that change would be
reflected in the net asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options
on financial futures contracts be engaged in for bona fide hedging purposes,
or if the Fund enters into futures contracts for speculative purposes, that
the aggregate initial margin deposits and premiums paid by the Fund will not
exceed 5% of the market value of its assets. In addition, the Fund will, with
respect to its purchases of financial futures contracts, establish a segre-
gated account consisting of cash or cash equivalents in an amount equal to the
total market value of the futures contracts, less the amount of initial margin
on deposit for the contracts. The Fund's ability to trade in financial futures
contracts and options on financial futures contracts may be limited to some
extent by the requirements of the Internal Revenue Code of 1986,
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
as amended (the "Code"), applicable to a regulated investment company that are
described below under "Dividends, Distributions and Taxes."
Although the Fund intends to enter into financial futures contracts and
options on financial futures contracts that are traded on a domestic exchange
or board of trade only if an active market exists for those instruments, no
assurance can be given that an active market will exist for them at any partic-
ular time. If closing a futures position in anticipation of adverse price move-
ments is not possible, the Fund would be required to make daily cash payments
of variation margin. In those circumstances, an increase in the value of the
portion of the Fund's investments being hedged, if any, may offset partially or
completely losses on the futures contract. No assurance can be given, however,
that the price of the securities being hedged will correlate with the price
movements in a futures contract and, thus, provide an offset to losses on the
futures contract or option on the futures contract. In addition, in light of
the risk of an imperfect correlation between securities held by the Fund that
are the subject of a hedging transaction and the futures or options used as a
hedging device, the hedge may not be fully effective because, for example,
losses on the securities held by the Fund may be in excess of gains on the
futures contract or losses on the futures contract may be in excess of gains on
the securities held by the Fund that were the subject of the hedge. In an
effort to compensate for the imperfect correlation of movements in the price of
the securities being hedged and movements in the price of futures contracts,
the Fund may enter into financial futures contracts or options on financial
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures con-
tract has been less or greater than that of the securities. This "over hedging"
or "under hedging" may adversely affect the Fund's net investment results if
market movements are not as anticipated when the hedge is established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities it holds and rates decrease
instead, the Fund will lose part or all of the benefit of the increased value
of securities that it has hedged because it will have offsetting losses in its
futures or options positions. In addition, in those situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation mar-
gin requirements on the futures contracts at a time when it may be disadvanta-
geous to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, when the Adviser believes
that market conditions warrant, the Fund may take a temporary defensive posture
and
20
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
invest without limitation in short-term California Exempt Obligations and Tax-
able Investments. To the extent the Fund holds Taxable Investments and, under
certain market conditions, certain floating and variable rate demand obliga-
tions or Auction Components, the Fund may not achieve its investment objective.
Money market instruments in which the Fund may invest include: U.S. govern-
ment securities; tax-exempt notes of municipal issuers rated, at the time of
purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch or, if
not rated, by issuers having outstanding, unsecured debt then rated within the
three highest rating categories; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks, domestic
savings and loan associations and similar institutions); commercial paper rated
no lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch or the equivalent from
another major rating service or, if unrated, of an issuer having an outstand-
ing, unsecured debt issue then rated within the three highest rating catego-
ries; and repurchase agreements. At no time will the Fund's investments in bank
obligations, including time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct obli-
gations of the United States and obligations issued by U.S. government agencies
and instrumentalities. Included among direct obligations of the United States
are Treasury Bills, Treasury Notes and Treasury Bonds, which differ principally
in terms of their maturities. Included among the securities issued by U.S. gov-
ernment agencies and instrumentalities are: securities that are supported by
the full faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported by the right
of the issuer to borrow from the United States Treasury (such as securities of
Federal Home Loan Banks); and securities that are supported by the credit of
the instrumentality (such as Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described below,
which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis. When-issued or delayed-
delivery transactions arise when securities are purchased or sold by the Fund
with payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. The Fund's Custodian will maintain, in a segre-
gated account of the Fund, cash, U.S. government securities or other liquid,
high-grade debt obligations having a value equal to or greater than the Fund's
purchase commitments; the Custodian will likewise segregate securities sold on
a delayed basis. The payment obli-
21
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
gations and the interest rates that will be received are each fixed at the time
the Fund enters into the commitment and no interest accrues to the Fund until
settlement. Thus, it is possible that the market value at the time of settle-
ment could be higher or lower than the purchase price if the general level of
interest rates has changed.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to California Exempt Obligations held in its portfolio. Under a stand-
by commitment, a broker, dealer or bank is obligated to repurchase at the
Fund's option specified securities at a specified price and, in this way,
stand-by commitments are comparable to put options. Each exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise the rights afforded by the
commitments for trading purposes. The Fund anticipates that stand-by commit-
ments will be available from brokers, dealers and banks without the payment of
any direct or indirect consideration. The Fund may pay for stand-by commitments
if payment is deemed necessary, thus increasing to a degree the cost of the
underlying California Exempt Obligation and similarly decreasing the security's
yield to investors.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations, such
as those described below:
California Exempt Obligations. Even though California Exempt Obligations are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of California
Exempt Obligations with longer remaining maturities typically fluctuate more
than those of similarly rated California Exempt Obligations with shorter
remaining maturities such as the Fund intends to hold. The values of fixed-
income securities also may be affected by changes in the credit rating or
financial condition of the issuing entities.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest on them from Federal income taxes (and, with respect to Cali-
fornia Exempt Obligations, to the exemption of interest on them from California
state personal income taxes) are rendered by bond counsel to the respective
issuers at the time of issuance. Neither the Fund nor the Adviser will review
the proceedings relating to the issuance of California Exempt Obligations or
the basis for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemp-
tion on various types of Municipal Obligations and may enact other similar laws
in the future. If any such laws are enacted that would reduce the availability
of California
22
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Exempt Obligations for investment by the Fund so as to affect the Fund's share-
holders adversely, the Trust will reevaluate the Fund's investment objective
and policies and might submit possible changes in the Fund's structure to
shareholders for their consideration. If legislation were enacted that would
treat a type of California Exempt Obligation as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible Taxable Investment
within the applicable limits set forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that the
Adviser determines to be of comparable quality to the rated securities in which
the Fund may invest. Dealers may not maintain daily markets in unrated securi-
ties and retail secondary markets for many of such securities may not exist. As
a result, the Fund's ability to sell these securities when the Adviser deems it
appropriate may be diminished.
Municipal Leases. Municipal leases in which the Fund may invest have special
risks not normally associated with Municipal Obligations. These obligations
frequently contain non-appropriation clauses that provide that the governmental
issuer of the obligation need not make future payments under the lease or con-
tract unless money is appropriated for that purpose by a legislative body annu-
ally or on another periodic basis. Municipal leases have additional risks
because they represent a type of financing that has not yet developed the depth
of marketability generally associated with other Municipal Obligations. More-
over, although a municipal lease will be secured by financed equipment or
facilities, the disposition of the equipment or facilities in the event of
foreclosure might prove difficult. In addition, in certain instances the tax-
exempt status of the municipal lease will not be subject to the legal opinion
of a nationally recognized bond counsel, although in all cases the Fund will
require that a municipal lease purchased by the Fund be covered by a legal
opinion to the effect that, as of each effective date of the municipal lease,
the lease is the valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability of
issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost bur-
dens are allocated and reallocated among Federal, state and local governmental
units. Such non-payment would result in a reduction of income to the Fund, and
could result in a reduction in the value of the municipal lease experiencing
non-payment and a decrease in the net asset value of the Fund. Issuers of
municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays and
limitations with respect to the collection of principal and interest on such
municipal leases and the Fund may not, in all circumstances, be able to collect
all principal and interest to which it is entitled. To enforce its rights in
the event of a default in the lease payments, the Fund may take possession of
and manage the assets securing the issuer's obligations on
23
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
such securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. Any income derived from the Fund's own-
ership or operation of such assets may not be tax-exempt. In addition, the
Fund's intention to qualify as a "regulated investment company" under the Code
may limit the extent to which the Fund may exercise its rights by taking pos-
session of such assets, because as a regulated investment company the Fund is
subject to certain limitations on its investments and on the nature of its
income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from time
to time, invest a portion of its assets in non-publicly traded California
Exempt Obligations. Non-publicly traded securities may be less liquid than pub-
licly traded securities. Although non-publicly traded securities may be resold
in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by the Fund.
When-Issued and Delayed-Delivery Transactions. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery. Pur-
chasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Non-Diversified Classification. Investment in the Fund, which is classified
as a non-diversified fund under the 1940 Act, may present greater risks to
investors than an investment in a diversified fund. The investment return on a
non-diversified fund typically is dependent upon the performance of a smaller
number of securities relative to the number of securities held in a diversified
fund. The Fund's assumption of large positions in the obligations of a small
number of issuers will affect the value of its portfolio to a greater extent
than that of a diversified fund in the event of changes in the financial condi-
tion, or in the market's assessment, of the issuers.
Special Considerations. In seeking to achieve its objective, the Fund may
invest without limit in Municipal Obligations which are private activity bonds.
Moreover, although the Fund does not currently intend to do so on a regular
basis, it may invest more than 20% of its assets in Municipal Obligations which
are repayable out of revenue streams generated from economically related pro-
jects or facilities, if such investment is deemed necessary or appropriate by
the Adviser. To the extent the Fund's assets are concentrated in Municipal
Obligations payable from revenues on economically related projects and facili-
ties, the Fund will be subject to the particular risks presented by such pro-
jects to a greater extent than it would be if the Fund's assets were not so
concentrated.
The payment of principal and interest on most securities purchased by the
Fund will depend on the ability of the issuers to meet their obligations. The
Fund's portfolio will be affected by general changes in interest rates, which
will result in
24
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
increases or decreases in the value of the obligations held by the Fund. The
market value of the obligations in the Fund's portfolio can be expected to vary
inversely to changes in prevailing interest rates. During 1996, the ratings of
California general obligations bonds was upgraded. S&P Ratings Group upgraded
its rating to A+; the same rating has been assigned to such debt by Fitch.
Moody's has assigned such debt an A1 rating.
Investors should be aware that certain California constitutional amendments,
legislative measures, executive orders, administrative regulations and voter
initiatives could result in certain adverse consequences affecting California
Exempt Obligations. For instance, certain provisions of the California Consti-
tution and statutes that limit the taxing and spending authority of California
governmental entities may impair the ability of the issuers of some California
Exempt Obligations to maintain debt service on their obligations. Other mea-
sures affecting the taxing or spending authority of California or its political
sub-divisions may be approved or enacted in the future. Some of the significant
financial considerations relating to the Fund's investments in California
Exempt Obligations are summarized in the SAI.
Year 2000. The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Smith Barney, the Fund's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact on the Fund's
operations, including the handling of securities trades, pricing and account
services. The Adviser and Smith Barney have advised the Fund that they have
been reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Adviser has been
advised by the Fund's custodian, transfer agent and accounting service agent
that they are also in the process of modifying their systems with the same
goal. There can, however, be no assurance that the Adviser, Smith Barney or any
other service provider will be successful, or that interaction with other non-
complying computer systems will not impair Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through principal
transactions, although the price paid usually includes an undisclosed compensa-
tion to the dealer acting as agent.
25
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund cannot accurately predict its portfolio turnover rate, but antici-
pates that the annual turnover will not exceed 100%. An annual turnover rate of
100% would occur if all of the securities held by the Fund are replaced once
during a period of one year. The Adviser will not consider turnover rate a lim-
iting factor in making investment decisions consistent with the investment
objective and policies of the Fund.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE on each day that the NYSE is open, by dividing the value of
the Fund's net assets attributable to each Class by the total number of shares
of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Short-
term investments that mature in 60 days or less are valued at amortized cost.
Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Funds valuation
policies is contained in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net investment income (that is, income
other than net realized capital gains) monthly; dividends ordinarily will be
paid on the last Friday of each calendar month to shareholders of record as of
three business days prior thereto. The Fund's net realized capital gains, if
any, are declared and distributed annually, normally at the end of the calendar
year in which earned or at the beginning of the subsequent year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make a distribution
shortly before December 31 of each year of any undistributed ordinary income or
capital gains and expects to pay any other distributions as are necessary to
avoid the application of this tax.
26
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The per share dividends on Class C shares of the Fund may be lower than the
per share dividends on Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per share divi-
dends on Class Y shares principally as a result of the service fee applicable
to Class A shares. Distributions of capital gains, if any, will be in the same
amount for Class A, Class C and Class Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from the Fund's
net investment income (other than dividends derived from interest earned on
qualifying tax-exempt obligations as described below) and distributions of the
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, regardless of how long shareholders in the Fund have held
their shares and whether the dividends or distributions are received in cash
or reinvested in additional shares of the Fund. Distributions of the Fund's
net realized long-term capital gains will be taxable to shareholders as long-
term capital gains, regardless of how long shareholders have held their shares
of the Fund and whether the distributions are received in cash or are rein-
vested in additional Fund shares. In addition, as a general rule, a sharehold-
er's gain or loss on a sale or redemption of shares of the Fund will be a
long-term capital gain or loss if the shareholder has held the shares for more
than one year and will be a short-term capital gain or loss if the shareholder
has held the shares for one year or less.
Dividends paid by the Fund that are derived from interest earned on qualify-
ing tax-exempt obligations are expected to be "exempt-interest" dividends that
shareholders may exclude from their gross incomes for Federal income tax pur-
poses if the Fund satisfies certain asset percentage requirements. Any exempt-
interest dividends of the Fund derived from interest on Municipal Obligations,
the interest on which is a specific tax preference item for Federal income tax
purposes, will be a specific tax preference item for purposes of the Federal
individual and corporate alternative minimum taxes. In addition, all exempt-
interest dividends will be a component of the "current earnings" adjustment
item for purposes of the Federal corporate alternative minimum income tax and
corporate shareholders may incur a larger Federal environmental tax liability
through the receipt of dividends and distributions from the Fund if the envi-
ronmental tax is reinstated as proposed by President Clinton. Dividends of the
Fund derived from interest on California Exempt Obligations will be exempt
from California State personal income (but not corporate franchise or income)
taxes.
Statements as to the tax status of the dividends and distributions received
by shareholders of the Fund are mailed annually. These statements set forth
the dollar amount of income excluded from Federal income taxes and the dollar
amount, if
27
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
any, subject to Federal income taxes. Statements from the Fund will also show
the dollar amount of income excluded or exempted from California State personal
income taxes and the dollar amount, if any, subject to these taxes. These
statements will also designate the amount of exempt-interest dividends that are
a specific preference item for purposes of the Federal individual and corporate
alternative minimum taxes.
Shareholders of the Fund should consult their tax advisors with specific ref-
erence to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows California taxpayers who are individuals how to trans-
late Federal and California State tax savings from investments such as the Fund
into an equivalent return from a taxable investment. To the extent that the
equivalent taxable yields illustrated in this table are based on an effective
tax rate which combines the Federal and California marginal income tax rates,
the table is not applicable to individuals who do not pay California State per-
sonal income taxes. The yields used below are for illustration only and are not
intended to represent current or future yields for the Fund, which may be
higher or lower than those shown.
<TABLE>
<CAPTION>
1997
TAXABLE INCOME* CALIFORNIA FEDERAL COMBINED CALIFORNIA TAX-EXEMPT EQUIVALENT YIELDS
SINGLE JOINT RATE*** RATE RATE** 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$0-24,650 0-41,200 6.00% 15.00% 20.10% 2.50% 3.75% 5.01% 6.26% 7.51% 8.76% 10.01% 11.26% 12.52%
24,651-59,750 41,201-99,600 9.30 28.00 34.70 3.06 4.59 6.13 7.66 9.19 10.72 12.25 13.78 15.31
59,751-124,650 99,601-151,750 9.30 31.00 37.42 3.20 4.79 6.39 7.99 9.59 11.19 12.78 14.38 15.98
124,651-271,050 151,751-271,050 9.30 36.00 41.95 3.45 5.17 6.89 8.61 10.34 12.06 13.78 15.50 17.23
over 271,150 over 271,150 9.30 39.60 45.22 3.65 5.48 7.30 9.13 10.95 12.78 14.60 16.43 18.25
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Code. It is assumed
that taxable income as defined in the Code is the same as under the
California personal income tax law; however, California taxable income may
differ due to differences in exemptions, itemized deductions and other
items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates and rate brackets for 1997, including indexing the rate
bracket for inflation. These rates include the effect of deducting state
and city taxes on your Federal return.
*** These rates represent the highest California personal income tax rates
within the applicable Federal income tax brackets for 1997. Where there is
a difference between the California personal income tax rates for single
and married filing joint, an average rate was used.
28
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Federal tax rates and California tax rates shown are those in effect for
1997 and are subject to change. The calculations reflected in the table assume
that no income will be subject to the Federal alternative minimum taxes.
PURCHASE OF SHARES
GENERAL
The Fund currently offers three Classes of shares. Class A shares are sold
to investors with an initial sales charge and Class C shares are sold without
an initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $15,000,000 (except, for
purchases of Class Y shares by Smith Barney Concert Allocation Series, Inc.
for which there is no minimum purchase amount). See "Prospectus Summary--
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the sell-
ing group. In addition, certain investors, including certain institutional
investors, may purchase shares directly from the Fund through First Data. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class C or Class Y shares. Smith Barney and other broker/dealers
may charge their customers an annual account maintenance fee in connection
with a brokerage account through which an investor purchases or holds shares.
Accounts held directly at the Transfer Agent are not subject to a maintenance
fee.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Fund. Investors
in Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Clas-
ses. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A and Class C shares and the subsequent investment requirement for
all Classes is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a quarterly basis, the minimum initial invest-
ment requirement for Class A and Class C shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment require-
ments in Class A shares for employees of Travelers and its subsidiaries,
including Smith Barney, Directors or Trustees of any of the Smith Barney
Mutual Funds, and their immediate family. The Fund reserves the right to waive
or change minimums, to decline any order to purchase its shares and to suspend
the offering of shares from time to time. Shares purchased will be held
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First
Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day (the "trade
date"). Orders received by dealers Introducing Brokers prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset val-
ue, are priced according to the net asset value determined on that day, pro-
vided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Fund shares
is due on the third business day (the "settlement date") after the trade date.
In all other cases, payments must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder, to provide systematic additions to
the shareholder's Fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
the Transfer Agent. The Systematic Investment Plan also authorizes Smith Bar-
ney to apply cash held in the shareholders' Smith Barney brokerage account or
redeem the shareholder's shares of a Smith Barney money market fund to make
additions to the account. Additional information is available from the Fund or
a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
AMOUNT OF INVESTMENT % OF OFFERING PRICE % OF AMOUNT INVESTED % OF OFFERING PRICE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
- --------------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class C shares is waived. See "Deferred Sales Charge
Alternatives" and "Waivers of CDSC."
30
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an indi-
vidual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and/or any of the Smith Barney
Mutual Funds (including retired Board members and employees); the immediate
families of such persons (including the surviving spouse of a deceased Board
Member or employee); and to a pension, profit-sharing or other benefit plan
for such persons and (ii) employees of members of the National Association of
Securities Dealers, Inc., provided such sales are made upon the assurance of
the purchaser that the purchase is made for investment purposes and that the
securities will not be resold except through redemption or repurchase; (b)
offers of Class A shares to any other investment company to effect the combi-
nation of such company with the Fund by merger, acquisition of assets or oth-
erwise; (c) purchases of Class A shares by any client of a newly employed
Smith Barney Financial Consultant (for a period up to 90 days from the com-
mencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial Con-
sultant and (iii) was subject to a sales charge; (d) purchases by shareholders
who have redeemed Class A shares in the Fund (or Class A shares of another
fund of the Smith Barney Mutual Funds that are offered with a sales charge)
and who wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) purchases
by accounts managed by registered investment advisory subsidiaries of Travel-
ers; and (f) purchases by investors participating in a Smith Barney fee-based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with
31
<PAGE>
PURCHASE OF SHARES (CONTINUED)
a sales charge listed under "Exchange Privilege" then held by such person and
applying the sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time of pur-
chase to permit verification that the purchase qualifies for the reduced sales
charge. The right of accumulation is subject to modification or discontinuance
at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan meet-
ing certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An individ-
ual who is a member of a qualified group may also purchase Class A shares at
the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enables Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the pur-
chaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to purchase shares at net asset value by aggregat-
ing the
32
<PAGE>
PURCHASE OF SHARES (CONTINUED)
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge over a 13 month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13 month period starting up
to 90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the sales charge applicable to the total amount
of the investment goal. If the goal is not achieved within the period, the
investor must pay the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. Please contact a Smith Barney Financial Con-
sultant or First Data to obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $5,000,000 in Class Y shares of the Fund
and agree to purchase a total of $15,000,000 of Class Y shares of the Fund
within thirteen months from the date of the Letter. If a total investment of
$15,000,000 is not made within the thirteen-month period, all Class Y shares
purchased to date will be transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further informa-
tion.
DEFERRED SALES CHARGE ALTERNATIVE
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and (b)
Class A shares that were purchased without an initial sales charge but subject
to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
original cost of the shares being redeemed or their net asset value at the time
of redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; or
(c) shares redeemed more than 12 months after their purchase. CDSC Shares are
subject to a 1.00% CDSC if redeemed within 12 months of purchase.
33
<PAGE>
PURCHASE OF SHARES (CONTINUED)
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distribu-
tions, and finally of other shares held by the shareholder for the longest
period of time. The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the shares
exchanged therefor were initially acquired in one of the other Smith Barney
Mutual Funds, and Fund shares being redeemed will be considered to represent,
as applicable, capital appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income tax purposes, the amount
of the CDSC will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any CDSC will be paid to
Smith Barney.
To provide an example, assume an investor purchased 100 Class C shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the tenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which repre-
sents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 1.00% (the applicable rate for Class C shares) for a
total deferred sales charge of $2.40.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, automatic
cash withdrawals in amounts equal to or less than 2.00% per month of the value
of the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within
twelve months following the death or disability of the shareholder; (d) invol-
untary redemptions; and (e) redemptions of shares to effect a combination of
the Fund with any investment company by merger, acquisition of assets or oth-
erwise. In addition, a shareholder who has redeemed shares from other funds of
the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
34
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to the other requirements of
the fund into which exchanges are made.
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable-Fixed Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds--Florida Portfolio
35
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Global Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
+++Smith Barney Muni Funds--California Money Market Portfolio
+++Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the Fund.
** Available for exchange with Class A, shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
36
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive Class in any of the funds identified above may do so without imposition of
any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. The Adviser may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may,
at its discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would expect to maintain for a sig-
nificant period of time. All relevant factors will be considered in determining
what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See Redemp-
tion of Shares--Telephone Redemption and Exchange Program. Exchanges will be
processed at the net asset value next determined. Redemption procedures dis-
cussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the reg-
istration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
37
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Fund's transfer agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and
Smith Barney will benefit from the use of temporarily uninvested funds. Redemp-
tion proceeds for shares purchased by check, other than a certified or official
bank check, will be remitted upon clearance of the check, which may take up to
ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Intermediate Maturity California Municipals Fund
Class A, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or redemp-
tion request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in a 10-day period. First Data may require additional supporting docu-
ments for redemptions made by corporations, executors, administrators, trustees
or guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.
38
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM.
Shareholders who do not have a Smith Barney Brokerage Account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization form, including a signature guaran-
tee, that will be provided by First Data upon request. (Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's signature guarantee when making his/her initial investment
in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the fund being acquired is identical to the registra-
tion of the shares of the fund exchanged. Such exchange requests may be made by
calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m. (New York
City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund and
its agents will employ procedures designed to verify the identity of the caller
and legitimacy of instructions (for example, a shareholder's name and account
number will be required and phone calls may be recorded). The Fund reserves the
right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven (7) days' prior notice to shareholders.
39
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of a shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund, howev-
er, will not redeem shares based solely on market reductions in net asset val-
ue. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
PERFORMANCE
From time to time, the Fund may advertise its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include its current dividend return. These figures are
computed separately for Class A, Class C and Class Y shares of the Fund. These
figures are based on historical earnings and are not intended to indicate
future performance. Total return is computed for a specified period of time
assuming deduction of the maximum sales charge, if any, from the initial amount
invested and reinvestment of all income dividends and capital gain distribu-
tions on the reinvestment dates at prices calculated as stated in this Prospec-
tus, then dividing the value of the investment at the end of the period so cal-
culated by the initial amount invested and subtracting 100%. The standard aver-
age annual total return, as prescribed by the SEC, is derived from this total
return, which provides the ending redeemable value. Such
40
<PAGE>
PERFORMANCE (CONTINUED)
standard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account. The
yield of a Fund class refers to the net investment income earned by investments
in the Class over a thirty-day period. This net investment income is then
annualized; i.e., the amount of income earned by the investments during that
30-day period is assumed to be earned each 30-day period for twelve periods and
is expressed as a percentage of the investments. The yield is calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The Fund calculates current divi-
dend return for each Class by annualizing the most recent monthly distribution
and dividing by the net asset value or the maximum public offering price (in-
cluding sales charge) on the last day of the period for which current dividend
return for a Fund Class is presented. The current dividend return for each
Class may vary from time to time depending on market conditions, the composi-
tion of its investment fund and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should
be considered when comparing a Class' current return to yields published for
other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all signif-
icant agreements between the Trust and the persons and companies that furnish
services to the Fund, including agreements with the Fund's investment adviser
and administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Fund have been delegated to the Fund's investment adviser and
administrator. The SAI contains background information regarding each Trustee
of the Trust and the executive officers of the Fund.
INVESTMENT ADVISOR AND ADMINISTRATOR -- MMC
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment adviser pursuant to an investment advisory agreement approved
by the Trust's Board of Trustees. The Adviser (through predecessor entities)
has been in the investment counseling business since 1934 and is a registered
investment adviser. The Adviser renders investment advice to investment compa-
nies that had aggregate assets under management as of January 31, 1998 in
excess of $94 billion.
41
<PAGE>
MANAGEMENT OF THE TRUST FUND (CONTINUED)
Subject to the supervision and direction of the Trust's Board of Trustees,
the Adviser manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfo-
lio managers and securities analysts who provide research services to the Fund.
For investment advisory services rendered to the Fund, the Fund pays the
Adviser a fee at the annual rate of 0.30% of the value of the Fund's average
daily net assets. Prior to November 17, 1995, the Fund paid the Adviser an
investment advisory fee at the annual rate of 0.35% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1997, the Fund
paid investment advisory fees to the Adviser in an amount equal to 0.7% of the
Fund's average daily net assets. During the same period, the Fund's investment
adviser waived investment advisory fees in an amount equal to 0.23% of the
value of the Fund's average daily net assets.
ADMINISTRATOR -- MMC
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1997, the Fund
paid an administration fee of 0.6% of the value of its average daily net assets
and the administrator voluntarily waived administration fees in an amount equal
to 0.14% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Joseph P. Deane is Vice President and Investment Officer of the Fund and has
been the portfolio manager of the Fund since it commenced operations on Decem-
ber 31, 1991. He manages the day-to-day operations of the Fund, including mak-
ing all investment decisions.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended November 30, 1997, is included
in the Annual Report dated November 30, 1997. A copy of the Annual Report may
be obtained upon request without charge from a Smith Barney Financial Consul-
tant or by writing or calling the Fund at the address or phone number listed on
page one of this Prospectus.
DISTRIBUTOR
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A
42
<PAGE>
DISTRIBUTOR (CONTINUED)
and Class C shares of the Fund at the annual rate of 0.15% of the average daily
net assets of the respective Class. Smith Barney is also paid a distribution
fee with respect to Class C shares at the annual rate of 0.20% of the average
daily net assets attributable to that Class. The fees are used by Smith Barney
to pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class C shares, to cover expenses primarily intended to result in the
sale of those shares. These expenses include: advertising expenses; the cost of
printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A and Class C shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a
holder of that Class. Smith Barney Financial Consultants may receive different
levels of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class C shares are not tied exclu-
sively to the shareholder distribution and service expenses actually incurred
by Smith Barney and the payments may exceed distributed expenses actually
incurred. The Trust's Board of Trustees will evaluate the appropriateness of
the Plan and its payment terms on a continuing basis and in so doing will con-
sider all relevant factors, including expenses borne by Smith Barney, amounts
received under the Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Trust was organized on October 17, 1991 under the laws of the Common-
wealth of Massachusetts and is a business entity commonly known as a "Massachu-
setts business trust."
Each Class of the Fund represents an identical interest in the Fund's invest-
ment portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class pursuant to the Plan; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; and (f) the exchange privilege of each Class. The
Trust's Board of Trustees does not anticipate that there will be any conflicts
among the interests of the holders of the different Classes. The Trustees, on
an ongoing basis, will consider whether any such conflict exists and, if so,
take appropriate action.
43
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the Fund
will be voted on a Fund-wide basis on all matters except matters affecting only
the interests of one Class, in which case only shares of the affected Class
would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees.
Shareholders of record of not less than two-thirds of the outstanding shares
of the Trust may remove a Trustee through a declaration in writing or by vote
cast in person or by proxy at a meeting called for that purpose. The Trustees
will call a meeting for any purpose upon written request of shareholders hold-
ing at least 10% of the Trust's outstanding shares and the Trust will assist
shareholders in calling such a meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's Transfer Agent.
The Fund sends shareholders a semi-annual report and an audited annual report
which includes a listing of investment securities held by the Fund at the end
of the reporting period. In an effort to reduce the Fund's printing and mailing
costs, the Fund plans to consolidate the mailing of its semi-annual and annual
reports by household. This consolidation means that a household having multiple
accounts with the identical address of record will receive a single copy of
each report. In addition, the Fund also plans to consolidate the mailing of its
Prospectus so that a shareholder having multiple accounts (that is, individual,
IRA and/or Self-Employed Retirement Plan accounts) will receive a single Pro-
spectus annually. Shareholders who do not want this consolidation to apply to
their accounts should contact their Smith Barney Financial Consultant or the
Fund's Transfer Agent.
44
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [LOGO]
SMITH BARNEY
INTERMEDIATE MATURITY
CALIFORNIA MUNICIPALS
FUND
388 Greenwich Street
New York, New York 10013
FD0248 3/98
PROSPECTUS
SMITH BARNEY
Intermediate
Maturity
New York
Municipals
Fund
MARCH 30, 1998
Prospectus begins on page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus March 30, 1998
- --------------------------------------------------------------------------------
Smith Barney Intermediate Maturity
New York Municipals Fund
388 Greenwich Street
New York, New York 10013
1 800-451-2010
Smith Barney Intermediate Maturity New York Municipals Fund (the "Fund")
seeks to provide New York investors with as high a level of current income
exempt from Federal income taxes and New York State and New York City personal
income tax as is consistent with preservation of principal. The Fund invests
primarily in investment grade obligations issued by the State of New York and
its political subdivisions, agencies and public authorities. The Fund is one of
a number of funds, each having distinct investment objectives and policies
making up the Smith Barney Investment Trust (the "Trust"). The Trust is an
open-end management investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges and service and distribution fees and expenses, that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of the other funds offered by the Trust are described
in separate prospectuses which may be obtained by calling or writing the Trust
at the telephone number or address set forth above or by contacting a Smith
Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information (the "SAI") dated March 30, 1998, as amended
or supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The SAI has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
Smith Barney Inc.
Distributor
Mutual Management Corp.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 11
- --------------------------------------------------------------------------------
Valuation of Shares 25
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 25
- --------------------------------------------------------------------------------
Purchase of Shares 28
- --------------------------------------------------------------------------------
Exchange Privilege 33
- --------------------------------------------------------------------------------
Redemption of Shares 36
- --------------------------------------------------------------------------------
Minimum Account Size 39
- --------------------------------------------------------------------------------
Performance 39
- --------------------------------------------------------------------------------
Management of the Trust and the Fund 40
- --------------------------------------------------------------------------------
Distributor 42
- --------------------------------------------------------------------------------
Additional Information 42
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in this Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE. The Fund is a non-diversified intermediate-term municipal
bond fund that seeks to provide New York investors with as high a level of
current income exempt from Federal income taxes and New York State and New York
City personal income tax as is consistent with the preservation of principal.
The Fund invests primarily in investment-grade obligations issued by the State
of New York and its political subdivisions, agencies and public authorities. The
weighted average maturity of the Fund's portfolio securities will normally not
be less than three nor more than 10 years. The maximum remaining maturity of the
securities in which the Fund will normally invest will be no greater than 20
years. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS. The Fund offers three classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which differ
principally in terms of sales charges and rates of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of $15,000,000. See "Purchase of Shares"
and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of the
average daily net assets of the Class. The initial sales charge may be waived
for certain purchases. Purchases of Class A shares of $500,000 or more, will be
made at net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See "Prospectus Summary -- No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.20% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Fund shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
3
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
C shares are sold without any initial sales charge so the entire purchase price
is immediately invested in the Fund. Any investment return on these additional
invested amounts may partially or wholly offset the higher annual expenses of
this Class. Because the Fund's future return cannot be predicted, however, there
can be no assurance that this would be the case. Finally, investors should
consider the effect of the CDSC period and any conversion rights of the classes
in the context of their own investment time frame.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price would be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more, will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class C shares, purchasers eligible to
purchase Class A shares at net asset value should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
PURCHASE OF SHARES. Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
4
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including qualified retirement plans and certain
institutional investors, may purchase shares directly from the Fund through the
Fund's transfer agent, First Data Investor Services Group, Inc. ("First Data").
See Purchase of Shares."
INVESTMENT MINIMUMS. Investors in Class A and Class C shares may open an account
by making an initial investment of at least $1,000 for each account. Investors
in Class Y shares may open an account for an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. The minimum
investment requirements for purchases of Fund shares through the Systematic
Investment Plan are described below. See "Purchase of Shares.
SYSTEMATIC INVESTMENT PLAN. The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial investment
requirement for Class A and Class C shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares through the
Systematic Investment Plan on a monthly basis is $25 and on a quarterly basis is
$50. See "Purchase of Shares."
REDEMPTION OF SHARES. Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND. Mutual Management Corp. ("MMC"or the
"Adviser") formerly known as Smith Barney Mutual Funds Management Inc. serves as
the Fund's investment adviser and administrator. The Adviser is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc, ("Holdings"), formerly known as
Smith Barney Holdings. Holdings is a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services including Asset Management, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Trust and the Fund."
EXCHANGE PRIVILEGE. Shares of a Class may be exchanged for shares of the same
Class of certain other Smith Barney Mutual Funds at the respective net asset
values next determined. See "Exchange Privilege."
VALUATION OF SHARES. Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and also is available
from a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS. Dividends are paid monthly from net
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
investment income. Distributions of net realized capital gains, if any, are paid
annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS. Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by reinvestments will not be subject to any sales charge or
CDSC. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS. There can be no assurance that the Fund
will achieve its investment objective. Shares of the Fund, unlike certain bank
deposit accounts, are not guaranteed or insured by any Federal or state
authority. Changes in interest rates generally will result in increases or
decreases in the market value of the obligations held by the Fund. The yield of
the Fund may not be as high as those of other funds that invest in lower quality
and/or longer term securities. The Fund is not a tax-exempt money market fund
and therefore its investment portfolio can be expected to experience greater
volatility than that of a tax-exempt money market fund. The net asset value of
the Fund will be subject to greater fluctuation to the extent that the Fund
invests in zero coupon securities. The Fund's net asset value per share will
fluctuate depending on a combination of factors such as current market interest
rates and the creditworthiness of the issuers in whose securities the Fund
invests. The Fund will not invest in obligations that are rated lower than Baa
by Moody's Investors Service, Inc. ("Moody's"), BBB by Standard & Poor's Ratings
Group ("S&P") or BBB by Fitch IBCA, Inc. ("Fitch"), at the time of purchase. The
ratings of Moody's, S&P and Fitch represent their opinions as to the quality of
the obligations that they undertake to rate; the ratings are relative and
subjective and are not absolute standards of quality.
The Fund may invest up to 20% of its total assets in unrated securities
that the Adviser determines to be of comparable quality to the securities rated
investment grade in which the Fund may invest. Dealers may not maintain daily
markets in unrated securities and retail secondary markets for many of them may
not exist; lack of markets may affect the Fund's ability to sell these
securities when the Adviser deems it appropriate. The Fund has the right to
invest without limitation in state and local obligations that are "private
activity bonds," the income from which may be taxable as a specific preference
item for purposes of the Federal alternative minimum tax. Thus, the Fund may not
be a suitable investment for investors who are subject to the alternative
minimum tax.
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks. The
instruments presenting the Fund with risks are municipal leases, zero coupon
securities, custodial receipts, municipal obligation components, floating and
variable rate demand notes and bonds, and participation interests. Entering into
securities transactions on a when-issued or delayed-delivery basis are
investment
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
techniques involving risks to the Fund. See "Investment Objective and Management
Policies -- Investment Techniques -- Risk Factors and Special Considerations"
and "Dividends, Distributions and Taxes."
Investment in the Fund, which is classified as a non-diversified fund, may
present a greater risk than an investment in a diversified fund. See "Investment
Objective and Management Policies -- Risk Factors and Special Considerations."
Investment in the Fund involves risks and special considerations applicable to
the State of New York. See "Investment Objective and Management Policies -- Risk
Factors and Special Considerations."
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
Intermediate Maturity New York Municipals Fund Class A Class C Class Y
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds,
whichever is lower) None* 1.00% None
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses***
(as a percentage of average net assets)
Management fees (net of fee waivers) 0.19% 0.19% 0.19%
12b-1 fees** 0.15 0.35 --
Other expenses+ 0.36 0.37 0.36
- --------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES
(after waivers) 0.70% 0.91% 0.55%
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but may be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Class C shares are subject to an ongoing distribution fee and, as a result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
*** "Management fees" have been restated to reflect the management fee waiver
currently in effect for the Fund. During the fiscal year ended November 30,
1997, the Fund's investment adviser and administrator voluntarily waived
portions of its fees in the aggregate amount equal to 0.31% of the value of
the Fund's average daily net assets thereby decreasing the amount paid by
the Fund in respect of management fees to 0.19% of the value of the Fund's
average daily net assets. This had the effect of lowering the Fund's overall
expenses and increasing the returns available to investors. If MMC had not
elected to waive fees and reimburse expenses, the Fund's total operating
expenses for Class A shares and Class C shares for the fiscal year ended
November 30, 1997, would have been 0.98% and 1.20%, respectively, of the
value of the Fund's average daily net assets. As of November 17, 1995, the
Fund's investment advisory fee was reduced from 0.35% to 0.30% of the
average daily net assets of the Fund.
+ For Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because prior to November 30, 1997 no Class Y
shares were sold.
7
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased. See
"Purchase of Shares" and "Redemption of Shares." Smith Barney receives an annual
12b-1 service fee of 0.15% of the value of average daily net assets of Class A
shares. For Class C shares, Smith Barney receives an annual 12b-1 fee of 0.35%
of the value of average daily net assets of this Class, consisting of a 0.20%
distribution fee and a 0.15% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
Intermediate Maturity New York Municipals Fund 1 year 3 years 5 years 10 years
================================================================================
<S> <C> <C> <C> <C>
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and (2)
redemption at the end of each time
period:
Class A $27 $42 $58 $105
Class C 19 33 50 112
Class Y 6 18 31 69
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A $27 $42 58 $105
Class C 9 29 50 112
Class Y 6 19 32 69
================================================================================
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
8
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's Annual Report
dated November 30, 1997. The following information for the period ended November
30, 1992 and for the fiscal years ended November 30, 1993 and November 30, 1994
has been audited by other auditors. This information should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to shareholders, which is incorporated by reference
into the SAI.
<TABLE>
<CAPTION>
For a share of beneficial interest outstanding throughout each year:
Smith Barney
Intermediate Maturity
New York Municipals Fund Year Ended November 30,
-----------------------
Class A Shares 1997 1996 1995 1994 1993 1992(1)
=======================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $8.47 $8.48 $7.80 $8.54 $8.18 $7.90
- ---------------------------------------------------------------------------------------
Income (Loss) From Operations
Net investment income(1) 0.41 0.41 0.41 0.40 0.40 0.38
Net realized and
unrealized gain (loss) 0.10 (0.01) 0.68 (0.72) 0.38 0.28
- ---------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.51 0.40 1.09 (0.32) 0.78 0.66
- ---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.41) (0.41) (0.41) (0.40) (0.40) (0.38)
Net realized gains -- -- -- (0.02) (0.02) --
- ---------------------------------------------------------------------------------------
Total Distributions (0.41) (0.41) (0.41) (0.42) (0.42) (0.38)
- ---------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.57 $8.47 $8.48 $7.80 $8.54 $8.18
- ---------------------------------------------------------------------------------------
Total ReturnP. 6.23% 4.85% 14.31% (3.97)% 9.76% 8.59%++
- ---------------------------------------------------------------------------------------
Net Assets,
End of Year (in 000s) $47,759 $49,355 $52,568 $62,090 $67,230 $24,543
- ---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.67% 0.66% 0.65% 0.65% 0.65% 0.65%+
Net investment income 4.83 4.86 5.01 4.77 4.59 4.95+
- ---------------------------------------------------------------------------------------
Portfolio Turnover Rate 52% 67% -- 68% 22% 68%
=======================================================================================
</TABLE>
(1) For the period from December 31, 1991 (inception date) to November 30, 1992.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(2) The investment adviser has waived all or part of its fees for the five years
ended November 30, 1997 and the period ended November 30, 1992. If such fees
had not been waived, the per share decreases in net investment income, and
the expense ratios, would have been as follows:
P. Total return does not include deduction of the applicable sales charge.
<TABLE>
<CAPTION>
Per Share Decrease Expense Ratio
In Net Investment Income Without Fee Waivers
---------------------------------------- ----------------------------------------
1997 1996 1995 1994 1993 1992 1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $0.03 $0.04 $0.03 $0.03 $0.04 $0.06 0.98% 1.08% 0.97% 0.98% 1.10% 1.45%+
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of beneficial interest outstanding throughout the year:
<TABLE>
<CAPTION>
Intermediate Maturity New York Municipals Fund
Class C Shares 1997 1996 1995(1)
======================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $8.47 $8.48 $7.87
- --------------------------------------------------------------------------------------
Income From Operations
Net investment income(2) 0.39 0.39 0.38
Net realized and unrealized gain (loss) 0.10 (0.01) 0.61
- --------------------------------------------------------------------------------------
Total Income From Operations 0.49 0.38 0.99
- --------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.39) (0.38)
- --------------------------------------------------------------------------------------
Total Distributions (0.39) (0.39) (0.38)
- --------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.57 $8.47 $8.48
- --------------------------------------------------------------------------------------
Total ReturnP. 6.00% 4.64% 13.01%++
- --------------------------------------------------------------------------------------
Net Assets, End of Year (in 000s) $2,283 $1,192 $393
- --------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.89% 0.88% 0.86%+
Ratio of Net Investment Income 4.61 4.64 4.74+
- --------------------------------------------------------------------------------------
Portfolio Turnover Rate 52% 67% --
======================================================================================
</TABLE>
(1) For the period from December 5, 1994 (inception date) to November 30, 1995.
(2) The investment adviser has waived a part of its fees for the two-year period
ended November 30, 1997 and for the period ended November 30, 1995. If such
fees had not been not waived, the per share effect on net investment income,
and expense ratios, would have been as follows:
Per Share Decreases to Expense Ratios
Net Investment Income Without Fee Waivers
---------------------- -------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Class C $0.03 $0.02 $0.03 1.20% 1.30%+ 1.19%+
++ Total return is not annualized, as it may not be representative of the total
for the year.
+ Annualized.
P. Total return does not include deduction of the applicable sales charge.
As of November 30, 1997, the Fund had not sold any Class Y shares, and
accordingly, no comparable financial information is available at this time for
that Class.
10
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide New York investors with as
high a level of current income exempt from Federal income taxes and New York
State and New York City personal income taxes as is consistent with preservation
of principal. No assurance can be given that the Fund will be able to achieve
its investment objective, which may be changed only with the approval of a
majority (as defined by the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Fund's outstanding shares.
Under normal market conditions, the Fund attempts to invest 100% in a
portfolio of investment grade debt obligations issued by or on behalf of the
State of New York and other states, territories and possessions of the United
States, the District of Columbia and their respective authorities, agencies,
instrumentalities and political subdivisions ("Municipal Obligations"). For
purposes of this Prospectus, debt obligations issued by the State of New York
and its political subdivisions, agencies and public authorities (together with
certain other governmental issuers such as the Commonwealth of Puerto Rico), the
interest from which debt obligations is, in the opinion of bond counsel to the
issuer, excluded from gross income for Federal income tax purposes and exempt
from New York State personal income tax are defined as "New York Exempt
Obligations." The Fund will operate subject to a fundamental investment policy
providing that, under normal market conditions, the Fund will invest at least
80% of its net assets in New York Exempt Obligations.
The Fund will invest at least 80% of its total assets in New York Exempt
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20% of
the Fund's total assets may be invested in unrated securities that are deemed by
the Adviser to be of a quality comparable to investment grade. The Fund will not
invest in New York Exempt Obligations that are rated lower than Baa by Moody's,
BBB by S&P or BBB by Fitch, at the time of purchase.
The Fund is classified as a non-diversified fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax and New York State franchise tax to the extent that its earnings are
distributed to shareholders. To qualify as a regulated investment company, the
Fund will, among other things, limit its investments so that, at the close of
each quarter of the taxable year (a) not more than 25% of the market value of
the Fund's total assets will be invested in the securities of a single issuer
and (b) with respect to 50% of the market value of its total assets, not more
than 5% of the market value of its total assets will be invested in the
securities of a single issuer and the Fund will not own more than 10% of the
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Investment Objective and Management Policies (continued)
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outstanding voting securities of a single issuer.
The ratings of Moody's, S&P and Fitch represent their opinions as to the
quality of the New York Exempt Obligations that they undertake to rate; the
ratings are relative and subjective and are not absolute standards of quality.
The Adviser's judgment as to credit quality of a New York Exempt Obligation,
thus, may differ from that suggested by the ratings published by a rating
service. A description of Moody's, S&P and Fitch ratings relevant to the Fund's
investments is included as an appendix to the SAI. The policies of the Fund
described above as to ratings of portfolio investments will apply only at the
time of the purchase of a security, and the Fund will not be required to dispose
of a security in the event Moody's, S&P or Fitch downgrades its assessment of
the credit characteristics of the security's issuer.
New York Exempt Obligations are classified as general obligation bonds,
revenue bonds and notes. General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable from the revenue derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. New York Exempt Obligations bear fixed, floating and
variable rates of interest, and variations exist in the security of New York
Exempt Obligations, both within a particular classification and between
classifications.
The yields on, and values of, New York Exempt Obligations are dependent on
a variety of factors, including general economic and monetary conditions,
conditions in the New York Exempt Obligation markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently, New
York Exempt Obligations with the same maturity, coupon and rating may have
different yields or values, whereas obligations of the same maturity and coupon
with different ratings may have the same yield or value. See "Risk Factors and
Special Considerations -- New York Exempt Obligations."
Issuers of New York Exempt Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future by
Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of the
obligations or upon the ability of municipalities to levy taxes. The possibility
also exists that, as a result of litigation or other conditions, the power or
ability of any issuer to pay, when due, the principal of, and interest on, its
obligations may be materially affected.
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Investment Objective and Management Policies (continued)
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MATURITY OF OBLIGATIONS HELD BY THE FUND
The Adviser believes that the Fund may offer an attractive investment
opportunity for investors seeking a higher effective tax yield than a tax-exempt
money market fund or a tax-exempt short-term bond fund and less fluctuation in
net asset value than a longer term tax-exempt bond fund. The Fund will normally
invest in intermediate maturity securities; the weighted average maturity of the
Fund will normally be not less than three nor more than 10 years. The maximum
remaining maturity of the securities in which the Fund will normally invest will
be no greater than 20 years.
PRIVATE ACTIVITY BONDS
The Fund may invest without limit in New York Exempt Obligations that are
"private activity bonds," as defined in the Code, which are in most cases
revenue bonds. Private activity bonds generally do not carry the pledge of the
credit of the issuing municipality, but are guaranteed by the corporate entity
on whose behalf they are issued. Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance nongovernmental activities
is a specific tax preference item for purposes of the Federal individual and
corporate alternative minimum taxes. Individual and corporate shareholders may
be subject to a Federal alternative minimum tax to the extent the Fund's
dividends are derived from interest on these bonds. Dividends derived from
interest income on New York Exempt Obligations are a "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum tax.
See "Dividends, Distributions and Taxes." Private activity bonds held by the
Fund will be included in the term New York Exempt Obligations for purposes of
determining compliance with the Fund's policy of investing at least 80% of its
total assets in New York Exempt Obligations.
RELATED INSTRUMENTS
The Fund may invest without limit in New York Exempt Obligations that are
repayable out of revenues generated from economically related projects or
facilities or debt obligations whose issuers are located in the same state.
Sizable investments in these obligations could involve an increased risk to the
Fund should any of the related projects or facilities experience financial
difficulties.
OTHER MISCELLANEOUS POLICIES
The Fund may invest up to an aggregate amount equal to 10% of its net
assets in illiquid securities, which term includes securities subject to
contractual or other restrictions on resale and other instruments that lack
readily available markets. In addition, up to 5% of the value of the Fund's
assets may be invested in securities of entities that have been in continuous
operation for fewer than three years.
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Investment Objective and Management Policies (continued)
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TYPES OF NEW YORK EXEMPT OBLIGATIONS HELD BY THE FUND
Municipal Leases. The Fund may invest without limit in "municipal leases."
Municipal leases may take the form of a lease or an installment purchase
contract issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. Interest payments on
qualifying municipal leases are exempt from Federal income taxes and state
income taxes within the state of issuance. Although lease obligations do not
constitute general obligations of the municipality for which the municipality's
taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments due
under the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In addition to the
"non-appropriation" risk, these securities represent a relatively new type of
financing that has not yet developed the depth of marketability associated with
more conventional bonds. Although "non-appropriation" lease obligations are
often secured by the underlying property, disposition of the property in the
event of foreclosure might prove difficult. The Fund may invest in municipal
leases without non-appropriation clauses only when the municipality is required
to continue the lease under all circumstances except bankruptcy. There is no
limitation on the percentage of the Fund's assets that may be invested in
municipal lease obligations. In evaluating municipal lease obligations, the
Adviser will consider such factors as it deems appropriate, which may include:
(a) whether the lease can be canceled; (b) the ability of the lease obligee to
direct the sale of the underlying assets; (c) the general creditworthiness of
the lease obligor; (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality; (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding; (f) whether
the security is backed by a credit enhancement such as insurance; and (g) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services other than those covered by the lease
obligation.
Municipal leases that the Fund may acquire will be both rated and unrated.
Rated leases include those rated investment grade at the time of investment or
those issued by issuers whose senior debt is rated investment grade at the time
of investment. The Fund may acquire unrated issues that the Adviser deems to be
comparable in quality to rated issues in which the Fund is authorized to invest.
A determination that an unrated lease obligation is comparable in quality to a
rated lease obligation will be subject to oversight and approval by the Trust's
Board of Trustees.
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Investment Objective and Management Policies (continued)
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Municipal leases held by the Fund will be considered illiquid securities
unless the Trust's Board of Trustees determines on an ongoing basis that the
leases are readily marketable. An unrated municipal lease with a
non-appropriation risk that is backed by an irrevocable bank letter of credit or
an insurance policy issued by a bank or insurer deemed by the Adviser to be of
high quality and minimal credit risk, will not be deemed to be illiquid solely
because the underlying municipal lease is unrated, if the Adviser determines
that the lease is readily marketable because it is backed by the letter of
credit or insurance policy.
Zero Coupon Securities. The Fund may invest up to 10% of its assets in zero
coupon New York Exempt Obligations. Zero coupon New York Exempt Obligations are
generally divided into two categories: pure zero obligations, which pay no
interest for their entire life and zero/fixed obligations, which pay no interest
for some initial period and thereafter pay interest currently. In the case of a
pure zero obligation, the failure to pay interest currently may result from the
obligation's having no stated interest rate, in which case the obligation pays
only principal at maturity and is issued at a discount from its stated principal
amount. A pure zero obligation may, in the alternative, provide for a stated
interest rate, but provide that no interest is payable until maturity, in which
case accrued, unpaid interest on the obligation may be capitalized as
incremental principal. The value to the investor of a zero coupon New York
Exempt Obligation consists of the economic accretion either of the difference
between the purchase price and the nominal principal amount (if no interest is
stated to accrue) or of accrued, unpaid interest during the New York Exempt
Obligation's life or payment deferral period.
Custodial Receipts. The Fund may acquire custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments, or both, on certain New York Exempt
Obligations. The underwriter of these certificates or receipts typically
purchases New York Exempt Obligations and deposits the obligations in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon New York Exempt Obligations described above. Although
under the terms of a custodial receipt the Fund would be typically authorized to
assert its rights directly against the issuer of the underlying obligation, the
Fund could be required to assert through the custodian bank those rights as may
exist against the underlying issuer. Thus, in the event the underlying issuer
fails to pay principal and/or interest when due, the Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security
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Investment Objective and Management Policies (continued)
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would be reduced in recognition of any taxes paid.
New York Exempt Obligation Components. The Fund may invest in New York
Exempt Obligations, the interest rate on which has been divided by the issuer
into two different and variable components, which together result in a fixed
interest rate. Typically, the first of the components (the "Auction Component")
pays an interest rate that is reset periodically through an auction process,
whereas the second of the components (the "Residual Component") pays a residual
interest rate based on the difference between the total interest paid by the
issuer on the New York Exempt Obligation and the auction rate paid on the
Auction Component. The Fund may purchase both Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
Component holders will decrease as the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the magnitude of
the increases and decreases in market value of Residual Components may be larger
than comparable changes in the market value of an equal principal amount of a
fixed rate New York Exempt Obligation having similar credit quality, redemption
provisions and maturity.
Floating and Variable Rate Instruments. The Fund may purchase floating and
variable rate demand notes and bonds, which are New York Exempt Obligations
normally having a stated maturity in excess of one year, but which permit their
holder to demand payment of principal at any time, or at specified intervals.
The maturity of a floating or variable rate demand note or bond will be deemed
shortened by virtue of a demand feature for purposes of calculating the Fund's
net asset value or determining its weighted average maturity.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of these obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time that
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, floating and variable
rate obligations are secured by letters of credit or other credit support
arrangements provided by banks. Use of letters of credit or other credit support
arrangements will not adversely affect the tax-exempt status of these
obligations. Because they are direct lending arrangements between the lender and
borrower, floating and variable rate obligations will generally not be traded.
In addition, no secondary market generally exists for these obligations,
although their holders may demand their payment at face value. For these
reasons, when floating and variable rate obligations held by the Fund are not
secured by letters of credit or
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Investment Objective and Management Policies (continued)
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other credit support arrangements, the Fund's right to demand payment is
dependent on the ability of the borrower to pay principal and interest on
demand. the Adviser, on behalf of the Fund, will consider the creditworthiness
of the issuers of floating and variable rate demand obligations in the Fund on
an ongoing basis.
Participation Interests. The Fund may purchase from financial institutions
tax-exempt participation interests in New York Exempt Obligations. A
participation interest gives the Fund an undivided interest in the New York
Exempt Obligation in the proportion that the Fund's participation interest bears
to the total amount of the New York Exempt Obligation. These instruments may
have floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Trust's Board of Trustees has determined meets certain quality
standards or the payment obligation otherwise will be collateralized by
obligations of the United States government or its agencies and
instrumentalities ("U.S. government securities"). The Fund will have the right,
with respect to certain participation interests, to demand payment, on a
specified number of days' notice, for all or any part of the Fund's interest in
the New York Exempt Obligation, plus accrued interest. The Fund intends to
exercise its right with respect to these instruments to demand payment only upon
a default under the terms of the New York Exempt Obligation or to maintain or
improve the quality of its investment portfolio.
Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Bonds it owns or an increase in the price of Municipal
Bonds it proposes to purchase, the Fund may enter into financial futures
contracts and invest in options on financial futures contracts that are traded
on a domestic exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Bonds or relate to debt
securities the prices of which are anticipated by the Adviser to correlate with
the prices of the Municipal Bonds owned or to be purchased by the Fund.
In entering into a financial futures contract, the Fund will be required to
deposit with the broker through which it undertakes the transaction an amount of
cash or cash equivalents equal to approximately 5% of the contract amount. This
amount, which is known as "initial margin," is subject to change by the exchange
or board of trade on which the contract is traded, and members of the exchange
or board of trade may charge a higher amount. Initial margin is in the nature of
a performance bond or good faith deposit on the contract that is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. In accordance with a process known as
"marking-to-market," subsequent payments, known as "variation margin," to and
from the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable. At
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Investment Objective and Management Policies (continued)
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any time prior to the expiration of a futures contract, the Fund may elect to
close the position by taking an opposite position, which will operate to
terminate the Fund's existing position in the contract.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at a
specified price, date, time and place. Unlike the direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the futures contract. The potential
loss related to the purchase of an option on financial futures contracts is
limited to the premium paid for the option (plus transaction costs). The value
of the option may change daily and that change would be reflected in the net
asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options on
financial futures contracts be engaged in for bona fide hedging purposes, or if
the Fund enters into futures contracts for speculative purposes, that the
aggregate initial margin deposits and premiums paid by the Fund will not exceed
5% of the market value of its assets. In addition, the Fund will, with respect
to its purchases of financial futures contracts, establish a segregated account
consisting of cash or cash equivalents in an amount equal to the total market
value of the futures contracts, less the amount of initial margin on deposit for
the contracts. The Fund's ability to trade in financial futures contracts and
options on financial futures contracts may be limited to some extent by the
requirements of the Code, applicable to a regulated investment company that are
described below under "Dividends, Distributions and Taxes."
Although the Fund intends to enter into financial futures contracts and
options on financial futures contracts that are traded on a domestic exchange or
board of trade only if an active market exists for those instruments, no
assurance can be given that an active market will exist for them at any
particular time. If closing a futures position in anticipation of adverse price
movements is not possible, the Fund would be required to make daily cash
payments of variation margin. In those circumstances, an increase in the value
of the portion of the Fund's investments being hedged, if any, may offset
partially or completely losses on the futures contract. No assurance can be
given, however, that the price of the securities being hedged will correlate
with the price movements in a futures contract and, thus,
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Investment Objective and Management Policies (continued)
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provide an offset to losses on the futures contract or option on the futures
contract. In addition, in light of the risk of an imperfect correlation between
securities held by the Fund that are the subject of a hedging transaction and
the futures or options used as a hedging device, the hedge may not be fully
effective because, for example, losses on the securities held by the Fund may be
in excess of gains on the futures contract or losses on the futures contract may
be in excess of gains on the securities held by the Fund that were the subject
of the hedge. In an effort to compensate for the imperfect correlation of
movements in the price of the securities being hedged and movements in the price
of futures contracts, the Fund may enter into financial futures contracts or
options on financial futures contracts in a greater or lesser dollar amount than
the dollar amount of the securities being hedged if the historical volatility of
the futures contract has been less or greater than that of the securities. This
"over hedging" or "under hedging" may adversely affect the Fund's net investment
results if market movements are not as anticipated when the hedge is
established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities it holds and rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures or options positions. In addition, in those situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements on the futures contracts at a time when it may be disadvantageous
to do so. These sales of securities may, but will not necessarily, be at
increased prices that reflect the decline in interest rates.
TAXABLE INVESTMENTS
Under normal conditions, the Fund may hold up to 20% of its total assets in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, when the Adviser believes
that market conditions warrant, the Fund may take a temporary defensive posture
and invest without limitation in short-term New York Exempt Obligations and
Taxable Investments. To the extent the Fund holds Taxable Investments and, under
certain market conditions, certain floating and variable rate demand obligations
or Auction Components, the Fund may not achieve its investment objective.
Money market instruments in which the Fund may invest include: U.S.
government securities; tax-exempt notes of municipal issuers rated, at the time
of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch or, if
not rated, by issuers having outstanding, unsecured debt then rated within the
three highest rating categories; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks, domestic
savings and loan associations and similar institutions); commercial paper rated
no lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch or the equivalent from
another major rating
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Investment Objective and Management Policies (continued)
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service or, if unrated, of an issuer having an outstanding, unsecured debt issue
then rated within the three highest rating categories; and repurchase
agreements. At no time will the Fund's investments in bank obligations,
including time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Fund may invest include direct
obligations of the United States and obligations issued by U.S. government
agencies and instrumentalities. Included among direct obligations of the United
States are Treasury Bills, Treasury Notes and Treasury Bonds, which differ
principally in terms of their maturities. Included among the securities issued
by U.S. government agencies and instrumentalities are: securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association certificates); securities that are supported by
the right of the issuer to borrow from the United States Treasury (such as
securities of Federal Home Loan Banks); and securities that are supported by the
credit of the instrumentality (such as Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation bonds).
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed-Delivery Securities. The Fund may purchase or sell
securities on a when-issued or delayed delivery basis. When-issued or
delayed-delivery transactions arise when securities are purchased or sold by the
Fund with payment and delivery taking place in the future in order to secure
what is considered to be an advantageous price and yield to the Fund at the time
of entering into the transaction. The Fund's Custodian will maintain, in a
segregated account of the Fund, cash, debt securities or any grade or equity
securities having a value equal to or greater than the Fund's purchase
commitments; the Custodian will likewise segregate securities sold on a delayed
basis. The payment obligations and the interest rates that will be received are
each fixed at the time the Fund enters into the commitment and no interest
accrues to the Fund until settlement. Thus, it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to New York Exempt Obligations held in its portfolio. Under a stand-by
commitment, a broker, dealer or bank is obligated to repurchase at the Fund's
option specified securities at a specified price and, in this way, stand-by
commitments are comparable to put options. Each exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise the rights afforded by the
commitments for
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Investment Objective and Management Policies (continued)
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trading purposes. The Fund anticipates that stand-by commitments will be
available from brokers, dealers and banks without the payment of any direct or
indirect consideration. The Fund may pay for stand-by commitments if payment is
deemed necessary, thus increasing to a degree the cost of the underlying New
York Exempt Obligation and similarly decreasing the security's yield to
investors.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
New York Exempt Obligations. Even though New York Exempt Obligations are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of New York Exempt
Obligations with longer remaining maturities typically fluctuate more than those
of similarly rated New York Exempt Obligations with shorter remaining maturities
such as the Fund intends to hold. The values of fixed-income securities also may
be affected by changes in the credit rating or financial condition of the
issuing entities.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal income taxes (and, with respect to
New York Exempt Obligations, to the exemption of interest on them from New York
state personal income taxes) are rendered by bond counsel to the respective
issuers at the time of issuance. Neither the Fund nor the Adviser will review
the proceedings relating to the issuance of New York Exempt Obligations or the
basis for opinions of counsel.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemption
on various types of Municipal Obligations and may enact other similar laws in
the future. If any such laws are enacted that would reduce the availability of
New York Exempt Obligations for investment by the Fund so as to affect the
Fund's shareholders adversely, the Trust will reevaluate the Fund's investment
objective and policies and might submit possible changes in the Fund's structure
to shareholders for their consideration. If legislation were enacted that would
treat a type of New York Exempt Obligation as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible Taxable Investment
within the applicable limits set forth in this Prospectus.
Unrated Securities. The Fund may invest in unrated securities that the
Adviser determines to be of comparable quality to the rated securities in which
the Fund may invest. Dealers may not maintain daily markets in unrated
securities and retail secondary markets for many of them may not exist. As a
result, the Fund's ability to sell these securities when the Adviser deems it
appropriate may be diminished.
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Investment Objective and Management Policies (continued)
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Municipal Leases. Municipal leases in which the Fund may invest have
special risks not normally associated with Municipal Obligations. These
obligations frequently contain non-appropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under the
lease or contract unless money is appropriated for that purpose by a legislative
body annually or on another periodic basis. Municipal leases have additional
risks because they represent a type of financing that has not yet developed the
depth of marketability generally associated with other Municipal Obligations.
Moreover, although a municipal lease will be secured by financed equipment or
facilities, the disposition of the equipment or facilities in the event of
foreclosure might prove difficult. In addition, in certain instances the
tax-exempt status of the municipal lease will not be subject to the legal
opinion of a nationally recognized bond counsel, although in all cases the Fund
will require that a municipal lease purchased by the Fund be covered by a legal
opinion to the effect that, as of each effective date of the municipal lease,
the lease is the valid and binding obligation of the government issuer.
Municipal leases are also subject to the risk of non-payment. The ability
of issuers of municipal leases to make timely lease payments may be adversely
impacted in general economic downturns and as relative governmental cost burdens
are allocated and reallocated among Federal, state and local governmental units.
Such non-payment would result in a reduction of income to the Fund, and could
result in a reduction in the value of the municipal lease experiencing
non-payment and a potential decrease in the net asset value of the Fund. Issuers
of municipal securities might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Fund could experience delays and
limitations with respect to the collection of principal and interest on such
municipal leases and the Fund may not, in all circumstances, be able to collect
all principal and interest to which it is entitled. To enforce its rights in the
event of a default in the lease payments, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Code may limit the extent to which
the Fund may exercise its rights by taking possession of such assets, because as
a regulated investment company the Fund is subject to certain limitations on its
investments and on the nature of its income.
Non-Publicly Traded Securities. As suggested above, the Fund may, from time
to time, invest a portion of its assets in non-publicly traded New York Exempt
Obligations. Non-publicly traded securities may be less liquid than publicly
traded securities. Although non-publicly traded securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by the Fund.
22
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
When-Issued and Delayed-Delivery Transactions. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery.
Purchasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Non-Diversified Classification. Investment in the Fund, which is classified
as a non-diversified fund under the 1940 Act, may present greater risks to
investors than an investment in a diversified fund. The investment return on a
non-diversified fund typically is dependent upon the performance of a smaller
number of securities relative to the number of securities held in a diversified
fund. The Fund's assumption of large positions in the obligations of a small
number of issuers will affect the value of its portfolio to a greater extent
than that of a diversified fund in the event of changes in the financial
condition, or in the market's assessment, of the issuers.
Special Considerations. In seeking to achieve its objective, the Fund may
invest without limit in Municipal Obligations which are private activity bonds.
Moreover, although the Fund does not currently intend to do so on a regular
basis, it may invest more than 20% of its assets in Municipal Obligations which
are repayable out of revenue streams generated from economically related
projects or facilities, if such investment is deemed necessary or appropriate by
the Adviser. To the extent the Fund's assets are concentrated in Municipal
Obligations payable from revenues on economically related projects and
facilities, the Fund will be subject to the particular risks presented by such
projects to a greater extent than it would be if the Fund's assets were not so
concentrated.
Certain substantial issuers of New York Exempt Obligations (including
issuers whose obligations may be acquired by the Fund) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowing and fewer markets for their outstanding debt obligations. In recent
years, several different issues of municipal securities of New York State and
its agencies and instrumentalities and of New York City have been downgraded by
S&P and Moody's. On July 10, 1995, S&P downgraded its rating of New York City's
$23 billion of outstanding general obligation bonds to "BBB+" from "A-", citing
the City's chronic structural budget problems and weak economic outlook. S&P
stated that New York City's reliance on one-time revenue measures to close
annual budget gaps, a dependence on unrealized labor savings, overly optimistic
estimates of revenues and state and federal aid and City's continued high debt
levels also contributed to its decision to lower the ratings. On the other hand,
strong demand for New York Exempt Obligations has more recently had the effect
of permitting New York Exempt Obligations to be issued with yields relatively
lower, and after issuance, to trade in
23
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
the market at prices relatively higher, than comparably rated municipal
obligations issued by other jurisdictions. Moody's ratings of City bonds were
revised in November 1981 from B (in effect since 1977) to Ba1, in November 1983
to Baa, in December 1985 to Baa1, in May 1988 to A and again in February 1991 to
Baa1. On July 17, 1997, Moody's changed its outlook on City bonds to positive
from stable. Since July 8, 1997, Fitch has rated City bonds A.
Other considerations affecting the Fund's investment in New York Exempt
Obligations are summarized in the SAI.
Year 2000. The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Smith Barney, the Fund's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the Fund's
operations, including the handling of securities trades, pricing and account
services. The Adviser and Smith Barney have advised the Fund that they have been
reviewing all of their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and expect that their
systems will be compliant before that date. In addition, the Adviser has been
advised by the Fund's custodian, transfer agent and accounting service agent
that they are also in the process of modifying their systems with the same goal.
There can, however, be no assurance that the Adviser, Smith Barney or any other
service provider will be successful, or that interaction with other
non-complying computer systems will not impair Fund services at that time.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer acting as agent.
The Fund cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur if all of the securities held by the Fund are replaced
once during a period of one year. The Adviser will not consider turnover rate a
limiting factor in making investment decisions consistent with the investment
objective and policies of the Fund.
24
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees.
Short-term investments that mature in 60 days or less are valued at amortized
cost. Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the SAI.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
Dividends and Distributions
The Fund declares dividends from its net investment income (that is, income
other than net realized capital gains) monthly; dividends ordinarily will be
paid on the last Friday of each calendar month to shareholders of record as of
the three business days prior thereto. The Fund's net realized capital gains, if
any, are declared and distributed annually, normally at the end of the calendar
year in which earned or at the beginning of the subsequent year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make a distribution
shortly before December 31 of each year of any undistributed ordinary income or
capital gains and expects to pay any other distributions as are necessary to
avoid the application of this tax.
The per share dividends on Class C shares of the Fund may be lower than the
per share dividends on Class A and Class Y shares principally as a result of the
distribution fee applicable with respect to Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per share
dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be in
the same amount for Class A, Class C and Class Y shares.
25
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
Taxes
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from the Fund's net
investment income (other than dividends derived from interest earned on
qualifying tax-exempt obligations as described below) and distributions of the
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income, regardless of how long shareholders in the Fund have held their
shares and whether the dividends or distributions are received in cash or
reinvested in additional shares of the Fund. Distributions of the Fund's net
realized long-term capital gains will be taxable to shareholders as long-term
capital gains, regardless of how long shareholders have held their shares of the
Fund and whether the distributions are received in cash or are reinvested in
additional Fund shares. In addition, as a general rule, a shareholder's gain or
loss on a sale or redemption of shares of the Fund will be a long-term capital
gain or loss if the shareholder has held the shares for more than one year and
will be a short-term capital gain or loss if the shareholder has held the shares
for one year or less.
Dividends paid by the Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross incomes for Federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of the Fund derived from interest on Municipal
Obligations, the interest on which is a specific tax preference item for Federal
income tax purposes, will be a specific tax preference item for purposes of the
Federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum income
tax and corporate shareholders may incur a larger Federal environmental tax
liability through the receipt of dividends and distributions from the Fund if
the environmental tax is reinstated as proposed by President Clinton. Dividends
of the Fund derived from interest on New York Exempt Obligations will be exempt
from New York State personal income (but not corporate franchise or income)
taxes.
Statements as to the tax status of the dividends and distributions received
by shareholders of the Fund are mailed annually. These statements set forth the
dollar amount of income excluded from Federal income taxes and the dollar
amount, if any, subject to Federal income taxes. Statements from the Fund will
also show the dollar amount of income excluded or exempted from New York State
personal income taxes and the dollar amount, if any, subject to these taxes.
These statements will also designate the amount of exempt-interest dividends
that are a specific preference item for purposes of the Federal individual and
corporate alternative minimum taxes.
Shareholders of the Fund should consult their tax advisors with specific
26
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
reference to their own tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows New York taxpayers who are individuals how to
translate Federal and New York State tax savings from investments such as the
Fund into an equivalent return from a taxable investment. To the extent that the
equivalent taxable yields illustrated in this table are based on an effective
tax rate which combines the Federal and New York marginal income tax rates, the
table is not applicable to individuals who do not pay New York State personal
income taxes. The yields used below are for illustration only and are not
intended to represent current or future yields for the Fund, which may be higher
or lower than those shown.
<TABLE>
<CAPTION>
New York,
Combined 1997 State, City New York Tax-Exempt
State Federal and Federal Equivalent Yields
Taxable Income and City Marginal Effective
Single Joint Rates**** Rates Rate** 2.00% 3.00% 4.00% 5.00% 6.00%
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-24,650 0-40,001 11.24% 15.00% 24.55% 2.65% 3.98% 5.30% 6.63% 7.95%
24,001-59,750 41,200-99,600 11.31 28.00 36.14 3.13 4.70 6.26 7.83 9.40
59,750-124,650 99,600-151,750 11.31 31.00 38.80 3.27 4.90 6.54 8.17 9.80
124,650-271,050 151,750-271,050 11.31 36.00 43.24 3.52 5.29 7.05 8.81 10.57
over 271,050 over 271,050 11.31 39.60 46.43 3.73 5.60 7.47 9.33 11.20
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
New York,
Combined 1997 State, City New York Tax-Exempt
State Federal and Federal Equivalent Yields
Taxable Income and City Marginal Effective
Single Joint Rates**** Rates Rate** 7.00% 8.00% 9.00% 10.00%
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-24,650 0-40,000 11.24% 15.00% 24.55% 9.28% 10.60% 11.93% 13.25%
24,650-59,750 41,200-99,600 11.31 28.00 36.14 10.96 12.53 14.09 15.66
59,750-124,650 99,600-151,750 11.31 31.00 38.80 11.44 13.07 14.71 16.34
124,650-271,050 151,750-271,050 11.31 36.00 43.24 12.33 14.09 15.86 17.62
over 271,050 over 271,050 11.31 39.60 46.43 13.07 14.93 16.80 18.67
- ------------------------------------------------------------------------------------------------
</TABLE>
* This amount represents taxable income as defined in the Code. It is assumed
that taxable income as defined in the Code is the same as under the New
York State or City personal income tax law, however, New York State or City
taxable law may differ due to differences in exemptions, itemized
deductions, and other items.
** For Federal tax purposes, these combined rates reflect the applicable
marginal rates and rate brackets for 1997, including indexing the rate
brackets for inflation. These rates include the effect of deducting state
and City taxes on your Federal return. For New York purposes, these
combined rates reflect the expected New York State and New York City tax
and surcharge rates for 1997.
*** These represent New York State, City and Federal Tax Equivalent Yields.
**** These rates represent the highest New York State and City personal income
tax rates within the applicable Federal income tax brackets for 1997.
The Federal tax rates and New York State and New York City tax rates shown
are those in effect for 1997 and are subject to change. The calculations
reflected in the table assume that no income will be subject to the Federal
alternative minimum taxes.
27
<PAGE>
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Purchase of Shares
- --------------------------------------------------------------------------------
General
The Fund offers three Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or CDSC and are
available only to investors investing a minimum of $15,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary-Alternate
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including certain
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A, Class C or Class Y shares. Smith Barney and other
broker/dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at the Transfer Agent are not subject to a
maintenance fee.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Fund. Investors in
Class Y shares may open an account by making an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For shareholders purchasing shares of the Fund through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A
and Class C shares and the subsequent investment requirement for all Classes is
$25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment requirement
for Class A and Class C shares and the subsequent investment requirement for all
Classes is $50. There are no minimum investment requirements in Class A shares
for employees of Travelers and its subsidiaries, including Smith Barney,
Directors or Trustees of any of the Smith Barney Mutual Funds, and their
immediate family. The Fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend the offering of shares
from time to time. Shares purchased will be held in the shareholder's account by
the Fund's transfer agent, First Data. Share certificates are issued only upon a
shareholder's written request to First Data.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset value,
are priced according to the net asset value determined on that day (the "trade
date").
28
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Orders received by dealers or Introducing Brokers prior to the close of regular
trading on the NYSE on any day the Fund calculates its net asset value are
priced according to the net asset value determined on that day, provided the
order is received by the Fund or Smith Barney prior to Smith Barney's close of
business. For shares purchased through Smith Barney or Introducing Brokers
purchasing through Smith Barney, payment for Fund shares is due on the third
business day (the "settlement date") after the trade date. In all other cases,
payments must be made with the purchase order.
Systematic Investment Plan
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder, to provide systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to complete
the transfer will be charged a fee of up to $25 by Smith Barney or the Transfer
Agent. The Systematic Investment Plan also authorizes Smith Barney to apply cash
held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.
Initial Sales Charge Alternative -- Class A Shares
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
Sales
Charge as Sales Dealers
% of Charge as Reallowance
Offering % of as % of
Amount of Investment Price Amount Invested Offering Price
================================================================================
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
================================================================================
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class C shares is waived. See "Deferred Sales Charge
Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
Initial Sales Charge Waivers
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees or members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of such company
with the Fund by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a mutual
fund which (i) was sponsored by the Financial Consultant's prior employer, (ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (d) purchases by shareholders who have redeemed Class A shares in
the Fund (or Class A shares of another fund of the Smith Barney Mutual Funds
that are offered with a sales charge) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) purchases by investors participating in
a Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
Right of Accumulation
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge, or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Fund and of funds sponsored by Smith Barney which
are offered with a sales charge listed under "Exchange Privilege" then held by
such person and applying the sales charge applicable to such aggregate. In order
to obtain such discount, the purchaser must provide sufficient information at
the time of purchase
30
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
to permit verification that the purchase qualifies for the reduced sales charge.
The right of accumulation is subject to modification or discontinuance at any
time with respect to all shares purchased thereafter.
Group Purchases
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enables Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and its members,
and must agree to include sales and other materials related to the Fund in its
publications and mailing to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to purchase shares at net asset value by
aggregating the investments over a 13 month period, provided that the investor
refers to such Letter when placing orders. For purposes of a Letter of Intent,
the "Amount of
31
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Fund and other funds of the Smith Barney
Mutual Funds offered with a sales charge over a 13 month period based on the
total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or the Transfer Agent to obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Fund and agree to purchase a total of $15,000,000 of Class Y shares of the Fund
within thirteen months from the date of the Letter. If a total investment of
$15,000,000 is not made with the thirteen-month period, all Class Y shares
purchased to date will the transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further
information.
Deferred Sales Charge Alternatives
CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and (b)
Class A shares that were purchased without an initial sales charge but subject
to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class C shares and Class A shares that are CDSC Shares, shares
redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase.
In determining the applicability of any CDSC, it will be assumed that a
32
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
Waivers of CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other funds of the Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part of
the redemption proceeds within 60 days and receive pro rata credit for any CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to other requirements of the
fund into which exchanges are made.
33
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
FUND NAME
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
34
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney Municipal High Income Fund
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Global Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the Fund.
** Available for exchange with Class A shares of the Fund. In addition, Class C
shareholders who own Class C shares of the Fund may exchange Fund shares for
Class C shares of this Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class C shares of the Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
35
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Fund who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. The Adviser may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may, at
its discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days prior to suspending the
exchange privilege and during the 15 day period the shareholder will be required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------------------
Redemption of Shares
- --------------------------------------------------------------------------------
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to the net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which
36
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Class, or if the investor owns fewer shares of the Class than specified, the
redemption request will be delayed until the Fund's transfer agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Intermediate Maturity New York Municipals Fund
Class A, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution, such as domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
37
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Telephone Redemption and Exchange Program.
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization form, including a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/ Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for the following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and
38
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
exchange program or to impose a charge for this service at any time following at
least seven (7) days' prior notice to shareholders.
Automatic Cash Withdrawal Plan
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the value of a shareholder's shares subject to the CDSC.) For
further information regarding the automatic cash withdrawal plan, shareholders
should contact a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include the Fund's current dividend return. These
figures are computed separately for Class A, Class C and Class Y shares of the
Fund. These figures are based on historical earnings and are not intended to
indicate future performance. Total return is computed for a specified period of
time assuming deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and capital gain
distributions on the reinvestment dates at prices calculated as stated in this
Prospectus, then dividing the value of the investment at the end of the period
so calculated by the initial amount invested and
39
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
subtracting 100%. The standard average annual total return, as prescribed by the
SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The yield of a Fund Class refers to the net investment income earned by
investments in the Class over a thirty-day period. This net investment income is
then annualized; i.e., the amount of income earned by the investments during
that 30-day period is assumed to be earned each 30-day period for twelve periods
and is expressed as a percentage of the investments. The yield is calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The Fund calculates current
dividend return for each Class by annualizing the most recent monthly
distribution and dividing by the net asset value or the maximum public offering
price (including sales charge) on the last day of the period for which current
dividend return for a Fund Class is presented. The current dividend return for
each Class may vary from time to time depending on market conditions, the
composition of its investment portfolio and operating expenses. These factors
and possible differences in the methods used in calculating current dividend
return should be considered when comparing a Class' current return to yields
published for other investment companies and other investment vehicles. The Fund
may also include comparative performance information in advertising or marketing
its shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
- --------------------------------------------------------------------------------
Management of the Trust and the Fund
- --------------------------------------------------------------------------------
Board of Trustees
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the companies that furnish services
to the Fund, including agreements with the Fund's investment adviser,
administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's investment adviser and
administrator. The SAI contains background information regarding each Trustee of
the Trust and the executive officers of the Fund.
Investment Adviser and Administrator -- MMC
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to an investment advisory agreement,
approved by the Trust's Board of Trustees. The Adviser (through predecessor
40
<PAGE>
- --------------------------------------------------------------------------------
Management of the Trust and the Fund (continued)
- --------------------------------------------------------------------------------
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. The Adviser renders investment advice to
investment companies that had aggregate assets under management as of January
31, 1998, in excess of $94 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Adviser manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfolio
managers and securities analysts who provide research services to the Fund. For
investment advisory services rendered to the Fund, the Fund pays the Adviser a
fee at the annual rate of 0.30% of the value of the Fund's average daily net
assets. Prior to November 17, 1995, the Fund paid the Adviser an investment
advisory fee at the annual rate of 0.35% of the value of the Fund's average
daily net assets. For the fiscal year ended November 30, 1997, the Fund paid an
investment advisory fee to the Adviser in an amount equal to 0.11% of the Fund's
average daily net assets. During the same period, the Fund's investment adviser
waived investment advisory fees in an amount equal to 0.19% of the value of the
Fund's average daily net assets.
Administrator -- MMC
MMC also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays MMC a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets. For the fiscal year ended November 30, 1997, the Fund
paid an administration fee to MMC in an amount equal to 0.08% of the Fund's
average daily net assets and the administrator voluntarily waived administrative
fees in an amount equal to 0.12% of the value of the Fund's average daily net
assets.
Portfolio Management
Peter Coffe, Vice President and Investment Officer of the Fund, has been
the portfolio manager of the Fund since February 20, 1996. He manages the
day-to-day operations of the Fund, including making all investment decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended November 30, 1997,
is included in the Annual Report dated November 30, 1997. A copy of the Annual
Report may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
41
<PAGE>
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A and Class C shares of the Fund at the annual rate of 0.15% of
the average daily net assets of the respective Class. Smith Barney is also paid
a distribution fee with respect to Class C shares at the annual rate of 0.20% of
the average daily net assets attributable to that Class. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class C shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential investors;
payments to and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of shares;
interest and/or carrying charges; and indirect and overhead costs of Smith
Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A and Class C shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a holder
of that Class. Smith Barney Financial Consultants may receive different levels
of compensation for selling different Classes of shares.
Payments under the Plan with respect to Class C shares are not tied
exclusively to the shareholder distribution and service expenses actually
incurred by Smith Barney, and the payments may exceed expenses actually incurred
by Smith Barney. The Trust's Board of Trustees will evaluate the appropriateness
of the Plan and its payment terms with respect to the Fund on a continuing basis
and in doing so will consider all relevant factors, including expenses borne by
Smith Barney and amounts received under the Plan and proceeds of the CDSC.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Trust was organized on October 17, 1991 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust."
Each Class of the Fund represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights, privileges
and preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges for each Class; (c) the distribution
and/or service fees
42
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
borne by each Class pursuant to the Plan; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; and (f) the exchange privilege of each Class. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take
appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the Fund
will be voted on a Fund-wide basis on all matters except matters affecting only
the interests of one Class, in which case only shares of the affected Class
would be entitled to vote.
The Fund does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may remove a Trustee
through a declaration in writing or by vote cast in person or by proxy at a
meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the Trust's
outstanding shares and the Trust will assist shareholders in calling such a
meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
The Fund sends shareholders a semi-annual report and an audited annual
report, each of which includes a listing of investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Fund also plans to
consolidate the mailing of its Prospectus so that a shareholder having multiple
accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their
Financial Consultants or First Data.
43
<PAGE>
SMITH BARNEY
------------
A Member of TraverlersGroup[Logo]
Smith Barney
Intermediate
Maturity
New York
Municipals Fund
388 Greenwich Street
New York, New York 10013
FD 0247 3/98
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE.
EVERYDAY
<PAGE>
PROSPECTUS MARCH 30, 1998
Smith Barney
Large Capitalization Growth Fund
388 Greenwich Street
New York, New York 10013
1-800-451-2010
Smith Barney Large Capitalization Growth Fund (the "Fund") is a mutual fund
that seeks long-term growth of capital by investing, under normal market condi-
tions, 65% of its assets in equity securities of companies with large market
capitalizations. The Fund defines large capitalization companies as those com-
panies with market capitalizations of $5 billion or more at the time of the
Fund's investment. The Fund is one of a number of funds, each having distinct
investment objectives and policies, making up the Smith Barney Investment Trust
(the "Trust"). The Trust is an open-end management investment company commonly
referred to as a mutual fund.
The Fund is one of a number of funds, each having distinct investment objec-
tives and policies making up the Smith Barney Investment Trust (the "Trust").
The Trust is an open-end management investment company commonly referred to as
a mutual fund.
This Prospectus sets forth concisely certain information about the Fund,
including sales charges, distribution and service fees and expenses, that pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Shares of the other Funds offered by the Trust are described in separate pro-
spectuses that may be obtained by calling the Trust at 1-800-451-2010.
Additional information about the Fund is contained in a Statement of Addi-
tional Information, (the "SAI") dated March 30, 1998, as amended or supple-
mented from time to time, that is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The SAI has been filed
with the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
MUTUAL MANAGEMENT CORP.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- -------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 10
- -------------------------------------------------
VALUATION OF SHARES 12
- -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 13
- -------------------------------------------------
PURCHASE OF SHARES 14
- -------------------------------------------------
EXCHANGE PRIVILEGE 24
- -------------------------------------------------
REDEMPTION OF SHARES 27
- -------------------------------------------------
MINIMUM ACCOUNT SIZE 29
- -------------------------------------------------
PERFORMANCE 30
- -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 30
- -------------------------------------------------
DISTRIBUTOR 31
- -------------------------------------------------
ADDITIONAL INFORMATION 32
- -------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentations in connection with this offering other than those contained in this
Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the distribu-
tor. This Prospectus does not constitute an offer by the Fund or the distribu-
tor to sell or a solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in this Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified, management invest-
ment company whose investment objective is to seek long-term growth of capital
by investing, under normal market conditions, 65% of its assets in equity secu-
rities of companies with large market capitalizations. See "Investment Objec-
tive and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rates of
expenses to which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum of
$15,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25%
of the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary--Reduced
or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year
after the date of purchase to zero. This CDSC may be waived for certain redemp-
tions. Class B shares are subject to an annual service fee of 0.25% and an
annual distribution fee of 0.75% of the average daily net assets of the Class.
The Class B shares' distribution fee may cause that Class to have higher
expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of dividends and dis-
tributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.75% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. The CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Fund shares, which when com-
bined with current holdings of Class C shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net
asset value with no initial sales charge or CDSC. They are not subject to any
service or distribution fees.
In deciding which Class of Fund shares to purchase, investors should con-
sider the following factors, as well as any other relevant facts and circum-
stances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his
or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the investment
accumulates, shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class
B shares, they do not have a conversion feature and therefore are subject to
an ongoing distribution fee. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase. The $500,000 investment may be met by adding the
purchase to the net asset value
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
of all Class A shares offered with a sales charge held in funds sponsored by
Smith Barney Inc. ("Smith Barney") listed under "Exchange Privilege." Class A
share purchases may also be eligible for a reduced initial sales charge. See
"Purchase of Shares." Because the ongoing expenses of Class A shares may be
lower than those for Class B and Class C shares, purchasers eligible to pur-
chase Class A shares at net asset value or at a reduced sales charge should
consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the pur-
pose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete descrip-
tion of the sales charges and service and distribution fees for each Class of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and
"Exchange Privilege" for other differences between the Classes of shares.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS Investors may be eligible to
participate in the Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
as well as other types of participant directed, tax-qualified employee benefit
plans. Other investors may be eligible to participate in the Smith Barney
ExecChoice(TM) Program. Class A and Class C shares are available as investment
alternatives under both of these programs. See "Purchase of Shares--Smith Bar-
ney 401(k) and ExecChoice(TM) Programs."
PURCHASE OF SHARES Shares may be purchased through a brokerage account main-
tained by Smith Barney during the Initial Subscription Period. During the con-
tinuous offering period, shares may also be purchased through a brokerage
account maintained with Smith Barney, a broker that clears securities transac-
tions through Smith Barney on a fully disclosed basis (an "Introducing Broker")
or an investment dealer in the selling group. In addition, certain investors,
including qualified retirement plans and certain institutional investors, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investors Services Group, Inc. ("First Data" or "Transfer Agent"). See
"Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed Retire-
ment Plan. Investors in Class Y shares may open an account for an initial
investment of $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial investment require-
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
ment for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes of shares is $25. The minimum investment require-
ments for purchases of Fund shares through the Systematic Investment Plan are
described below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN During the continuous offering period, the Fund
offers shareholders a Systematic Investment Plan under which they may authorize
the automatic placement of a purchase order each month or quarter for Fund
shares. The minimum initial investment requirement for Class A, Class B and
Class C shares and the subsequent investment requirement for all Classes for
shareholders purchasing shares through the Systematic Investment Plan on a
monthly basis is $25 and on a quarterly basis is $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE FUND Mutual Management Corp. ("MMC" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management Inc., serves as the
Fund's investment manager. The Manager is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc, ("Holdings") formerly known as Smith Barney
Holdings. Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services including Asset Management, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and distribu-
tions of net realized capital gains, if any, are declared and paid annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
additional shares of the same Class at current net asset value. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribu-
tion reinvestments will become eligible for conversion to Class A shares on a
pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The value of the Fund's invest-
ments, and thus the net asset value of the Fund's shares, will fluctuate in
response to changes in market and economic conditions, as well as the finan-
cial condition and prospects of issuers in which the Fund invests. The Fund
may invest in foreign securities, though management intends to limit such
investments to 10% of the Fund's assets. Foreign investments may include addi-
tional risks associated with currency exchange rates, less complete financial
information about individual companies, less market liquidity and political
instability. See "Investment Objective and Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an investor will incur either directly or indirectly as a shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that may be incurred
at the time of purchase or redemption and the Fund's estimated operating
expenses:
<TABLE>
<CAPTION>
SMITH BARNEY
LARGE CAPITALIZATION GROWTH FUND CLASS A CLASS B CLASS C CLASS Y
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) None* 5.00% 1.00% None
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees** 0.25 1.00 1.00 None
Other expenses*** 0.15 0.15 0.15 0.07
- -------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.15% 1.90% 1.90% 0.82%
- -------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the NASD.
*** "Other Expenses" have been estimated based on expenses the Fund has
incurred during its fiscal year ended November 30, 1997.
7
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
and ExecChoice(TM) Programs. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee of 0.25% of the
value of average daily net assets of Class A shares. For Class B and Class C
shares, Smith Barney receives an annual 12b-1 fee of 1.00% of the value of
average daily net assets of each respective Class, consisting of a 0.75% dis-
tribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding the
various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
SMITH BARNEY
LARGE CAPITALIZATION GROWTH FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each
time period:
Class A...................................... $61 $85 $110 $183
Class B...................................... 69 90 113 203
Class C...................................... 29 60 103 222
Class Y...................................... 8 26 46 101
An investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A...................................... $61 $85 $110 $183
Class B...................................... 19 60 103 203
Class C...................................... 19 60 103 222
Class Y...................................... 8 26 46 101
- ----------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
8
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP, indepen-
dent auditors, whose report thereon appears in the Fund's Annual Report dated
November 30, 1997. The information set out below should be read in conjunction
with the financial statements and related notes that also appear in the Fund's
Annual Report to shareholders, which is incorporated by reference into the SAI.
FOR A SHARE OF EACH CLASS OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD:
<TABLE>
<CAPTION>
SMITH BARNEY LARGE CAPITALIZATION CLASS CLASS CLASS CLASS
GROWTH FUND A(1) B(1) C(1) Y(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.88 $11.88 $11.88 $ 12.66
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) 0.01 (0.01) (0.01) 0.01
Net realized and unrealized gain (loss) 0.39 0.39 0.39 (0.37)
- -------------------------------------------------------------------------------
Total Income From Operations 0.40 0.38 0.38 0.37
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- -- --
- -------------------------------------------------------------------------------
Total Distributions -- -- -- --
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.28 $12.26 $12.26 $12.29
- -------------------------------------------------------------------------------
TOTAL RETURN+(P) 3.37% 3.20% 3.20% (2.92)%
- -------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $111,063 $179,598 $37,224 $84,758
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 1.15% 1.90% 1.90% 0.82%
Net investment income 0.38 (0.37) (0.38) 0.54
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 1% 1% 1% 1%
- -------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY TRANSACTIONS $0.06 $0.06 $0.06 $0.06
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 29, 1997 (inception date) to November 30, 1997.
(2) For the period from October 15, 1997 (inception date) to November 30, 1997.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
(PTotal)return does not reflect deduction of any applicable sales charges.
9
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is long term growth of capital by investing
in equity securities of companies with large market capitalizations. This
investment objective may not be changed without the approval of the holders of
a majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund attempts to achieve its investment objective by investing primarily
in equity securities consisting of common stocks which are believed to afford
attractive opportunities for investment growth. The core holdings of the Fund
are large capitalization companies that are dominant in their industries,
global in scope and have a long term history of performance. The Fund normally
invests at least 65% of its total assets in these securities. The Fund does
have the flexibility, however, to invest the balance in companies with other
market capitalizations. The Fund defines large market capitalization companies
as those having $5 billion or more at the time of the Fund's investment. Compa-
nies whose capitalization falls below this level after purchase will continue
to be considered large capitalization companies for purposes of the 65% policy.
Companies with large market capitalizations typically have a large number of
publicly held shares and a high trading volume resulting in a high degree of
liquidity. When choosing the Fund's investments, the Fund seeks companies that
it expects will demonstrate consistent and sustainable long term growth in
earnings per share, strong cash flow, a high return on equity and a quality
balance sheet. This method of selecting stocks is based on the belief that a
company's earnings growth will eventually translate into growth in the price of
its stock. In analyzing securities for investment, the Manager considers many
different factors, including past growth records, management capability, future
earnings prospects and technological innovation, as well as general market and
economic factors that can influence the price of securities. The value of the
Fund's investments, and thus the net asset value of the Fund's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers in which the Fund invests.
Under normal market conditions, the majority of the Fund's portfolio will
consist of common stocks, but it also may contain money market instruments for
cash management purposes. The Fund reserves the right, as a defensive measure,
to hold money market securities, including repurchase agreements or cash, in
such proportions as, in the opinion of management, prevailing market or eco-
nomic conditions warrant.
Further information about the Fund's investment policies, including a list of
those restrictions on its investment activities that cannot be changed without
shareholder approval, appears in the SAI.
10
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
INVESTMENT STRATEGIES AND TECHNIQUES
Equity Securities. The Fund will normally invest at least 65% of its assets
in equity securities, primarily common stocks and, to a lesser extent, securi-
ties convertible into common stock and rights to subscribe for common stock.
Common stocks represent an equity (ownership) interest in a corporation.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions.
Short-Term Investments. The Fund may also invest in money market instruments
such as: U.S. government securities; certificates of deposit, time deposits and
bankers' acceptances issued by domestic banks (including their branches located
outside the United States and subsidiaries located in Canada), domestic
branches of foreign banks, savings and loan associations and similar institu-
tions; high-grade commercial paper; and repurchase agreements with respect to
such instruments.
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
securities on a when-issued or delayed-delivery basis. The Fund will enter into
a when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In such transactions delivery of the securi-
ties occurs beyond the normal settlement periods, but no payment or delivery is
made by the Fund prior to the actual delivery or payment by the other party to
the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the dates when the investments are actually delivered to the buyers. The Fund
will establish with its custodian a segregated account consisting of cash or
equity and debt securities of any grade provided such securities have been
determined by the Manager to be liquid and unencumbered pursuant to guidelines
established by the Trustees in an amount equal to the amount of its when-issued
and delayed-delivery commitments. Placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net assets.
Foreign Securities. The Fund may invest in securities of non-U.S. issuers in
the form of American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") or similar securities representing interests in the common stock of
foreign issuers. Management intends to limit the Fund's investment in these
types of securities, to 10% of the Fund's net assets. ADRs are receipts, typi-
cally issued by a U.S. bank or trust company, which evidence ownership of
underlying securities issued by a foreign corporation. EDRs are receipts issued
in Europe which evidence a similar ownership arrangement. Generally, ADRs, in
registered form, are designed for use in the U.S. securities markets and EDRs
are designed for use in
11
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
European securities markets. The underlying securities are not always denomi-
nated in the same currency as the ADRs or EDRs. Although investment in the
form of ADRs or EDRs facilitates trading in foreign securities, it does not
mitigate the risks associated with investing in foreign securities.
Investments in foreign securities incur higher costs than investments in
U.S. securities, including higher costs in making securities transactions as
well as foreign government taxes which may reduce the investment return of the
Fund. In addition, foreign investments may include additional risks associated
with currency exchange rates, less complete financial information about indi-
vidual companies, less market liquidity and political instability.
Portfolio Transactions and Turnover. Portfolio securities transactions on
behalf of the Fund are placed by the Manager with a number of brokers and
dealers, including Smith Barney. Smith Barney has advised the Fund that in
transactions with the Fund, Smith Barney charges a commission rate at least as
favorable as the rate that Smith Barney charges its comparable unaffiliated
customers in similar transactions.
The Fund generally does not engage in short-term trading but intends to pur-
chase securities for long-term growth. Accordingly, the Fund's annual portfo-
lio turnover rate is not expected to exceed 100%.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney, the Fund's
Distributor, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact on the
Fund's operations, including the handling of securities trades, pricing and
account services. The Manager and Smith Barney have advised the Fund that they
have been reviewing all of their computer systems and actively working on nec-
essary changes to their systems to prepare for the year 2000 and expect that
their systems will be compliant before that date. In addition, the Manager has
been advised by the Fund's custodian, transfer agent and accounting service
agent that they are also in the process of modifying their systems with the
same goal. There can, however, be no assurance that the Manager, Smith Barney
or any other service provider will be successful, or that interaction with
other non-complying computer systems will not impair Fund services at that
time.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regu-
lar trading on the NYSE on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number
of shares of the Class outstanding.
12
<PAGE>
VALUATION OF SHARES (CONTINUED)
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Trust's Board of Trustees. Short-
term investments that mature in 60 days or less are valued at amortized cost.
Amortized cost involves valuing an investment at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. Further information regarding the Fund's valuation
policies is contained in the SAI.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute substantially all its net investment
income (that is, its income other than its net realized capital gains) and net
realized capital gains, if any, once a year, normally at the end of the year
in which earned or at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales charge or CDSC. In order to
avoid the application of a 4.00% nondeductible excise tax on certain undis-
tributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution, shortly before December 31 in each year, of any
undistributed ordinary income or capital gains and expects to pay any other
dividends and distributions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C shares of the Fund may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and
Class C shares. The per share dividends on Class A shares of the Fund may be
lower than the per share dividends on Class Y shares principally as a result
of the service fee applicable to Class A shares. Distributions of capital
gains, if any, will be in the same amount for Class A, Class B, Class C and
Class Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from net invest-
ment income and distributions of net realized short-term capital gains will be
taxable to shareholders as ordinary income, regardless of how long sharehold-
ers have held their Fund shares and whether such dividends and distributions
are received in cash or reinvested in additional Fund shares. Distributions of
net realized long-term capital gains will be taxable to shareholders as long-
term capital gains, regardless of how long shareholders have held Fund shares
and whether such distributions are received in cash or are reinvested in addi-
tional Fund shares. Furthermore, as a
13
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
general rule, a shareholder's gain or loss on a sale or redemption of Fund
shares will be a long-term capital gain or loss if the shareholder has held the
shares for more than one year and will be a short-term capital gain or loss if
the shareholder has held the shares for one year or less. Some of the Fund's
dividends declared from net investment income may qualify for the Federal divi-
dends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and distribu-
tions will be mailed annually. Each shareholder also will receive, if appropri-
ate, various written notices after the close of the Fund's prior taxable year
as to the Federal income tax status of his or her dividends and distributions
which were received from the Fund during the Fund's prior taxable year. Share-
holders should consult their own tax advisors regarding specific questions as
to the Federal and local tax consequences of investing in the Fund.
PURCHASE OF SHARES
GENERAL
The Fund currently offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC
and are available only to investors investing a minimum of $15,000,000 (except,
for purchases of Class Y shares by Smith Barney Concert Allocation Series, Inc.
for which there is no minimum purchase amount). See "Prospectus Summary--Alter-
native Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney. Shares may also be purchased through an Introducing Broker
or an investment dealer in the selling group. In addition, certain investors,
including qualified retirement plans and certain other institutional investors,
may purchase shares directly from the Fund through the Transfer Agent. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class B, Class C or Class Y shares. Smith Barney and other
broker/dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or
holds shares. Accounts held directly at the Transfer Agent are not subject to a
maintenance fee.
Investors in Class A, Class B and Class C shares may open an account by mak-
ing an initial investment of at least $1,000 for each account, or $250 for an
IRA or
14
<PAGE>
PURCHASE OF SHARES (CONTINUED)
a Self-Employed Retirement Plan, in the Fund. Investors in Class Y shares may
open an account by making an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial investment requirement for Class A, Class B and
Class C shares and the subsequent investment requirement for all Classes in
the Fund is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent invest-
ment requirement for all Classes is $25. For shareholders purchasing shares of
the Fund through the Systematic Investment Plan on a quarterly basis, the min-
imum initial investment requirement for Class A, Class B and Class C shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares purchases by employees of
Travelers and its subsidiaries, including Smith Barney, Directors or Trustees,
of any of the Smith Barney Mutual Funds, and their immediate family. The Fund
reserves the right to waive or change minimums, to decline any order to pur-
chase its shares and to suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's account by the Fund's
transfer agent. Share certificates are issued only upon a shareholder's writ-
ten request to the Transfer Agent.
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Fund calculates its net asset value
are priced according to the net asset value determined on that day (the "trade
date"). Orders received by dealers or Introducing Brokers prior to the close
of regular trading on the NYSE on any day the Fund calculates its net asset
value, are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Fund shares
is due on the third business day (the "settlement date") after the trade date.
In all other cases, payments must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is authorized,
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to
the shareholder's Fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
the Transfer Agent. The Systematic Investment Plan also authorizes Smith Bar-
ney to apply cash held in the sharehold-
15
<PAGE>
PURCHASE OF SHARES (CONTINUED)
er's Smith Barney brokerage account or redeem the shareholder's shares of a
Smith Barney money market fund to make additions to the account. Additional
information is available from the Fund or a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------ DEALERS'
% OF % OF REALLOWANCE AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $ 25,000 5.00% 5.26% 4.50%
$ 25,000 - 49,999 4.00 4.17 3.60
50,000 - 99,999 3.50 3.63 3.15
100,000 - 249,999 3.00 3.09 2.70
250,000 - 499,999 2.00 2.04 1.80
500,000 and over * * *
- ---------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares
is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which the CDSC
applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and/or any of the Smith Barney
Mutual Funds (including retired Board members and employees); the immediate
families of such persons (including the surviving spouse of a deceased Board
Member or employee); and to a pension, profit-sharing or other benefit plan for
such persons and (ii) employees of members of the NASD, provided such sales are
made upon the assurance of the purchaser that the purchase is made for invest-
ment purposes and that the securities will not be resold except through redemp-
tion or repurchase; (b) offers of Class A shares to any other investment com-
pany to effect the combination
16
<PAGE>
PURCHASE OF SHARES (CONTINUED)
of such company with the Fund by merger, acquisition of assets or otherwise;
(c) purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the condition the pur-
chase of Class A shares is made with the proceeds of the redemption of shares
of a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchases by shareholders who have redeemed
Class A shares in the Fund or Class A shares of another fund of the Smith Bar-
ney Mutual Funds that are offered with a sales charge, and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by regis-
tered investment advisory subsidiaries of Travelers; (f) direct rollovers by
plan participants of distributions from a 401(k) plan offered to employees of
Travelers or its subsidiaries or a 401(k) plan enrolled in the Smith Barney
401(k) Program (Note: subsequent investments will be subject to the applicable
sales charge); (g) purchases by separate accounts used to fund certain unregis-
tered variable annuity contracts; and (h) purchases by investors participating
in a Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of the Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the
group. To be eligible for
17
<PAGE>
PURCHASE OF SHARES (CONTINUED)
such reduced sales charges or to purchase at net asset value, all purchases
must be pursuant to an employer- or partnership-sanctioned plan meeting certain
requirements. One such requirement is that the plan must be open to specified
partners or employees of the employer and its subsidiaries, if any. Such plan
may, but is not required to, provide for payroll deductions, IRAs or invest-
ments pursuant to retirement plans under Sections 401 or 408 of the Code. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An individ-
ual who is a member of a qualified group may also purchase Class A shares at
the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the pur-
chaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes pur-
chases of all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge over the 13 month period based on the total amount
of intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13 month period starting up
to 90 days before the date of execution of a Letter of Intent. Each investment
made during the period receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the sales charges applica-
ble to the purchases made and the charges previously paid, or an appropriate
number of escrowed shares will be redeemed. Please contact a Smith Barney
Financial Consultant or First Data to obtain a Letter of Intent application.
18
<PAGE>
PURCHASE OF SHARES (CONTINUED)
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $5,000,000 in Class Y shares of the Fund
and agree to purchase a total of $15,000,000 of Class Y shares of the Fund
within thirteen (13) months from the date of the Letter. If a total investment
of $15,000,000 is not made within the thirteen-month period, all Class Y shares
purchased to date will be transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.25%) and expenses applicable
to the Fund's Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such transfer will not be subject to Federal income taxes. Please
contact a Smith Barney Financial Consultant or First Data for further informa-
tion.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at the net asset value next determined without an ini-
tial sales charge so that the full amount of an investor's purchase payment may
be immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. CDSC Shares are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gain distributions; (c)
with respect to Class B shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders, except in the case of
Class B shares held under the Smith Barney 401(k) Program, as described below.
See "Purchase of Shares--Smith Barney 401(k) and ExecChoice(TM) Programs."
19
<PAGE>
PURCHASE OF SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 5.00%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There also will be converted at that time
such proportion of Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend
Shares) owned by the shareholder. See "Prospectus Summary--Alternative Pur-
chase Arrangements--Class B Shares Conversion Feature." The length of time
that CDSC Shares acquired through an exchange have been held will be calcu-
lated from the date that the shares exchanged were initially acquired in one
of the other applicable Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gain distribution reinvestments in such other funds.
For Federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount realized on redemp-
tion. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her invest-
ment. Assuming at the time of the redemption the net asset value had appreci-
ated to $12 per share, the value of the investor's shares would be $1,260 (105
shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided, however, that auto-
matic cash withdrawals in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for withdrawal plans that
were established
20
<PAGE>
PURCHASE OF SHARES (CONTINUED)
prior to November 7, 1994); (c) redemptions of shares within 12 months follow-
ing the death or disability of the shareholder; (d) redemptions of shares made
in connection with qualified distributions from retirement plans or IRAs upon
the attainment of age 59 1/2; (e) involuntary redemptions; and (f) redemptions
of shares to effect a combination of the Fund with any investment company by
merger, acquisition of assets or otherwise. In addition, a shareholder who has
redeemed shares from other Smith Barney Mutual Funds may, under certain cir-
cumstances, reinvest all or part of the redemption proceeds within 60 days and
receive pro rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by the Transfer
Agent in the case of all other shareholders) of the shareholder's status or
holdings, as the case may be.
SMITH BARNEY 401(K) PROGRAM AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the same
terms and conditions, which are outlined below, are offered to all plans par-
ticipating ("Participating Plans") in these programs.
Each Fund offers to Participating Plans Class A and Class C shares as
investment alternatives under the Smith Barney 401(k) and ExecChoice(TM) Pro-
grams. Class A and Class C shares acquired through the Participating Plans are
subject to the same service and/or distribution fees as the Class A and Class
C shares acquired by other investors; however, they are not subject to any
initial sales charge or CDSC. Once a Participating Plan has made an initial
investment in a Fund, all of its subsequent investments in the Fund must be in
the same Class of shares, except as otherwise described below.
Class A Shares. Class A shares of a Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney Mutual Funds.
Class C Shares. Class C shares of a Fund are offered without any sales
charge or CDSC to any Participating Plan that purchases less than $1,000,000
of Class C shares of one or more funds of the Smith Barney Mutual Funds.
401(k) and ExecChoice(TM) Plans Opened On or After June 21, 1996. At the end
of the fifth year after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program, if its total
Class C holdings in all non-money market Smith Barney Mutual Funds equal at
least $1,000,000, it will be offered the opportunity to exchange all of its
Class C shares for Class A shares of a Fund. (For Participating Plans that
were originally estab-
21
<PAGE>
PURCHASE OF SHARES (CONTINUED)
lished through a Smith Barney retail brokerage account, the five year period
will be calculated from the date the retail brokerage account was opened.) Such
Participating Plans will be notified of the pending exchange in writing within
30 days after the fifth anniversary of the enrollment date and, unless the
exchange offer has been rejected in writing, the exchange will occur on or
about the 90th day after the fifth anniversary date. If the Participating Plan
does not qualify for the five year exchange to Class A shares, a review of the
Participating Plan's holdings will be performed each quarter until either the
Participating Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the date a Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program, if its total Class
C holdings in all non-money market Smith Barney Mutual Funds equal at least
$500,000 as of the calendar year-end, the Participating Plan will be offered
the opportunity to exchange all of its Class C shares for Class A shares of a
Fund. Such Plans will be notified in writing within 30 days after the last
business day of the calendar year and, unless the exchange offer has been
rejected in writing, the exchange will occur on or about the last business day
of the following March.
Any Participating Plan in the Smith Barney 401(k) Program that has not previ-
ously qualified for an exchange into Class A shares will be offered the oppor-
tunity to exchange all of its Class C shares for Class A shares of a Fund,
regardless of asset size, at the end of the eighth year after the date the Par-
ticipating Plan enrolled in the Smith Barney 401(k) Program. Such Plans will be
notified of the pending exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating Plan will not be eligible
to acquire additional Class C shares of the Fund but instead may acquire Class
A shares of the Fund. Any Class C shares not converted will continue to be sub-
ject to the distribution fee.
Participating Plans wishing to acquire shares of a Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from the Transfer Agent. For further information regarding
these Programs, investors should contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Smith Barney Mutual Funds are not available for purchase by Participating Plans
opened on or after June 21, 1996, but may continue to be purchased by any Par-
ticipating Plan in the Smith Barney 401(k) Program opened prior to such date
and originally investing in such Class. Class B shares acquired are subject to
a CDSC of 3.00% of redemption proceeds, if the Participating Plan terminates
within eight years of the date the Participating Plan first enrolled in the
Smith Barney 401(k) Program.
22
<PAGE>
PURCHASE OF SHARES (CONTINUED)
At the end of the eighth year after the date the Participating Plan enrolled
in the Smith Barney 401(k) Program, the Participating Plan will be offered the
opportunity to exchange all of its Class B shares for Class A shares of the
Fund. Such Participating Plan will be notified of the pending exchange in writ-
ing approximately 60 days before the eighth anniversary of the enrollment date
and, unless the exchange has been rejected in writing, the exchange will occur
on or about the eighth anniversary date. Once the exchange has occurred, a Par-
ticipating Plan will not be eligible to acquire additional Class B shares of
the Fund but instead may acquire Class A shares of the Fund. If the Participat-
ing Plan elects not to exchange all of its Class B shares at that time, each
Class B share held by the Participating Plan will have the same conversion fea-
ture as Class B shares held by other investors. See "Purchase of Shares--
Deferred Sales Charge Alternatives".
No CDSC is imposed on redemptions of Class B shares to the extent that the
net asset value of the shares redeemed does not exceed the current net asset
value of the shares purchased through reinvestment of dividends or capital gain
distributions, plus the current net asset value of Class B shares purchased
more than eight years prior to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the purchase payments made dur-
ing the preceding eight years. Whether or not the CDSC applies to the redemp-
tion by a Participating Plan depends on the number of years since the Partici-
pating Plan first became enrolled in the Smith Barney 401(k) Program, unlike
the applicability of the CDSC to redemptions by other shareholders, which
depends on the number of years since those shareholders made the purchase pay-
ment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a) the retirement of an employee in the Participating Plan; (b) the termina-
tion of employment of an employee in the Participating Plan; (c) the death or
disability of an employee in the Participating Plan; (d) the attainment of age
59 1/2 by an employee in the Participating Plan; (e) hardship of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
23
<PAGE>
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
Smith Barney Mutual Funds, to the extent shares are offered for sale in the
shareholder's state of residence. Exchanges of Class A, Class B and Class C
shares are subject to minimum investment requirements and all shares are sub-
ject to the other requirements of the fund into which exchanges are made.
FUND NAME
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
+++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Fund
Smith Barney Funds, Inc.--U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
24
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Municipal High Income Fund
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Global Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
+++Smith Barney Municipal Money Market Fund, Inc.
+++Smith Barney Muni Funds--California Money Market Portfolio
+++Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund. In
addition, Participating Plans opened prior to June 21, 1996 and investing
in Class C shares of the Fund may exchange Fund shares for Class C shares
of this Fund.
***Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) and ExecChoice(TM) Programs may exchange those shares for
Class C shares of this Fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
25
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Class B Exchanges. In the event a Class B shareholder wishes to exchange all
or a portion of his or her shares in any of the funds imposing a CDSC higher
than that imposed by the Fund, the exchanged Class B shares will be subject to
the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the
respective Class in any of the funds identified above may do so without impo-
sition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can be detrimental to the Fund's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary
to the best interests of the Fund's other shareholders. In this event, the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by a shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will
be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged, no signature guarantee
is required.
A capital gain or loss for tax purposes will be realized upon the exchange,
depending upon the cost or other basis of shares redeemed. Before exchanging
shares, investors should read the current prospectus describing the shares to
be acquired. The Fund reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to shareholders.
26
<PAGE>
REDEMPTION OF SHARES
The Fund is required to redeem shares tendered to it, as described below, at
a redemption price equal to their net asset value per share next determined
after receipt of a written request in proper form at no charge other than any
applicable CDSC. Redemption requests received after the close of regular trad-
ing on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for redemp-
tion must specify the Class being redeemed. In the event of a failure to spec-
ify which Class, or if the investor owns fewer shares of the Class than speci-
fied, the redemption request will be delayed until the Transfer Agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under
the Investment Company Act of 1940, as amended (the "1940 Act"), in extraordi-
nary circumstances. Generally, if the redemption proceeds are remitted to a
Smith Barney brokerage account, these funds will not be invested for the share-
holder's benefit without specific instruction and Smith Barney will benefit
from the use of temporarily uninvested funds. Redemption proceeds for shares
purchased by check, other than a certified or official bank check, will be
remitted upon clearance of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling group or by sub-
mitting a written request for redemption to:
Smith Barney Large Capitalization Growth Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $10,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Fed -
27
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
eral Reserve System or member firm of a national securities exchange. Written
redemption requests of $10,000 or less do not require a signature guarantee
unless more than one such redemption request is made in any 10-day period or
the redemption proceeds are to be sent to an address other than the address of
record. Unless otherwise directed, redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly
received until First Data receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be eligi-
ble to redeem and exchange Fund shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a sig-
nature guarantee, that will be provided by First Data upon request. (Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with a signature guarantee when making his/her initial investment
in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value next determined. Redemptions of shares (i) by retirement plans or (ii)
for which certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the
28
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined.
Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1.00% per month of
the value of the shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. (With respect to withdrawal plans in effect prior
to November 7, 1994, any applicable CDSC will be waived on amounts withdrawn
that do not exceed 2.00% per month of the shareholder's shares subject to the
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, each account must satisfy the minimum account size.) The Fund, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
29
<PAGE>
PERFORMANCE
From time to time the Fund may advertise its total return and average annual
total return in advertisements and/or other types of sales literature. These
figures are computed separately for Class A, Class B, Class C and Class Y
shares of the Fund. These figures are based on historical earnings and are not
intended to indicate future performance. Total return is computed for a speci-
fied period of time assuming deduction of the maximum sales charge, if any,
from the initial amount invested and reinvestment of all income dividends and
capital gain distributions on the reinvestment dates at prices calculated as
stated in this Prospectus, then dividing the value of the investment at the end
of the period so calculated by the initial amount invested and subtracting
100%. The standard average annual total return, as prescribed by the SEC is
derived from this total return, which provides the ending redeemable value.
Such standard total return information may also be accompanied with nonstandard
total return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account. The
Fund may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from Lipper
Analytical Services, Inc. and other financial publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for the management and supervision of the Trust rests
with the Trust's Board of Trustees. The Trustees approve all significant agree-
ments between the Trust and the persons and companies that furnish services to
the Fund, including agreements with the Fund's distributor, investment manager,
custodian and transfer agent. The day-to-day operations of the Fund are dele-
gated to the Fund's investment manager. The SAI contains background information
regarding each Trustee of the Trust and executive officers of the Fund.
INVESTMENT MANAGER--MMC
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as the
Fund's investment manager pursuant to an investment management agreement
approved by the Trust's Board of Trustees. The Manager (through predecessor
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. The Manager renders investment advice to invest-
ment companies that had aggregate assets under management as of January 31,
1998 in excess of $94 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
the Manager manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders
30
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
to purchase and sell securities, and employs professional portfolio managers
and securities analysts who provide research services to the Fund. For invest-
ment management services rendered, the Fund pays the Manager a monthly fee at
the annual rate of 0.75% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Alan Blake, Vice President and Investment Officer of the Fund, is the portfo-
lio manager and manages the day-to-day operations of the Fund, including making
all investment decisions.
DISTRIBUTOR
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual
service fee with respect to Class A, Class B and Class C shares of the Fund at
the annual rate of 0.25% of the average daily net assets of the respective
Class. Smith Barney is also paid an annual distribution fee with respect to
Class B and Class C shares at the annual rate of 0.75% of the average daily net
assets attributable to those Classes. Class B shares which automatically con-
vert to Class A shares eight years after the date of original purchase will no
longer be subject to distribution fees. The fees are used by Smith Barney to
pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class B and Class C shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising; the
cost of printing and mailing prospectuses to potential investors; payments to
and expenses of Smith Barney Financial Consultants and other persons who pro-
vide support services in connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead costs of Smith Barney asso-
ciated with the sale of Fund shares, including lease, utility, communications
and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may
31
<PAGE>
DISTRIBUTOR (CONTINUED)
exceed distribution expenses actually incurred. The Fund's Board of Directors
will evaluate the appropriateness of the Plan and its payment terms on a con-
tinuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
ADDITIONAL INFORMATION
The Trust was organized on October 17, 1991 under the laws of the Common-
wealth of Massachusetts and is a business entity commonly known as a "Massachu-
setts business trust." The Trust offers shares of beneficial interest of sepa-
rate funds with a par value of $.001 per share. The Fund offers shares of bene-
ficial interest currently classified into four Classes--A, B, C and Y. Each
Class of the Fund represents an identical interest in the Fund's investment
portfolio. As a result, the Classes have the same rights, privileges and pref-
erences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges; if any, for each Class; (c) the distri-
bution and/or service fees borne by each Class pursuant to the Plan; (d) the
expenses allocable exclusively to each Class; (e) voting rights on matters
exclusively affecting a single Class; (f) the exchange privilege of each Class;
and (g) the conversion feature of the Class B shares. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the inter-
ests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any such conflict exists and, if so, take appro-
priate action.
The Fund does not hold annual shareholder meetings. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Shareholders of record of
no less than two-thirds of the outstanding shares of the Trust may remove a
Trustee through a declaration in writing or by vote cast in person or by proxy
at a meeting called for that purpose. The Trustees will call a meeting for any
purpose upon written request of shareholders holding at least 10% of the
Trust's outstanding shares and the Trust will assist shareholders in calling
such a meeting as required by the 1940 Act.
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the Fund
will be voted on a Fund-wide basis on all matters except matters affecting only
the interests of one Class, in which case only shares of the affected Class
would be entitled to vote.
PNC Bank National Association, located at 17th and Chestnut Streets, Phila-
delphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
32
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the reporting period. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply
to their accounts should contact their Smith Barney Financial Consultant or the
Fund's Transfer Agent.
33
<PAGE>
SMITH BARNEY
------------
A Member of Traveler Group [LOGO]
SMITH BARNEY LARGE
CAPITALIZATION
GROWTH FUND INC.
388 Greenwich Street
New York, New York 10013
FD 01306 3/98
PART B
STATEMENT OF ADDITIONAL INFORMATION
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
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
$6100
$0
$101,600
18
Alfred
Bianchetti*
6100
0
49,600
13
Martin Brody
6100
0
119,814
21
Dwight B. Crane
6100
0
133,850
24
Burt N. Dorsett
6100
0
49,600
13
Elliot S. Jaffe
6100
0
48,500
13
Stephen E.
Kaufman
6100
0
91,964
15
Joseph J.
McCann
6100
0
49,600
13
Heath B.
McLendon *
- -
- -
- -
42
Cornelius C.
Rose, Jr.
6100
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 [ $ ]
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's Board
of Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any of the Smith Barney Mutual Funds
may exchange all or part of their shares for shares of the same Class of
other Smith Barney Mutual Funds, on the basis of relative net asset value per
share at the time of exchange as follows:
A. Class A shares of the Fund may be exchanged without a sales charge
for Class A shares of any of the Smith Barney Mutual Funds.
B. Class C shares of any fund may be exchanged without a sales charge.
For purposes of CDSC applicability, Class C shares of the Fund
exchanged for Class C shares of another Smith Barney Mutual Fund will
be deemed to have been owned since the date the shares being exchanged
were deemed to be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investors prior ownership of Class A shares of Smith Barney High Income Fund
and the account number in order to accomplish an exchange of shares of Smith
Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders in any Smith Barney Mutual Fund
to acquire shares of the same Class in a fund with different investment
objectives when they believe a shift between funds is an appropriate
investment decision. This privilege is available to shareholders residing in
any state in which the fund shares being acquired may legally be sold. Prior
to any exchange, the shareholder should obtain and review a copy of the
current prospectus of each fund into which an exchange is being considered.
Prospectuses may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset
value and, subject to any applicable CDSC, the proceeds are immediately
invested, at a price as described above, in shares of the fund being
acquired. Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Trust may quote a Funds yield or total return in
advertisements or in reports and other communications to shareholders. The
Trust may include comparative performance information in advertising or
marketing 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 Fund's prior taxable year. If a
shareholder receives a capital gain dividend with respect to any share and if
the share has been held by the shareholder for six months or less, then any
loss on the sale or exchange of such share will be treated as a long-term
capital loss to the extent of the capital gain dividend.
The portion of the dividends received from the Fund that qualifies for the
dividends-received deduction for corporations will be reduced to the extent
that the Fund holds dividend-paying stock for less than 46 days (91 days for
certain preferred stocks). The Fund's holding period will not include any
period during which the Fund has reduced its risk of loss from holding the
stock by purchasing an option to sell or entering into a short sale of
substantially identical stock or securities convertible into the stock. The
holding period for stock may also be reduced if the Fund diminishes its risk
of loss by holding one or more other positions with respect to substantially
similar or related properties. Dividends-received deductions will be allowed
only with respect to shares that a corporate shareholder has held for at
least 46 days within the meaning of the same holding period rules applicable
to the Fund.
If the Fund is the holder of record of any stock on the record date for any
dividends payable with respect to such stock, such dividends shall be
included in the Fund's gross income as of the later of (a) the date that such
stock became ex-dividend with respect to such dividends (that is, the date on
which a buyer of the stock would not be entitled to receive the declared but
unpaid, dividends) or (b) the date that the Fund acquired such stock.
Accordingly, in order to satisfy its income distribution requirements, the
Fund may be required to pay dividends based on anticipated earnings and
shareholders may receive dividends in an earlier year than would otherwise be
the case.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a mutual
fund for which the otherwise applicable sales charge is reduced by reason of
a reinvestment right (that is 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 individual's taxpayer identification number is his or her social
security number. The backup withholding tax is not an additional tax and may
be credited against a shareholder's regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders and is not intended as a substitute
for careful tax planning. Shareholders are urged to consult their tax
advisors with specific reference to their own tax situations, including their
state and local tax liabilities.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust on October 17,
1991 under the name Shearson Lehman Brothers Intermediate-Term Trust. On
November 20, 1991, July 30, 1993, October 14, 1994 and August 16, 1995, the
Trusts name was changed to Shearson Lehman Brothers Income Trust, Smith
Barney Shearson Income Trust, Smith Barney Income Trust and Smith Barney
Investment Trust, respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania, 19103,
serves as the custodian of the Fund. Under its custody agreement with the
Fund, PNC holds the Fund's securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon the month-
end market value of securities held in custody and also receives securities
transactions charges. The assets of the Fund are held under bank
custodianship in compliance with the 1940 Act.
First Data, 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
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 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 and
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" or the "Adviser" or the "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.
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
$6100
$0
$101,600
18
Alfred
Bianchetti*
6100
0
49,600
13
Martin Brody
6100
0
119,814
21
Dwight B. Crane
6100
0
133,850
24
Burt N.
Dorsett**
6100
0
49,600
13
Elliot S. Jaffe
6100
0
48,500
13
Stephen E.
Kaufman
6100
0
91,964
15
Joseph J.
McCann
6100
0
49,600
13
Heath B.
McLendon *
- -
- -
- -
42
Cornelius C.
Rose, Jr.
6100
0
49,600
13
* Designates an "interested" Trustee.
** Pursuant to the Fund's deferred compensation plan, Mr. Dorsett elected to
defer the compensation due to him from the Fund. As of January
1, 1997, Mr. Dorsett elected not to defer his future compensation.
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 ending
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 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 a block grant of
about $54 per pupil for any one-time purpose. Per-pupil expenditures are
projected to increase by another $126 in 1995-96 to $4,435. A full 2.7%
cost of living allowance is funded for the first time in several years.
The budget 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 in 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 was 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 of $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
California Fund cannot predict the impact of this or related legislation on
the bonds in its 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, and 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 obligations.
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/IBCA. Moody's Investors Service has
assigned such debt an A1 rating. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised
downward or withdrawn entirely if, in the judgment of the particular rating
agency, circumstances so warrant.
The California Fund believes the information summarized above describes some
of the more significant aspects relating to it. 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 California
Fund 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 Fund is not taxable as corporation for California tax
purposes. Interest on the underlying Securities owned by the California Fund
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 Fund will recognize gain or loss on the
sale, redemption or other disposition of Securities within the California
Fund, or on the sale or other disposition of Unit Holders interest in the
California Fund. As a result, a Unit Holder may incur California tax
liability upon the sale, redemption or other disposition of Securities within
the California Fund 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 operating results for the 1996 fiscal year were balanced in
accordance with GAAP, after taking into account a discretionary transfer of
$224 million, the sixteenth 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 year 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, initiatives
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 and $2.8 billion for the 1999 through 2001 fiscal years.
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 in 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-.
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 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 economies. 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 stated 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.
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 repurchase 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 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
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 Fund's 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%. 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 a 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
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
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
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
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
*The inception dates for Class C of California Fund and New York Fund are
November 8, 1994 and December 5, 1994, respectively.
New York Fund:
Year
Year
Year
Ended
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 depending 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 to continue to qualify each year as a
"regulated investment company" under the Code. Provided that a Fund (a) is a
regulated investment company and (b) distributes to its shareholders at least
90% of its taxable net investment income (including, for this purpose, its
net realized short-term capital gains) and 90% of its tax-exempt interest
income (reduced by certain expenses), the Fund will not be liable for Federal
income taxes to the extent its taxable net investment income and its net
realized long-term and short-term capital gains, if any, are distributed to
its shareholders. Any such taxes paid by a Fund would reduce the amount of
income and gains available for distribution to shareholders.
Because the Fund may distribute exempt-interest dividends, interest on
indebtedness incurred by a shareholder to purchase or carry shares of a Fund
is not deductible for Federal income tax purposes. In addition, the
indebtedness is not deductible by a shareholder of the California Fund for
California State personal income tax purposes, nor by a New York Fund
shareholder for New York State and New York City personal income tax
purposes. If a shareholder receives exempt-interest dividends with respect
to any share of a Fund and if the share is held by the shareholder for six
months or less, then any loss on the sale or exchange of the share may, to
the extent of the exempt-interest dividends, be disallowed. In addition, the
Code may require a shareholder that receives exempt-interest dividends to
treat as taxable income a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. Furthermore, the portion
of any exempt-interest dividend paid by a Fund that represents income derived
from private activity bonds held by the Fund may not retain its tax-exempt
status in the hands of a shareholder who is a "substantial user" of a
facility financed by the bonds, or a "related person" of the substantial
user. Moreover, as noted in the Prospectuses (a) some or all of a Funds
exempt-interest dividends may be a specific preference item, or a component
of an adjustment item, for purposes of the Federal individual and corporate
alternative minimum taxes and (b) the receipt of a Funds dividends and
distributions may affect a corporate shareholders Federal "environmental" tax
liability 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 Fund's securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon the month-
end market value of securities held in custody and also receives securities
transactions charges. The assets of the Fund are held under bank
custodianship in compliance with the 1940 Act.
First Data, 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 Fund's 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
Moody's 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 & Poor's
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. 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
Moody's 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.
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet financial commitment in a
timely manner.
Fitch's 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
u:/legal/funds/slit/1998/secdocs/slitsai2.doc
1
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Smith Barney Intermediate Maturity California Municipals Fund, Smith
Barney Intermediate Maturity New York Municipals Fund and Smith Barney Large
Capitalization Growth Fund Annual Reports for the fiscal year ended November
30, 1997 were filed on January 30, 1998 as Accession Number 91155-98-000062.
Included in Part C:
Consent of Independent Accountants is filed herewith.
(b) Exhibits
Unless otherwise noted, all references are to the Registrants
Registration Statement on Form N-1A (the Registration Statement") as filed
with the Securities and Exchange Commission ("SEC") on October 21,
1991 (File Nos. 33-43446 and 811-6444).
(1)(a) Registrants Master Trust Agreement dated October 17, 1991 and
Amendments to the Master Trust Agreement dated November 21, 1991 and July 30,
1993, respectively, are incorporated by reference to Post-Effective Amendment
No. 4 to the Registration Statement filed on January 28, 1994 (Post-Effective
Amendment No. 4").
(b) Amendments to the Master Trust Agreement dated October 14, 1994
and
November 7, 1994, respectively, are incorporated by reference to the
Registration Statement filed on Form N-14 on January 6, 1995 (the N-14").
(c) Amendments to the Master Trust Agreement dated July 20, 1995 and
August 10, 1995 are incorporated by reference to Post-Effective Amendment No.
9 to the Registration Statement filed on August 29, 1995 ("Post-Effective
Amendment No. 9").
(d) Amendment to the Master Trust Agreement dated February 28, 1998 is
filed herein.
(2) Registrants by-laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) (a) Registrants form of stock certificate for Smith Barney
S&P 500 Index Fund is incorporated by reference to Post-Effective Amendment
No. 16 to the Registration Statement filed on December 29, 1997.
(4) (b) Registrants form of stock certificate for Smith Barney
Large Capitalization Growth Fund is incorporated by reference to Post-
Effective
Amendment No.17 to the Registration Statement filed on February 20, 1998
("Post-Effective Amendment No. 17").
(5)(a) Investment Advisory Agreement between the Registrant and
Greenwich Street Advisors dated July 30, 1993 is incorporated by reference to
Post-Effective Amendment No. 3 to the Registration Statement filed on
December
1, 1993 ("Post-Effective Amendment No. 3").
(b) Transfer of Investment Advisory Agreement dated November 7, 1994
between the Registrant on behalf of Smith Barney Intermediate Maturity
California Municipals Fund, Greenwich Street Advisors and Mutual
Management Corp. is incorporated by reference to the N-14.
(c) Form of Transfer of Investment Advisory Agreement for Smith Barney
Limited Maturity Municipals Fund, Smith Barney Intermediate Maturity New York
Municipals Fund and Smith Barney Limited Maturity Treasury Fund is
incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement filed on January 27, 1995 (Post-Effective Amendment
No.
6").
(d) Form of Investment Advisory Agreement between the Registrant on
behalf of Smith Barney S&P 500 Index Fund and Travelers Investment
Management Company dated December 11, 1997 is incorporated by
reference to Post Effective Amendment No. 15 to the Registration Statement
filed on December 12, 1997.
(e) Form of Investment Advisory Agreement between the Registrant on
behalf of Smith Barney Large Capitalization Growth Fund and Mutual Management
Corp. (f/k/a Smith Barney Mutual Funds Management Inc.) is incorporated by
reference
to Post-Effective Amendment No. 17 to the Registration Statement filed on
February 20,
1998 ("Post-Effective Amendment No. 17")
(6)(a) Distribution Agreement between the Registrant and Smith Barney
Shearson Inc. dated July 30, 1993 is incorporated by reference to Post-
Effective
Amendment No. 3.
(b) Form of Distribution Agreement between the Registrant on behalf of
Smith Barney S&P 500 Index Fund and PFS Distributors is incorporated
by reference to Post-Effective Amendment No. 10.
(7) Not Applicable.
(8) Form of Custody Agreement with PNC Bank, National Association, is
incorporated by reference to Post-Effective Amendment No. 9.
(9)(a) Administration Agreement between the Registrant on behalf of
Smith Barney Intermediate Maturity California Municipals Fund and Smith
Barney Advisers, Inc. (SBA") is incorporated by reference to the N-14.
(b) Form of Administration Agreement between the Registrant on behalf
of Smith Barney Limited Maturity Municipals Fund and Smith Barney
Intermediate
Maturity New York Municipals Fund and SBA is incorporated by reference to
Post-Effective Amendment No. 6.
(c) Form of Administration Agreement between the Registrant on behalf
of Smith Barney S&P 500 Index Fund and Mutual Management Corp. is
incorporated by reference to Post Effective Amendment No. 15.
(d) Transfer Agency Agreement with First Data Investor Services
Group, Inc. (formerly known as "The Shareholder Services Group Inc.")
is incorporated by reference to Post-Effective Amendment No. 3.
(e) Form of Sub-Transfer Agency Agreement between the Registrant on
behalf of Smith Barney S&P 500 Index Fund and PFS Shareholder Services is
incorporated by reference to Post-Effective Amendment No. 10.
(10) Opinion of counsel regarding legality of shares being
registered is incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement filed on December 6, 1991.
(11) Consent of Independent Accountants is filed herewith.
(12) Not Applicable.
(13) Purchase Agreement between the Registrant and Shearson Lehman
Brothers Inc. is incorporated by reference to Pre-Effective Amendment No. 1.
(14) Not Applicable.
(15)(a) Amended Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant on behalf of Smith Barney Intermediate Maturity
California Municipals Fund and Smith Barney Inc. is incorporated by reference
to the N-14.
(b) Form of Amended Service and Distribution Plan pursuant to Rule 12b-
1
between the Registrant on behalf of Smith Barney Limited Maturity Municipals
Fund and Smith Barney Intermediate Maturity New York Municipals Fund and
Smith
Barney Inc. is incorporated by reference to Post-Effective Amendment No. 6.
(c) Form of Shareholder Services and Distribution Plan pursuant to
Rule
12b-1 between the Registrant on behalf of Smith Barney S&P 500 Index Fund
is incorporated by reference to Post Effective Amendment No. 15.
(d) Form of Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant on behalf of the Fund and Smith Barney
Large Capitalization Growth Fund is incorporated by reference to Post
Effective Amendment No. 17 to the Registration Statement filed on
February 20, 1998 ("Post-Effective Amendment No. 17").
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement filed on April 1, 1993.
(17) Financial Data Schedule is filed herewith.
(18) Plan adopted pursuant to Rule 18f-3(d) of the Investment Company
Act of 1940, as amended, is incorporated by reference to Post-Effective
Amendment No. 10.
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
(1) (2)
Title of Class
Beneficial Interest par value Number of Record Holders
$0.001 per share as of March 20, 1998
Intermediate Maturity California Class A 462
Municipals Fund Class C 75
Class Y 3
Intermediate Maturity New York Class A 1,097
Municipals Fund Class C 65
Smith Barney S&P 500 Class A 572
Index Fund Class D 1
Large Capitalization Growth Fund Class A 9,331
Class B 19,855
Class C 3,896
Class Y 8
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-Effective
Amendment No. 1.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser and Administrator - Mutual Management Corp. (f/k/a Smith
Barney Mutual Funds Management Inc.), formerly known as Smith Barney
Advisers, Inc.,
was incorporated in December 1968 under the laws of the State of Delaware.
MMC is a wholly owned subsidiary of Smith Barney Holdings Inc. (formerly
known as Smith Barney Shearson Holdings Inc.), which in turn is a wholly
owned subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). MMC is registered as an investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act") and has, through its
predecessors, been in the investment counseling business since 1934.
Investment Adviser - Travelers Investment Management Company. (TIMCO). TIMCO
serves as the investment adviser for S&P 500 Index Fund pursuant to a written
agreement (the Advisory Agreement). TIMCO was incorporated on August 31, 1967
under the laws of the State of Connecticut. TIMCO is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. (formerly known as Smith
Barney Holdings Inc.), which in turn is a wholly owned subsidiary of
Travelers Group Inc. (formerly known as Primerica Corporation) (Travelers).
TIMCO is registered as an investment adviser under the Investment Advisers
Act of 1940 (the Advisers Act) since 1971 and has, through its predecessors,
been in the investment counseling business since 1967.
The list required by this Item 28 of the officers and directors of TIMCO
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two fiscal years, is incorporated by reference to Schedules A
and D of FORM ADV filed by SBA pursuant to the Advisers Act (SEC File No.801-
07212.
The list required by this Item 28 of the officers and directors of MMC
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officer and directors
during the past two fiscal years, is incorporated by reference
to Schedules A and D of FORM ADV filed by MMC pursuant to the Advisers
Act (SEC File No. 801-8314).
Item 29. Principal Underwriters
Consulting Group Capital Markets Funds; Global Horizons Investment Series
(Cayman Islands); Greenwich Street California Municipal Fund Inc.; Greenwich
Street Municipal Fund Inc.; Greenwich Street Series Fund; High Income
Opportunity Fund Inc.; The Italy Fund Inc.; Managed High Income Portfolio
Inc.; Managed Municipals Portfolio II Inc.; Managed Municipals Portfolio
Inc.;
Municipal High Income Fund Inc.; Puerto Rico Daily Liquidity Fund Inc.; Smith
Barney Adjustable Rate Government Income Fund; Smith Barney Aggressive Growth
Fund Inc.; Smith Barney Appreciation Fund Inc.; Smith Barney Arizona
Municipals Fund Inc.; Smith Barney California Municipals Fund Inc.; Smith
Barney Concert Allocation Series Inc.; Smith Barney Small Cap Blend Fund,
Inc.; Smith Barney Equity Funds; Smith Barney Fundamental Value Fund Inc.;
Smith Barney Funds, Inc.; Smith Barney Income Funds; Smith Barney
Institutional Cash Management Fund, Inc.; Smith Barney Intermediate Municipal
Fund, Inc.; Smith Barney Investment Funds Inc.; Smith Barney Investment
Trust; Smith Barney Managed Governments Fund Inc.; Smith Barney Managed
Municipals Fund Inc.; Smith Barney Massachusetts Municipals Fund; Smith
Barney Money Funds, Inc.; Smith Barney Muni Funds; Smith Barney Municipal
Fund, Inc.; Smith Barney Municipal Money Market Fund, Inc.; Smith Barney
Natural Resources Fund Inc.; Smith Barney New Jersey Municipals Fund Inc.;
Smith Barney Oregon Municipals Fund Inc.; Smith Barney Principal Return Fund;
Smith Barney Telecommunications Trust; Smith Barney Variable Account Funds;
Smith Barney World Funds, Inc.; Smith Barney Worldwide Special Fund N.V.
(Netherlands Antilles); Travelers Series Fund Inc.; The USA High Yield Fund
N.V.; Worldwide Securities Limited (Bermuda); Zenix Income Fund Inc. and
various series of unit investment trusts.
Smith Barney is wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
(formerly known as Smith Barney Holdings Inc.)
The information required by this Item 29 with respect to each director,
officer and partner of Smith Barney is incorporated by reference to Schedule
A
of FORM BD filed by Smith Barney pursuant to the Securities Exchange Act of
1934 (SEC File No. 812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Investment Trust
388 Greenwich Street
New York, New York 10013
(2) Mutual Management Corp. (f/k/a Smith Barney Mutual Funds
Management Inc.)
388 Greenwich Street
New York, New York 10013
(Records relating to its function as investment adviser to
certain of the Funds
and administrator to all of the Funds)
(3) Travelers Investment Management Company
One Tower Square
Hartford, CT 06183-2030
(Records relating to its function as investment adviser to Smith
Barney
S&P 500 Index Fund)
(4) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(Records relating to its function as custodian)
(5) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(Records relating to its function as Transfer Agent and Dividend
Paying Agent)
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) The Registrant hereby undertakes to furnish to each person
to whom a prospectus of the Registrant is delivered, a copy of the
Registrant's latest annual report, upon request and without charge.
485 (b) Certification
The Registrant hereby certifies that it meets all requirements for
effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY INVESTMENT
TRUST, has duly caused this registration statement to be signed on its behalf
by the undersigned, thereto duly authorized in the City of New York, in the
State of New York on the 30th day of March, 1998.
SMITH BARNEY
INVESTMENT TRUST
/s/Heath B. McLendon
Heath B. McLendon, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
/s/Heath B. McLendon Chairman of the Board 3/30/98
Heath B. McLendon (Chief Executive Officer)
/s/Lewis E. Daidone Treasurer 3/30/98
Lewis E. Daidone (Chief Financial and
Accounting Officer)
/s/Herbert Barg* Trustee 3/30/98
Herbert Barg
/s/Alfred J. Bianchetti* Trustee 3/30/98
Alfred J. Bianchetti
/s/Martin Brody* Trustee 3/30/98
Martin Brody
/s/Dwight B. Crane* Trustee 3/30/98
Dwight B. Crane
/s/Burt N. Dorsett* Trustee 3/30/98
Burt N. Dorsett
/s/Elliot S. Jaffe* Trustee 3/30/98
Elliot S. Jaffe
/s/Stephen E. Kaufman*Trustee 3/30/98
Stephen E. Kaufman
/s/Joseph J. McCann* Trustee 3/30/98
Joseph J. McCann
/s/Cornelius C. Rose, Jr.* Trustee 3/30/98
Cornelius C. Rose, Jr.
_____________________________________________________________________
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power
of attorney dated January 27, 1995.
/s/ Heath B. McLendon
Heath B. McLendon
PART B
STATEMENT OF ADDITIONAL INFORMATION
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Smith Barney Intermediate Maturity California Municipals Fund, Smith
Barney Intermediate Maturity New York Municipals Fund and Smith Barney Large
Capitalization Growth Fund Annual Reports for the fiscal year ended November
30, 1997 were filed on January 30, 1998 as Accession Number 91155-98-000062.
Included in Part C:
Consent of Independent Accountants is filed herewith.
(b) Exhibits
Unless otherwise noted, all references are to the Registrants
Registration Statement on Form N-1A (the Registration Statement") as filed
with the Securities and Exchange Commission ("SEC") on October 21,
1991 (File Nos. 33-43446 and 811-6444).
(1)(a) Registrants Master Trust Agreement dated October 17, 1991 and
Amendments to the Master Trust Agreement dated November 21, 1991 and July 30,
1993, respectively, are incorporated by reference to Post-Effective Amendment
No. 4 to the Registration Statement filed on January 28, 1994 (Post-Effective
Amendment No. 4").
(b) Amendments to the Master Trust Agreement dated October 14, 1994
and
November 7, 1994, respectively, are incorporated by reference to the
Registration Statement filed on Form N-14 on January 6, 1995 (the N-14").
(c) Amendments to the Master Trust Agreement dated July 20, 1995 and
August 10, 1995 are incorporated by reference to Post-Effective Amendment No.
9 to the Registration Statement filed on August 29, 1995 ("Post-Effective
Amendment No. 9").
(d) Amendment to the Master Trust Agreement dated February 28, 1998 is
filed herein.
(2) Registrants by-laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) (a) Registrants form of stock certificate for Smith Barney
S&P 500 Index Fund is incorporated by reference to Post-Effective Amendment
No. 16 to the Registration Statement filed on December 29, 1997.
(4) (b) Registrants form of stock certificate for Smith Barney
Large Capitalization Growth Fund is incorporated by reference to Post-
Effective
Amendment No.17 to the Registration Statement filed on February 20, 1998
("Post-Effective Amendment No. 17").
(5)(a) Investment Advisory Agreement between the Registrant and
Greenwich Street Advisors dated July 30, 1993 is incorporated by reference to
Post-Effective Amendment No. 3 to the Registration Statement filed on
December
1, 1993 ("Post-Effective Amendment No. 3").
(b) Transfer of Investment Advisory Agreement dated November 7, 1994
between the Registrant on behalf of Smith Barney Intermediate Maturity
California Municipals Fund, Greenwich Street Advisors and Mutual
Management Corp. is incorporated by reference to the N-14.
(c) Form of Transfer of Investment Advisory Agreement for Smith Barney
Limited Maturity Municipals Fund, Smith Barney Intermediate Maturity New York
Municipals Fund and Smith Barney Limited Maturity Treasury Fund is
incorporated by reference to Post-Effective Amendment No. 6 to the
Registration Statement filed on January 27, 1995 (Post-Effective Amendment
No.
6").
(d) Form of Investment Advisory Agreement between the Registrant on
behalf of Smith Barney S&P 500 Index Fund and Travelers Investment
Management Company dated December 11, 1997 is incorporated by
reference to Post Effective Amendment No. 15 to the Registration Statement
filed on December 12, 1997.
(e) Form of Investment Advisory Agreement between the Registrant on
behalf of Smith Barney Large Capitalization Growth Fund and Mutual Management
Corp. (f/k/a Smith Barney Mutual Funds Management Inc.) is incorporated by
reference
to Post-Effective Amendment No. 17 to the Registration Statement filed on
February 20,
1998 ("Post-Effective Amendment No. 17")
(6)(a) Distribution Agreement between the Registrant and Smith Barney
Shearson Inc. dated July 30, 1993 is incorporated by reference to Post-
Effective
Amendment No. 3.
(b) Form of Distribution Agreement between the Registrant on behalf of
Smith Barney S&P 500 Index Fund and PFS Distributors is incorporated
by reference to Post-Effective Amendment No. 10.
(7) Not Applicable.
(8) Form of Custody Agreement with PNC Bank, National Association, is
incorporated by reference to Post-Effective Amendment No. 9.
(9)(a) Administration Agreement between the Registrant on behalf of
Smith Barney Intermediate Maturity California Municipals Fund and Smith
Barney Advisers, Inc. (SBA") is incorporated by reference to the N-14.
(b) Form of Administration Agreement between the Registrant on behalf
of Smith Barney Limited Maturity Municipals Fund and Smith Barney
Intermediate
Maturity New York Municipals Fund and SBA is incorporated by reference to
Post-Effective Amendment No. 6.
(c) Form of Administration Agreement between the Registrant on behalf
of Smith Barney S&P 500 Index Fund and Mutual Management Corp. is
incorporated by reference to Post Effective Amendment No. 15.
(d) Transfer Agency Agreement with First Data Investor Services
Group, Inc. (formerly known as "The Shareholder Services Group Inc.")
is incorporated by reference to Post-Effective Amendment No. 3.
(e) Form of Sub-Transfer Agency Agreement between the Registrant on
behalf of Smith Barney S&P 500 Index Fund and PFS Shareholder Services is
incorporated by reference to Post-Effective Amendment No. 10.
(10) Opinion of counsel regarding legality of shares being
registered is incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement filed on December 6, 1991.
(11) Consent of Independent Accountants is filed herewith.
(12) Not Applicable.
(13) Purchase Agreement between the Registrant and Shearson Lehman
Brothers Inc. is incorporated by reference to Pre-Effective Amendment No. 1.
(14) Not Applicable.
(15)(a) Amended Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant on behalf of Smith Barney Intermediate Maturity
California Municipals Fund and Smith Barney Inc. is incorporated by reference
to the N-14.
(b) Form of Amended Service and Distribution Plan pursuant to Rule 12b-
1
between the Registrant on behalf of Smith Barney Limited Maturity Municipals
Fund and Smith Barney Intermediate Maturity New York Municipals Fund and
Smith
Barney Inc. is incorporated by reference to Post-Effective Amendment No. 6.
(c) Form of Shareholder Services and Distribution Plan pursuant to
Rule
12b-1 between the Registrant on behalf of Smith Barney S&P 500 Index Fund
is incorporated by reference to Post Effective Amendment No. 15.
(d) Form of Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant on behalf of the Fund and Smith Barney
Large Capitalization Growth Fund is incorporated by reference to Post
Effective Amendment No. 17 to the Registration Statement filed on
February 20, 1998 ("Post-Effective Amendment No. 17").
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement filed on April 1, 1993.
(17) Financial Data Schedule is filed herewith.
(18) Plan adopted pursuant to Rule 18f-3(d) of the Investment Company
Act of 1940, as amended, is incorporated by reference to Post-Effective
Amendment No. 10.
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
(1) (2)
Title of Class
Beneficial Interest par value Number of Record Holders
$0.001 per share as of March 20, 1998
Intermediate Maturity California Class A 462
Municipals Fund Class C 75
Class Y 3
Intermediate Maturity New York Class A 1,097
Municipals Fund Class C 65
Smith Barney S&P 500 Class A 572
Index Fund Class D 1
Large Capitalization Growth Fund Class A 9,331
Class B 19,855
Class C 3,896
Class Y 8
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-Effective
Amendment No. 1.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser and Administrator - Mutual Management Corp. (f/k/a Smith
Barney Mutual Funds Management Inc.), formerly known as Smith Barney
Advisers, Inc.,
was incorporated in December 1968 under the laws of the State of Delaware.
MMC is a wholly owned subsidiary of Smith Barney Holdings Inc. (formerly
known as Smith Barney Shearson Holdings Inc.), which in turn is a wholly
owned subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). MMC is registered as an investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act") and has, through its
predecessors, been in the investment counseling business since 1934.
Investment Adviser - Travelers Investment Management Company. (TIMCO). TIMCO
serves as the investment adviser for S&P 500 Index Fund pursuant to a written
agreement (the Advisory Agreement). TIMCO was incorporated on August 31, 1967
under the laws of the State of Connecticut. TIMCO is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. (formerly known as Smith
Barney Holdings Inc.), which in turn is a wholly owned subsidiary of
Travelers Group Inc. (formerly known as Primerica Corporation) (Travelers).
TIMCO is registered as an investment adviser under the Investment Advisers
Act of 1940 (the Advisers Act) since 1971 and has, through its predecessors,
been in the investment counseling business since 1967.
The list required by this Item 28 of the officers and directors of TIMCO
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two fiscal years, is incorporated by reference to Schedules A
and D of FORM ADV filed by SBA pursuant to the Advisers Act (SEC File No.801-
07212.
The list required by this Item 28 of the officers and directors of MMC
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officer and directors
during the past two fiscal years, is incorporated by reference
to Schedules A and D of FORM ADV filed by MMC pursuant to the Advisers
Act (SEC File No. 801-8314).
Item 29. Principal Underwriters
Consulting Group Capital Markets Funds; Global Horizons Investment Series
(Cayman Islands); Greenwich Street California Municipal Fund Inc.; Greenwich
Street Municipal Fund Inc.; Greenwich Street Series Fund; High Income
Opportunity Fund Inc.; The Italy Fund Inc.; Managed High Income Portfolio
Inc.; Managed Municipals Portfolio II Inc.; Managed Municipals Portfolio
Inc.;
Municipal High Income Fund Inc.; Puerto Rico Daily Liquidity Fund Inc.; Smith
Barney Adjustable Rate Government Income Fund; Smith Barney Aggressive Growth
Fund Inc.; Smith Barney Appreciation Fund Inc.; Smith Barney Arizona
Municipals Fund Inc.; Smith Barney California Municipals Fund Inc.; Smith
Barney Concert Allocation Series Inc.; Smith Barney Small Cap Blend Fund,
Inc.; Smith Barney Equity Funds; Smith Barney Fundamental Value Fund Inc.;
Smith Barney Funds, Inc.; Smith Barney Income Funds; Smith Barney
Institutional Cash Management Fund, Inc.; Smith Barney Intermediate Municipal
Fund, Inc.; Smith Barney Investment Funds Inc.; Smith Barney Investment
Trust; Smith Barney Managed Governments Fund Inc.; Smith Barney Managed
Municipals Fund Inc.; Smith Barney Massachusetts Municipals Fund; Smith
Barney Money Funds, Inc.; Smith Barney Muni Funds; Smith Barney Municipal
Fund, Inc.; Smith Barney Municipal Money Market Fund, Inc.; Smith Barney
Natural Resources Fund Inc.; Smith Barney New Jersey Municipals Fund Inc.;
Smith Barney Oregon Municipals Fund Inc.; Smith Barney Principal Return Fund;
Smith Barney Telecommunications Trust; Smith Barney Variable Account Funds;
Smith Barney World Funds, Inc.; Smith Barney Worldwide Special Fund N.V.
(Netherlands Antilles); Travelers Series Fund Inc.; The USA High Yield Fund
N.V.; Worldwide Securities Limited (Bermuda); Zenix Income Fund Inc. and
various series of unit investment trusts.
Smith Barney is wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
(formerly known as Smith Barney Holdings Inc.)
The information required by this Item 29 with respect to each director,
officer and partner of Smith Barney is incorporated by reference to Schedule
A
of FORM BD filed by Smith Barney pursuant to the Securities Exchange Act of
1934 (SEC File No. 812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Investment Trust
388 Greenwich Street
New York, New York 10013
(2) Mutual Management Corp. (f/k/a Smith Barney Mutual Funds
Management Inc.)
388 Greenwich Street
New York, New York 10013
(Records relating to its function as investment adviser to
certain of the Funds
and administrator to all of the Funds)
(3) Travelers Investment Management Company
One Tower Square
Hartford, CT 06183-2030
(Records relating to its function as investment adviser to Smith
Barney
S&P 500 Index Fund)
(4) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(Records relating to its function as custodian)
(5) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(Records relating to its function as Transfer Agent and Dividend
Paying Agent)
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) The Registrant hereby undertakes to furnish to each person
to whom a prospectus of the Registrant is delivered, a copy of the
Registrant's latest annual report, upon request and without charge.
485 (b) Certification
The Registrant hereby certifies that it meets all requirements for
effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY INVESTMENT
TRUST, has duly caused this registration statement to be signed on its behalf
by the undersigned, thereto duly authorized in the City of New York, in the
State of New York on the 30th day of March, 1998.
SMITH BARNEY
INVESTMENT TRUST
/s/Heath B. McLendon
Heath B. McLendon, Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
/s/Heath B. McLendon Chairman of the Board 3/30/98
Heath B. McLendon (Chief Executive Officer)
/s/Lewis E. Daidone Treasurer 3/30/98
Lewis E. Daidone (Chief Financial and
Accounting Officer)
/s/Herbert Barg* Trustee 3/30/98
Herbert Barg
/s/Alfred J. Bianchetti* Trustee 3/30/98
Alfred J. Bianchetti
/s/Martin Brody* Trustee 3/30/98
Martin Brody
/s/Dwight B. Crane* Trustee 3/30/98
Dwight B. Crane
/s/Burt N. Dorsett* Trustee 3/30/98
Burt N. Dorsett
/s/Elliot S. Jaffe* Trustee 3/30/98
Elliot S. Jaffe
/s/Stephen E. Kaufman*Trustee 3/30/98
Stephen E. Kaufman
/s/Joseph J. McCann* Trustee 3/30/98
Joseph J. McCann
/s/Cornelius C. Rose, Jr.* Trustee 3/30/98
Cornelius C. Rose, Jr.
_____________________________________________________________________
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power
of attorney dated January 27, 1995.
/s/ Heath B. McLendon
Heath B. McLendon
SMITH BARNEY
INVESTMENT TRUST
FIRST AMENDED AND RESTATED
MASTER TRUST AGREEMENT
February 28, 1998
SMITH BARNEY
INVESTMENT TRUST
FIRST AMENDED AND RESTATED
MASTER TRUST AGREEMENT
PAGE
ARTICLE INAME AND DEFINITIONS 1
Section 1.1 Name and Principal Office 1
Section 1.2 Definitions 1
(a) Trust 2
(b) Class 2
(c) Trustees 2
(d) Shares 2
(e) Series 2
(f) Shareholder 2
(g) 1940 Act 2
(h) Commission 2
(i) Declaration of Trust 2
(j) By-Laws 2
ARTICLE IIPURPOSE OF TRUST 2
ARTICLE IIITHE TRUSTEES 3
Section 3.1 Number, Designation, Election, Term, etc 3
(a) Trustees 3
(b) Number 3
(c) Election and Term 3
(d) Resignation and Retirement 3
(e) Removal 3
(f) Vacancies 4
(g) Effect of Death, Resignation, etc 4
(h) No Accounting 4
(i) Trustees Emeritus Designation 4
(j) Trustees Emeritus Rights and Obligations 4
Section 3.2 Powers of Trustees 5
(a) Investments 6
(b) Disposition of Assets 6
(c) Ownership Powers 6
(d) Subscription 6
(e) Form of Holding 6
(f) Reorganization, etc 6
(g) Voting Trusts, etc 6
(h) Compromise 7
(i) Partnerships, etc 7
(j) Borrowing and Security 7
(k) Guarantees, etc 7
(l) Insurance 7
(m) Pensions, etc 7
Section 3.3 Certain Contracts 8
(a) Advisory 8
(b) Administration 8
(c) Distribution 8
(d) Custodian and Depository 8
(e) Transfer and Dividend Disbursing Agency 8
(f) Shareholder Servicing 8
(g) Accounting 9
Section 3.4 Payment of Trust Expenses and Compensation of Trustees 10
Section 3.5 Ownership of Assets of the Trust 10
ARTICLE IVSHARES 10
Section 4.1 Description of Shares 10
Section 4.2 Establishment and Designation of Sub-Trusts 12
(a) Assets Belonging to Sub-Trusts 12
(b) Liabilities Belonging to Sub-Trusts 12
(c) Dividends 13
(d) Liquidation 14
(e) Voting 14
(f) Redemption by Shareholder 14
(g) Redemption by Trust 14
(h) Net Asset Value 15
(i) Transfer 15
(j) Equality 15
(k) Fractions 16
(l) Conversion Rights 16
(m) Class Differences 16
Section 4.3 Ownership of Shares 16
Section 4.4 Investments in the Trust 16
Section 4.5 No Pre-emptive Rights 17
Section 4.6 Status of Shares and Limitation of Personal Liability 17
ARTICLE VSHAREHOLDERS VOTING POWERS AND MEETINGS 17
Section 5.1 Voting Powers 17
Section 5.2 Meetings 18
Section 5.3 Record Dates 18
Section 5.4 Quorum and Required Vote 18
Section 5.5 Action by Written Consent 19
Section 5.6 Inspection of Records 19
Section 5.7 Additional Provisions 19
Section 5.8 Shareholder Communications 19
ARTICLE VILIMITATION OF LIABILITY; INDEMNIFICATION 20
Section 6.1 Trustees, Shareholders, etc. Not Personally Liable; Notice 20
Section 6.2 Trustees Good Faith Action; Expert Advice; No Bond or
Surety 20
Section 6.3 Indemnification of Shareholders 21
Section 6.4 Indemnification of Trustees, Officers, etc. 21
Section 6.5 Compromise Payment 22
Section 6.6 Indemnification Not Exclusive, etc. 22
Section 6.7 Liability of Third Persons Dealing with Trustees 22
ARTICLE VIIMISCELLANEOUS 23
Section 7.1 Duration and Termination of Trust 23
Section 7.2 Reorganization 23
Section 7.3 Amendments 23
Section 7.4 Filing of Copies; References; Headings 24
Section 7.5 Applicable Law 24
Section 7.6 Resident Agent 25
SMITH BARNEY
INVESTMENT TRUST
FIRST AMENDED AND RESTATED
MASTER TRUST AGREEMENT
FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT made at Boston,
Massachusetts this 28th day of February, 1998, by the Trustees hereunder, and
by the holders of shares of beneficial interest to be issued hereunder as
hereinafter provided.
WITNESSETH
WHEREAS this Trust has been formed to carry on the business of an
investment company; and
WHEREAS this Trust is authorized to issue its shares of beneficial
interest in separate series, each separate series to be a Sub-Trust
hereunder, all in accordance with the provisions hereinafter set forth; and
WHEREAS the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with
the provisions hereinafter set forth.
WHEREAS, the Trustees desire to amend and restate the Master Trust
Agreement dated October 17, 1991 in its entirety by adopting this First
Amended and Restated Master Trust Agreement, which shall supersede such
Master Trust Agreement and be the governing instrument of the Trust from and
after the date hereof.
NOW, THEREFORE, the Trustees hereby amend and restate the Master Trust
Agreement dated October 17, 1991 in its entirety and declare that they will
hold all cash, securities and other assets which they may from time to time
acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of
the same upon the following terms and conditions for the benefit of the
holders from time to time of shares of beneficial interest in this Trust or
Sub-Trusts created hereunder as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS tc \l1 "ARTICLE I NAME AND
DEFINITIONS
Section I.1 Name and Principal Office tc \l2 "Section I.1 Name and
Principal Office . This Trust shall be known as Smith Barney Investment
Trust and the Trustees shall conduct the business of the Trust under that
name or any other name or names as they may from time to time determine. The
principal office of the Trust shall be located at 388 Greenwich Street, New
York, New York or at such other location as the Trustees may from time to
time determine.
Section I.2 Definitions tc \l2 "Section I.2 Definitions . Whenever
used herein, unless otherwise required by the context or specifically
provided:
(a) The Trust tc \l3 "(a) The Trust refers to the
Massachusetts business trust established by this Trust Agreement, as amended
from time to time, inclusive of each and every Sub-Trust established
hereunder;
(b) Class tc \l3 "(b) Class refers to any class of Shares of
any Series or Sub-Trust established and designated under or in accordance
with Article IV;
(c) Trustees tc \l3 "(c) Trustees refers to the Trustees of
the Trust and of each Sub-Trust hereunder named herein or elected in
accordance with Article III;
(d) Shares tc \l3 "(d) Shares refers to the transferable
units of interest into which the beneficial interest in the Trust and each
Sub-Trust of the Trust and/or any class of any Sub-Trust (as the context may
require) shall be divided from time to time;
(e) Series tc \l3 "(e) Series refers to Series of Shares
established and designated under or in accordance with the provisions of
Article IV, each of which Series shall be a Sub-Trust of the Trust;
(f) Shareholder tc \l3 "(f) Shareholder means a record owner
of Shares;
(g) The 1940 Act tc \l3 "(g) The 1940 Act refers to the
Investment Company Act of 1940 and the Rules and Regulations thereunder, all
as amended from time to time;
(h) The term Commission tc \l3 "(h) The term Commission
shall have the meaning given it in the 1940 Act;
(i) Declaration of Trust tc \l3 "(i) Declaration of Trust
shall mean this First Amended and Restated Master Trust Agreement as amended
or restated from time to time; and
(j) By-Laws tc \l3 "(j) By-Laws shall mean the By-Laws of
the Trust as amended from time to time.
ARTICLE II
PURPOSE OF TRUST tc \l1 "ARTICLE II PURPOSE OF TRUST
The purpose of the Trust is to operate as an investment company and to
offer Shareholders of the Trust and each Sub-Trust of the Trust one or more
investment programs primarily in securities and debt instruments.
ARTICLE III
THE TRUSTEES tc \l1 "ARTICLE III THE TRUSTEES
Section III.1 Number, Designation, Election, Term, etc tc \l2
"Section III.1 Number, Designation, Election, Term, etc .
(a) Trustees tc \l3 "(a) Trustees . The Trustees hereof and
of each Sub-Trust hereunder are: Herbert Barg, 273 Montgomery Avenue, Bala
Cynwyd, PA 19004; Alfred J. Bianchetti, 19 Circle End Drive, Ramsey, NJ
07446; Martin Brody, HMK Associates, 30 Columbia Turnpike, Florham Park, NJ
07932; Dwight B. Crane, Harvard Business School, Soldiers Field, Morgan Hall
#371, Boston, MA 02163; Burt N. Dorsett, Dorsett McCabe Management, Inc., 45
Rockefeller Plaza, Suite 2570, New York, NY 10111; Elliot S. Jaffe, The Dress
Barn, Inc., Executive Office, 30 Dunnigan Drive, Suffern, NY 10901;
Stephen E. Kaufman, Stephen E. Kaufman PC Co., 277 Park Avenue, Room 3604,
New York, NY 10172; Joseph J. McCann, 200 Oak Park Place, Suite One,
Pittsburgh, PA 15243; Heath B. McLendon, Smith Barney Inc., 388 Greenwich
Street, 22nd Floor, New York, NY 10013 and Cornelius C. Rose Jr., P. O. Box
335, Enfield, NH 03748.
(b) Number tc \l3 "(b) Number . The Trustees serving as
such, whether named above or hereafter becoming a Trustee, may increase or
decrease (to not less than two) the number of Trustees to a number other than
the number theretofore determined. No decrease in the number of Trustees
shall have the effect of removing any Trustee from office prior to the
expiration of his term, but the number of Trustees may be decreased in
conjunction with the removal of a Trustee pursuant to subsection (e) of this
Section 3.1.
(c) Election and Term tc \l3 "(c) Election and Term . The
Trustees shall be elected by the Shareholders of the Trust at the first
meeting of Shareholders following the initial public offering of shares of
the Trust. Subject to Section 3.1(i) hereof, each Trustee, whether named
above or hereafter becoming a Trustee, shall serve as a Trustee of the Trust
and of each Sub-Trust hereunder during the lifetime of this Trust and until
its termination as hereinafter provided except as such Trustee sooner dies,
resigns or is removed. Subject to Section 16(a) of the 1940 Act, the
Trustees may elect their own successors and may, pursuant to Section 3.1(f)
hereof, appoint Trustees to fill vacancies.
(d) Resignation and Retirement tc \l3 "(d) Resignation and
Retirement . Any Trustee may resign his trust or retire as a Trustee, by
written instrument signed by him and delivered to the other Trustees or to
any officer of the Trust, and such resignation or retirement shall take
effect upon such delivery or upon such later date as is specified in such
instrument and shall be effective as to the Trust and each Sub-Trust
hereunder.
(e) Removal tc \l3 "(e) Removal . Any Trustee may be
removed with or without cause at any time: (i) by written instrument, signed
by at least two-thirds of the number of Trustees prior to such removal,
specifying the date upon which such removal shall become effective; or (ii)
by vote of Shareholders holding not less than two-thirds of the Shares then
outstanding, cast in person or by proxy at any meeting called for the
purpose; or (iii) by a written declaration signed by Shareholders holding not
less than two-thirds of the Shares then outstanding and filed with the Trusts
Custodian. Any such removal shall be effective as to the Trust and each
Sub-Trust hereunder.
(f) Vacancies tc \l3 "(f) Vacancies . Any vacancy or
anticipated vacancy resulting from any reason, including without limitation
the death, resignation, retirement, removal or incapacity of any of the
Trustees, or resulting from an increase in the number of Trustees by the
other Trustees may (but so long as there are at least two remaining Trustees,
need not unless required by the 1940 Act) be filled by a majority of the
remaining Trustees, subject to the provisions of Section 16(a) of the 1940
Act, through the appointment in writing of such other person as such
remaining Trustees in their discretion shall determine and such appointment
shall be effective upon the written acceptance of the person named therein to
serve as a Trustee and agreement by such person to be bound by the provisions
of this Declaration of Trust, except that any such appointment in
anticipation of a vacancy to occur by reason of retirement, resignation or
increase in number of Trustees to be effective at a later date shall become
effective only at or after the effective date of said retirement, resignation
or increase in number of Trustees. As soon as any Trustee so appointed shall
have accepted such appointment and shall have agreed in writing to be bound
by this Declaration of Trust and the appointment is effective, the Trust
estate shall vest in the new Trustee, together with the continuing Trustees,
without any further act or conveyance.
(g) Effect of Death, Resignation, etc tc \l3 "(g) Effect of
Death, Resignation, etc . The death, resignation, retirement, removal or
incapacity of the Trustees, or any one of them, shall not operate to annul or
terminate the Trust or any Sub-Trust hereunder or to revoke or terminate any
existing agency or contract created or entered into pursuant to the terms of
this Declaration of Trust.
(h) No Accounting tc \l3 "(h) No Accounting . Except to
the extent required by the 1940 Act or under circumstances which would
justify his or her removal for cause, no person ceasing to be a Trustee as a
result of his or her death, resignation, retirement, removal or incapacity
(nor the estate of any such person) shall be required to make an accounting
to the Shareholders or remaining Trustees upon such cessation.
(i) Trustees Emeritus Designation tc \l3 "(i) Trustees Emeritus
Designation . A Trustee who has reached the age of seventy two (72) years
may elect the status of Trustee Emeritus provided that the Trustee has served
for ten (10) years as a Trustee or on the board of trustees of another
investment company distributed, advised or administered by an entity under
common control with the Trusts distributor, investment adviser or
administrator. Upon reaching eighty (80) years of age, a Trustee must elect
status as a Trustee Emeritus. The provisions of this Section 3.1(i) shall
not be deemed to restrict a Trustees ability to resign.
(j) Trustees Emeritus Rights and Obligations tc \l3 "(j)
Trustees Emeritus Rights and Obligations . An individual designated as
a Trustee Emeritus may attend meetings of the Trustees. A Trustee Emeritus
shall have no voting rights and shall not be under a duty to manage or direct
the business and affairs of the Trust. A Trustee Emeritus shall not be
deemed to stand in a fiduciary relation to the Trust and shall not be
responsible to discharge the duties of a Trustee or to exercise that
diligence, care or skill which a Trustee would ordinarily be required to
exercise under applicable laws. In addition, a Trustee Emeritus shall be
indemnified to the full extent that an officer or Trustee of the Trust may be
indemnified under the Trusts governing documents and applicable state and
federal laws.
As long as an individual is a Trustee Emeritus, but in no event for
more than a period of ten (10) years, provided the Trust has net assets in
excess of $100 million, a Trustee Emeritus shall receive 50% of the annual
retainer and annual meeting fees paid to active Trustees. In any event, a
Trustee Emeritus shall be entitled to reasonable out-of-pocket expenses for
each meeting attended.
Section III.2 Powers of Trustees tc \l2 "Section III.2 Powers of
Trustees . Subject to the provisions of this Declaration of Trust, the
business of the Trust shall be managed by the Trustees, and they shall have
all powers necessary or convenient to carry out that responsibility and the
purpose of the Trust. Without limiting the foregoing, the Trustees may adopt
By-Laws not inconsistent with this Declaration of Trust providing for the
conduct of the business and affairs of the Trust and may amend and repeal
them to the extent that such By-Laws do not reserve that right to the
Shareholders; they may from time to time in accordance with the provisions of
Section 4.1 hereof establish Sub-Trusts, each such Sub-Trust to operate as a
separate and distinct investment medium and with separately defined
investment objectives and policies and distinct investment purpose; they may
from time to time in accordance with the provisions of Section 4.1 hereof
establish classes of Shares of any Series or Sub-Trust or divide the Shares
of any Series or Sub-Trust into classes; they may as they consider
appropriate elect and remove officers and appoint and terminate agents and
consultants and hire and terminate employees, any one or more of the
foregoing of whom may be a Trustee, and may provide for the compensation of
all of the foregoing; they may appoint from their own number, and terminate,
any one or more committees consisting of two or more Trustees, including
without implied limitation an executive committee, which may, when the
Trustees are not in session and subject to the 1940 Act, exercise some or all
of the power and authority of the Trustees as the Trustees may determine; in
accordance with Section 3.3 they may employ one or more advisers,
administrators, depositories and custodians and may authorize any depository
or custodian to employ subcustodians or agents and to deposit all or any part
of such assets in a system or systems for the central handling of securities
and debt instruments, retain transfer, dividend, accounting or shareholder
servicing agents or any of the foregoing, provide for the distribution of
Shares by the Trust through one or more distributors, principal underwriters
or otherwise, set record dates or times for the determination of Shareholders
or various of them with respect to various matters; they may compensate or
provide for the compensation of the Trustees, officers, advisers,
administrators, custodians, other agents, consultants and employees of the
Trust or the Trustees on such terms as they deem appropriate; and in general
they may delegate to any officer of the Trust, to any committee of the
Trustees and to any employee, adviser, administrator, distributor,
depository, custodian, transfer and dividend disbursing agent, or any other
agent or consultant of the Trust such authority, powers, functions and duties
as they consider desirable or appropriate for the conduct of the business and
affairs of the Trust, including without implied limitation the power and
authority to act in the name of the Trust and of the Trustees, to sign
documents and to act as attorney-in-fact for the Trustees.
Without limiting the foregoing and to the extent not inconsistent with
the 1940 Act or other applicable law, the Trustees shall have power and
authority for and on behalf of the Trust and each separate Sub-Trust
established hereunder:
(a) Investments tc \l3 "(a) Investments . To invest and
reinvest cash and other property, and to hold cash or other property
uninvested without in any event being bound or limited by any present or
future law or custom in regard to investments by trustees;
(b) Disposition of Assets tc \l3 "(b) Disposition of Assets .
To sell, exchange, lend, pledge, mortgage, hypothecate, write options on and
lease any or all of the assets of the Trust;
(c) Ownership Powers tc \l3 "(c) Ownership Powers . To vote
or give assent, or exercise any rights of ownership, with respect to stock or
other securities, debt instruments or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion
with relation to securities, debt instruments or property as the Trustees
shall deem proper;
(d) Subscription tc \l3 "(d) Subscription . To exercise
powers and rights of subscription or otherwise which in any manner arise out
of ownership of securities or debt instruments;
(e) Form of Holding tc \l3 "(e) Form of Holding . To hold
any security, debt instrument or property in a form not indicating any trust,
whether in bearer, unregistered or other negotiable form, or in the name of
the Trustees or of the Trust or of any Sub-Trust or in the name of a
custodian, subcustodian or other depository or a nominee or nominees or
otherwise;
(f) Reorganization, etc tc \l3 "(f) Reorganization, etc .
To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security or debt
instrument of which is or was held in the Trust; to consent to any contract,
lease, mortgage, purchase or sale of property by such corporation or issuer,
and to pay calls or subscriptions with respect to any security or debt
instrument held in the Trust;
(g) Voting Trusts, etc tc \l3 "(g) Voting Trusts, etc .
To join with other holders of any securities or debt instruments in acting
through a committee, depository, voting trustee or otherwise, and in that
connection to deposit any security or debt instrument with, or transfer any
security or debt instrument to, any such committee, depository or trustee,
and to delegate to them such power and authority with relation to any
security or debt instrument (whether or not so deposited or transferred) as
the Trustees shall deem proper, and to agree to pay, and to pay, such portion
of the expenses and compensation of such committee, depository or trustee as
the Trustees shall deem proper;
(h) Compromise tc \l3 "(h) Compromise . To compromise,
arbitrate or otherwise adjust claims in favor of or against the Trust or any
Sub-Trust of any matter in controversy, including but not limited to claims
for taxes;
(i) Partnerships, etc tc \l3 "(i) Partnerships, etc . To enter
into joint ventures, general or limited partnerships and any other
combinations or associations;
(j) Borrowing and Security tc \l3 "(j) Borrowing and
Security . To borrow funds and to mortgage and pledge the assets of the
Trust or any part thereof to secure obligations arising in connection with
such borrowing;
(k) Guarantees, etc tc \l3 "(k) Guarantees, etc . To endorse
or guarantee the payment of any notes or other obligations of any person; to
make contracts of guaranty or suretyship, or otherwise assume liability for
payment thereof; and to mortgage and pledge the Trust property or any part
thereof to secure any of or all such obligations;
(l) Insurance tc \l3 "(l) Insurance . To purchase and pay
for entirely out of Trust property such insurance as they may deem necessary
or appropriate for the conduct of the business, including, without
limitation, insurance policies insuring the assets of the Trust and payment
of distributions and principal on its portfolio investments, and insurance
policies insuring the Shareholders, Trustees, officers, employees, agents,
consultants, investment advisers, managers, administrators, distributors,
principal underwriters, or independent contractors, or any thereof (or any
person connected therewith), of the Trust individually against all claims and
liabilities of every nature arising by reason of holding, being or having
held any such office or position, or by reason of any action alleged to have
been taken or omitted by any such person in any such capacity, including any
action taken or omitted that may be determined to constitute negligence
whether or not the Trust would have the power to indemnify such person
against such liability; and
(m) Pensions, etc tc \l3 "(m) Pensions, etc . To pay
pensions for faithful service, as deemed appropriate by the Trustees, and to
adopt, establish and carry out pension, profit-sharing, share bonus, share
purchase, savings, thrift and other retirement, incentive and benefit plans,
trusts and provisions, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any
or all of the Trustees, officers, employees and agents of the Trust.
Except as otherwise provided by the 1940 Act or other applicable law,
this Declaration of Trust or the By-Laws, any action to be taken by the
Trustees on behalf of the Trust or any Sub-Trust may be taken by a majority
of the Trustees present at a meeting of Trustees (a quorum, consisting of at
least a majority of the Trustees then in office, being present), within or
without Massachusetts, including any meeting held by means of a conference
telephone or other communications equipment by means of which all persons
participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting,
or by written consents of a majority of the Trustees then in office (or such
larger or different number as may be required by the 1940 Act or other
applicable law).
Section III.3 Certain Contracts tc \l2 "Section III.3 Certain
Contracts . Subject to compliance with the provisions of the 1940 Act, but
notwithstanding any limitations of present and future law or custom in regard
to delegation of powers by trustees generally, the Trustees may, at any time
and from time to time and without limiting the generality of their powers and
authority otherwise set forth herein, enter into one or more contracts with
any one or more corporations, trusts, associations, partnerships, limited
partnerships, other types of organizations, or individuals (Contracting
Party), to provide for the performance and assumption of some or all of the
following services, duties and responsibilities to, for or on behalf of the
Trust, and/or any Sub-Trust, and/or the Trustees, and to provide for the
performance and assumption of such other services, duties and
responsibilities in addition to those set forth below as the Trustees may
determine appropriate:
(a) Advisory tc \l3 "(a) Advisory . Subject to the general
supervision of the Trustees and in conformity with the stated policy of the
Trustees with respect to the investments of the Trust or of the assets
belonging to any Sub-Trust of the Trust (as that phrase is defined in
subsection (a) of Section 4.2), to manage such investments and assets, make
investment decisions with respect thereto, and to place purchase and sale
orders for portfolio transactions relating to such investments and assets;
(b) Administration tc \l3 "(b) Administration . Subject to
the general supervision of the Trustees and in conformity with any policies
of the Trustees with respect to the operations of the Trust and each
Sub-Trust (including each class thereof), to supervise all or any part of the
operations of the Trust and each Sub-Trust and to provide all or any part of
the administrative and clerical personnel, office space and office equipment
and services appropriate for the efficient administration and operations of
the Trust and each Sub-Trust;
(c) Distribution tc \l3 "(c) Distribution . To distribute
the Shares of the Trust and each Sub-Trust (including any class thereof), to
be principal underwriter of such Shares, and/or to act as agent of the Trust
and each Sub-Trust in the sale of Shares and the acceptance or rejection of
orders for the purchase of Shares;
(d) Custodian and Depository tc \l3 "(d) Custodian and
Depository . To act as depository for and to maintain custody of the
property of the Trust and each Sub-Trust and accounting records in connection
therewith;
(e) Transfer and Dividend Disbursing Agency tc \l3 "(e)
Transfer and Dividend Disbursing Agency . To maintain records of the
ownership of outstanding Shares, the issuance and redemption and the transfer
thereof, and to disburse any dividends declared by the Trustees and in
accordance with the policies of the Trustees and/or the instructions of any
particular Shareholder to reinvest any such dividends;
(f) Shareholder Servicing tc \l3 "(f) Shareholder Servicing .
To provide service with respect to the relationship of the Trust and its
Shareholders, records with respect to Shareholders and their Shares and
similar matters; and
(g) Accounting tc \l3 "(g) Accounting . To handle all or any
part of the accounting responsibilities, whether with respect to the Trusts
properties, Shareholders or otherwise.
The same person may be the Contracting Party for some or all of the
services, duties and responsibilities to, for and of the Trust and/or the
Trustees, and the contracts with respect thereto may contain such terms
interpretive of or in addition to the delineation of the services, duties and
responsibilities provided for, including provisions that are not inconsistent
with the 1940 Act relating to the standard of duty of and the rights to
indemnification of the Contracting Party and others, as the Trustees may
determine. Nothing herein shall preclude, prevent or limit the Trust or a
Contracting Party from entering into sub-contractual arrangements relative to
any of the matters referred to in Sections 3.3(a) through (g) hereof.
The fact that:
(i) any of the Shareholders, Trustees, or officers of the
Trust is a shareholder, director, officer, partner, trustee, employee,
manager, adviser, principal underwriter or distributor or agent of or
for any Contracting Party, or of or for any parent or affiliate of any
Contracting Party or that the Contracting Party or any parent or
affiliate thereof is a Shareholder or has an interest in the Trust or
any Sub-Trust, or that
(ii) any Contracting Party may have a contract providing
for the rendering of any similar services to one or more other
corporations, trusts, associations, partnerships, limited partnerships
or other organizations, or have other business or interests,
shall not affect the validity of any contract for the performance and
assumption of services, duties and responsibilities to, for or of the Trust
or any Sub-Trust and/or the Trustees or disqualify any Shareholder, Trustee
or officer of the Trust from voting upon or executing the same or create any
liability or accountability to the Trust, any Sub-Trust or its Shareholders,
provided that in the case of any relationship or interest referred to in the
preceding clause (i) on the part of any Trustee or officer of the Trust
either (x) the material facts as to such relationship or interest have been
disclosed to or are known by the Trustees not having any such relationship or
interest and the contract involved is approved in good faith by a majority of
such Trustees not having any such relationship or interest (even though such
unrelated or disinterested Trustees are less than a quorum of all of the
Trustees), (y) the material facts as to such relationship or interest and as
to the contract have been disclosed to or are known by the Shareholders
entitled to vote thereon and the contract involved is specifically approved
in good faith by vote of the Shareholders or (z) the specific contract
involved is fair to the Trust as of the time it is authorized, approved or
ratified by the Trustees or by the Shareholders.
Section III.4 Payment of Trust Expenses and Compensation of
Trustees tc \l2 "Section III.4 Payment of Trust Expenses and
Compensation of Trustees . The Trustees are authorized to pay or to cause to
be paid out of the principal or income of the Trust or any Sub-Trust, or
partly out of principal and partly out of income, and to charge or allocate
the same to, between or among such one or more of the Sub-Trusts and/or one
or more classes of Shares thereof that may be established and designated
pursuant to Article IV, as the Trustees deem fair, all expenses, fees,
charges, taxes and liabilities incurred or arising in connection with the
Trust, any Sub-Trust and/or any class of Shares thereof, or in connection
with the management thereof, including, but not limited to, the Trustees
compensation and such expenses and charges for the services of the Trusts
officers, employees, investment adviser, administrator, distributor,
principal underwriter, auditor, counsel, depository, custodian, transfer
agent, dividend disbursing agent, accounting agent, shareholder servicing
agent, and such other agents, consultants, and independent contractors and
such other expenses and charges as the Trustees may deem necessary or proper
to incur. Without limiting the generality of any other provision hereof, the
Trustee shall be entitled to reasonable compensation from the Trust for their
services as Trustees and may fix the amount of such compensation.
Section III.5 Ownership of Assets of the Trust tc \l2 "Section
III.5 Ownership of Assets of the Trust . Title to all of the assets of the
Trust shall at all times be considered as vested in the Trustees.
ARTICLE IV
SHARES tc \l1 "ARTICLE IV SHARES
Section IV.1 Description of Shares tc \l2 "Section IV.1
Description of Shares . The beneficial interest in the Trust shall be
divided into Shares, all with $.001 par value, but the Trustees shall have
the authority from time to time to issue Shares in one or more Series (each
of which Series of Shares shall represent the beneficial interest in a
separate and distinct Sub-Trust of the Trust, including without limitation
each Sub-Trust specifically established and designated in Section 4.2), as
they deem necessary or desirable. For all purposes under this Declaration of
Trust or otherwise, including, without implied limitation, (i) with respect
to the rights of creditors and (ii) for purposes of interpreting the relevant
rights of each Sub-Trust and the Shareholders of each Sub-Trust, each
Sub-Trust established hereunder shall be deemed to be a separate trust. The
Trustees shall have exclusive power without the requirement of Shareholder
approval to establish and designate such separate and distinct Sub-Trusts,
and to fix and determine the relative rights and preferences as between the
shares of the separate Sub-Trusts as to right of redemption and the price,
terms and manner of redemption, special and relative rights as to dividends
and other distributions and on liquidation, sinking or purchase fund
provisions, conversion rights, and conditions under which the several
Sub-Trusts shall have separate voting rights or no voting rights.
In addition, the Trustees shall have exclusive power, without the
requirement of Shareholder approval, to issue classes of Shares of any
Sub-Trust or divide the Shares of any Sub-Trust into classes, each class
having such different dividend, liquidation, voting and other rights as the
Trustees may determine, and may establish and designate the specific classes
of Shares of each Sub-Trust. The fact that a Sub-Trust shall have initially
been established and designated without any specific establishment or
designation of classes (i.e., that all Shares of such Sub-Trust are initially
of a single class), or that a Sub-Trust shall have more than one established
and designated class, shall not limit the authority of the Trustees to
establish and designate separate classes, or one or more further classes, of
said Sub-Trust without approval of the holders of the initial class thereof,
or previously established and designated class or classes thereof, provided
that the establishment and designation of such further separate classes would
not adversely affect the rights of the holders of the initial or previously
established and designated class.
The number of authorized Shares and the number of Shares of each
Sub-Trust or class thereof that may be issued is unlimited, and the Trustees
may issue Shares of any Sub-Trust or class thereof for such consideration and
on such terms as they may determine (or for no consideration if pursuant to a
Share dividend or split-up), all without action or approval of the
Shareholders. All Shares when so issued on the terms determined by the
Trustees shall be fully paid and non-assessable (but may be subject to
mandatory contribution back to the Trust as provided in subsection (h) of
Section 4.2). The Trustees may classify or reclassify any unissued Shares or
any Shares previously issued and reacquired of any Sub-Trust or class thereof
into one or more Sub-Trusts or classes thereof that may be established and
designated from time to time. The Trustees may hold as treasury Shares,
reissue for such consideration and on such terms as they may determine, or
cancel, at their discretion from time to time, any Shares of any Sub-Trust or
class thereof reacquired by the Trust.
The Trustees may from time to time close the transfer books, or
establish record dates and times for the purposes of determining the holders
of Shares entitled to be treated as such, to the extent provided or referred
to in Section 5.3.
The establishment and designation of any Sub-Trust or of any class of
Shares of any Sub-Trust in addition to those established and designated in
Section 4.2 shall be effective (i) upon the execution by a majority of the
then Trustees of an instrument setting forth such establishment and
designation of the relative rights and preferences of the Shares of such
Sub-Trust or class, (ii) upon the execution of an instrument in writing by an
officer of the Trust pursuant to the vote of a majority of the Trustees, or
(iii) as otherwise provided in either such instrument. At any time that
there are no Shares outstanding of any particular Sub-Trust or class
previously established and designated, the Trustees may by an instrument
executed by a majority of their number (or by an instrument executed by an
officer of the Trust pursuant to the vote of a majority of the Trustees)
abolish that Sub-Trust or class and the establishment and designation
thereof. Each instrument referred to in this paragraph shall have the status
of an amendment to this Declaration of Trust.
Any Trustee, officer or other agent of the Trust, and any organization
in which any such person is interested, may acquire, own, hold and dispose of
Shares of any Sub-Trust (including any classes thereof) of the Trust to the
same extent as if such person were not a Trustee, officer or other agent of
the Trust; and the Trust may issue and sell or cause to be issued and sold
and may purchase Shares of any Sub-Trust (including any classes thereof) from
any such person or any such organization subject only to the general
limitations, restrictions or other provisions applicable to the sale or
purchase of Shares of such Sub-Trust including any classes thereof generally.
Section IV.2 Establishment and Designation of Sub-Trusts tc \l2
"Section IV.2 Establishment and Designation of Sub-Trusts . Without
limiting the authority of the Trustees set forth in Section 4.1 to establish
and designate any further Sub-Trusts and classes, the Trustees hereby
establish and designate the following Sub-Trusts and classes thereof: Smith
Barney Intermediate Maturity California Municipals Fund, Smith Barney
Intermediate Maturity New York Municipals Fund, Smith Barney Large
Capitalization Growth Fund and Smith Barney S&P 500 Index Fund each of which
shall consist of four classes designated as Class A, Class B, Class C and
Class Y Shares and solely with respect to the Smith Barney S&P 500 Index
Fund, an additional class designated as Class D Shares. The Shares of such
Sub-Trusts and classes thereof and any Shares of any further Sub-Trusts or
classes that may from time to time be established and designated by the
Trustees shall (unless the Trustees otherwise determine with respect to some
further Sub-Trust or class at the time of establishing and designating the
same) have the following relative rights and preferences:
(a) Assets Belonging to Sub-Trusts tc \l3 "(a) Assets
Belonging to Sub-Trusts . All consideration received by the Trust for the
issue or sale of Shares of a particular Sub-Trust or any classes thereof,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits, and proceeds thereof, including
any proceeds derived from the sale, exchange or liquidation of such assets,
and any funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall be held by the Trustees in trust for the
benefit of the holders of Shares of that Sub-Trust or class thereof and shall
irrevocably belong to that Sub-Trust (and be allocable to any classes
thereof) for all purposes, and shall be so recorded upon the books of account
of the Trust. Such consideration, assets, income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds, in whatever form the same may be, together
with any General Items allocated to that Sub-Trust as provided in the
following sentence, are herein referred to as assets belonging to that
Sub-Trust (and allocable to any classes thereof). In the event that there
are any assets, income, earnings, profits, and proceeds thereof, funds, or
payments which are not readily identifiable as belonging to any particular
Sub-Trust (collectively General Items), the Trustees shall allocate such
General Items to and among any one or more of the Sub-Trusts established and
designated from time to time in such manner and on such basis as they, in
their sole discretion, deem fair and equitable; and any General Items so
allocated to a particular Sub-Trust shall belong to that Sub-Trust (and be
allocable to any classes thereof). Each such allocation by the Trustees
shall be conclusive and binding upon the Shareholders of all Sub-Trusts
(including any classes thereof) for all purposes.
(b) Liabilities Belonging to Sub-Trusts tc \l3 "(b) Liabilities
Belonging to Sub-Trusts . The assets belonging to each particular Sub-Trust
shall be charged with the liabilities in respect of that Sub-Trust and all
expenses, costs, charges and reserves attributable to that Sub-Trust, and any
general liabilities, expenses, costs, charges or reserves of the Trust which
are not readily identifiable as belonging to any particular Sub-Trust shall
be allocated and charged by the Trustees to and among any one or more of the
Sub-Trusts established and designated from time to time in such manner and on
such basis as the Trustees in their sole discretion deem fair and equitable.
In addition, the liabilities in respect of a particular class of Shares of a
particular Sub-Trust and all expenses, costs, charges and reserves belonging
to that class of Shares, and any general liabilities, expenses, costs,
charges or reserves of that particular Sub-Trust which are not readily
identifiable as belonging to any particular class of Shares of that Sub-Trust
shall be allocated and charged by the Trustees to and among any one or more
of the classes of Shares of that Sub-Trust established and designated from
time to time in such manner and on such basis as the Trustees in their sole
discretion deem fair and equitable. The liabilities, expenses, costs,
charges and reserves allocated and so charged to a Sub-Trust or class thereof
are herein referred to as liabilities belonging to that Sub-Trust or class
thereof. Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the
Shareholders, creditors and any other persons dealing with the Trust or any
Sub-Trust (including any classes thereof) for all purposes. Any creditor of
any Sub-Trust may look only to the assets of that Sub-Trust to satisfy such
creditors debt.
(c) Dividends tc \l3 "(c) Dividends . Dividends and
distributions on Shares of a particular Sub-Trust or any class thereof may be
paid with such frequency as the Trustees may determine, which may be daily or
otherwise pursuant to a standing resolution or resolutions adopted only once
or with such frequency as the Trustees may determine, to the holders of
Shares of that Sub-Trust or class, from such of the income and capital gains,
accrued or realized, from the assets belonging to that Sub-Trust, or in the
case of a class, belonging to that Sub-Trust and allocable to that class, as
the Trustees may determine, after providing for actual and accrued
liabilities belonging to that Sub-Trust or class. All dividends and
distributions on Shares of a particular Sub-Trust or class thereof shall be
distributed pro rata to the holders of Shares of that Sub-Trust or class in
proportion to the number of Shares of that Sub-Trust or class held by such
holders at the date and time of record established for the payment of such
dividends or distributions, except that in connection with any dividend or
distribution program or procedure the Trustees may determine that no dividend
or distribution shall be payable on Shares as to which the Shareholders
purchase order and/or payment have not been received by the time or times
established by the Trustees under such program or procedure. Such dividends
and distributions may be made in cash or Shares of that Sub-Trust or class or
a combination thereof as determined by the Trustees or pursuant to any
program that the Trustees may have in effect at the time for the election by
each Shareholder of the mode of the making of such dividend or distribution
to that Shareholder. Any such dividend or distribution paid in Shares will
be paid at the net asset value thereof as determined in accordance with
subsection (h) of Section 4.2.
The Trustees shall have full discretion, to the extent not inconsistent
with the 1940 Act, to determine which items shall be treated as income and
which items as capital; and each such determination and allocation shall be
conclusive and binding upon the shareholders.
(d) Liquidation tc \l3 "(d) Liquidation . In the event of the
liquidation or dissolution of the Trust, the Shareholders of each Sub-Trust
or any class thereof that has been established and designated shall be
entitled to receive, when and as declared by the Trustees, the excess of the
assets belonging to that Sub-Trust, or in the case of a class, belonging to
that Sub-Trust and allocable to that class, over the liabilities belonging to
that Sub-Trust or class. The assets so distributable to the Shareholders of
any particular Sub-Trust or class thereof shall be distributed among such
Shareholders in proportion to the number of Shares of that Sub-Trust or class
thereof held by them and recorded on the books of the Trust. The liquidation
of any particular Sub-Trust or class thereof may be authorized by vote of a
majority of the Trustees then in office subject to the approval of a majority
of the outstanding voting Shares of that Sub-Trust, as defined in the 1940
Act.
(e) Voting tc \l3 "(e) Voting . On each matter submitted
to a vote of the Shareholders, each holder of a Share of each Sub-Trust or
class thereof shall be entitled to one vote for each whole Share and to a
proportionate fractional vote for each fractional Share standing in his name
on the books of the Trust. The Trustees shall cause each matter required or
permitted to be voted upon at a meeting or by written consent of Shareholders
to be submitted to a vote of all Sub-Trusts and classes thereof entitled to
vote thereon (irrespective of class), unless the 1940 Act or other applicable
laws or regulations require that the actions of the Shareholders be taken by
a separate vote of one or more Sub-Trusts or classes thereof, or the Trustees
determine that any matter to be submitted to a vote of Shareholders affects
only the rights or interests of one or more (but not all) Sub-Trusts or
classes thereof, in which case only the Shareholders of the Sub-Trust or
Sub-Trusts or class or classes so affected shall be entitled to vote thereon.
(f) Redemption by Shareholder tc \l3 "(f) Redemption by
Shareholder . Each holder of Shares of a particular Sub-Trust or any class
thereof shall have the right at such times as may be permitted by the Trust,
but no less frequently than once each week, to require the Trust to redeem
all or any part of his Shares of that Sub-Trust or class thereof at a
redemption price equal to the net asset value per Share of that Sub-Trust or
class thereof next determined in accordance with subsection (h) of this
Section 4.2 after the Shares are properly tendered for redemption. Payment
of the redemption price shall be in cash; provided, however, that if the
Trustees determine, which determination shall be conclusive, that conditions
exist which make payment wholly in cash unwise or undesirable, the Trust may
make payment wholly or partly in securities or other assets belonging to the
Sub-Trust of which the Shares being redeemed are part at the value of such
securities or assets used in such determination of net asset value.
Notwithstanding the foregoing, the Trust may postpone payment of the
redemption price and may suspend the right of the holders of Shares of any
Sub-Trust or class thereof to require the Trust to redeem Shares of that
Sub-Trust during any period or at any time when and to the extent permissible
under the 1940 Act.
(g) Redemption by Trust tc \l3 "(g) Redemption by Trust .
Each Share of each Sub-Trust or class thereof that has been established and
designated is subject to redemption by the Trust at the redemption price
which would be applicable if such Share was then being redeemed by the
Shareholder pursuant to subsection (f) of this Section 4.2: (a) at any time,
if the Trustees determine in their sole discretion that failure to so redeem
may have materially adverse consequences to the holders of the Shares of the
Trust or any Sub-Trust thereof or class thereof, or (b) upon such other
conditions as may from time to time be determined by the Trustees and set
forth in the then current Prospectus of the Trust with respect to maintenance
of Shareholder accounts of a minimum amount. Upon such redemption the
holders of the Shares so redeemed shall have no further right with respect
thereto other than to receive payment of such redemption price.
(h) Net Asset Value tc \l3 "(h) Net Asset Value . The net
asset value per Share of any Sub-Trust shall be (i) in the case of a
Sub-Trust whose Shares are not divided into classes, the quotient obtained by
dividing the value of the net assets of that Sub-Trust (being the value of
the assets belonging to that Sub-Trust less the liabilities belonging to that
Sub-Trust) by the total number of Shares of that Sub-Trust outstanding, and
(ii) in the case of a class of Shares of a Sub-Trust whose Shares are divided
into classes, the quotient obtained by dividing the value of the net assets
of that Sub-Trust allocable to such class (being the value of the assets
belonging to that Sub-Trust allocable to such class less the liabilities
belonging to such class) by the total number of Shares of such class
outstanding; all determined in accordance with the methods and procedures,
including without limitation those with respect to rounding, established by
the Trustees from time to time.
The Trustees may determine to maintain the net asset value per Share of
any Sub-Trust at a designated constant dollar amount and in connection
therewith may adopt procedures not inconsistent with the 1940 Act for the
continuing declarations of income attributable to that Sub-Trust as dividends
payable in additional Shares of that Sub-Trust at the designated constant
dollar amount and for the handling of any losses attributable to that
Sub-Trust. Such procedures may provide that in the event of any loss each
Shareholder shall be deemed to have contributed to the capital of the Trust
attributable to that Sub-Trust his pro rata portion of the total number of
Shares required to be canceled in order to permit the net asset value per
Share of that Sub-Trust to be maintained, after reflecting such loss, at the
designated constant dollar amount. Each Shareholder of the Trust shall be
deemed to have agreed, by his investment in any Sub-Trust with respect to
which the Trustees shall have adopted any such procedure, to make the
contribution referred to in the preceding sentence in the event of any such
loss.
(i) Transfer tc \l3 "(i) Transfer . All Shares of each
particular Sub-Trust or class thereof shall be transferable, but transfers of
Shares of a particular Sub-Trust or class thereof will be recorded on the
Share transfer records of the Trust applicable to that Sub-Trust or class
only at such times as Shareholders shall have the right to require the Trust
to redeem Shares of that Sub-Trust or class and at such other times as may be
permitted by the Trustees.
(j) Equality tc \l3 "(j) Equality . Except as provided
herein or in the instrument designating and establishing any class of Shares
or any Sub-Trust, all Shares of each particular Sub-Trust or class thereof
shall represent an equal proportionate interest in the assets belonging to
that Sub-Trust, or in the case of a class, belonging to that Sub-Trust and
allocable to that class, subject to the liabilities belonging to that
Sub-Trust or class, and each Share of any particular Sub-Trust or class shall
be equal to each other Share of that Sub-Trust or class; but the provisions
of this sentence shall not restrict any distinctions permissible under
subsection (c) of this Section 4.2 that may exist with respect to dividends
and distributions on Shares of the same Sub-Trust or class. The Trustees may
from time to time divide or combine the Shares of any particular Sub-Trust or
class into a greater or lesser number of Shares of that Sub-Trust or class
without thereby changing the proportionate beneficial interest in the assets
belonging to that Sub-Trust or class or in any way affecting the rights of
Shares of any other Sub-Trust or class.
(k) Fractions tc \l3 "(k) Fractions . Any fractional Share
of any Sub-Trust or class, if any such fractional Share is outstanding, shall
carry proportionately all the rights and obligations of a whole Share of that
Sub-Trust or class, including rights and obligations with respect to voting,
receipt of dividends and distributions, redemption of Shares, and liquidation
of the Trust.
(l) Conversion Rights tc \l3 "(l) Conversion Rights . Subject
to compliance with the requirements of the 1940 Act, the Trustees shall have
the authority to provide that holders of Shares of any Sub-Trust or class
thereof shall have the right to convert said Shares into Shares of one or
more other Sub-Trust or class thereof in accordance with such requirements
and procedures as may be established by the Trustees.
(m) Class Differences tc \l3 "(m) Class Differences . The
relative rights and preferences of the classes of any Sub-Trust may differ in
such other respects as the Trustees may determine to be appropriate in their
sole discretion, provided that such differences are set forth in the
instrument establishing and designating such classes and executed by a
majority of the Trustees (or by an instrument executed by an officer of the
Trust pursuant to a vote of a majority of the Trustees).
Section IV.3 Ownership of Shares tc \l2 "Section IV.3 Ownership
of Shares . The ownership of Shares shall be recorded on the books of the
Trust or of a transfer or similar agent for the Trust, which books shall be
maintained separately for the Shares of each Sub-Trust and each class thereof
that has been established and designated. No certificates certifying the
ownership of Shares need be issued except as the Trustees may otherwise
determine from time to time. The Trustees may make such rules as they
consider appropriate for the issuance of Shares certificates, the use of
facsimile signatures, the transfer of Shares and similar matters. The record
books of the Trust as kept by the Trust or any transfer or similar agent, as
the case may be, shall be conclusive as to who are the Shareholders and as to
the number of Shares of each Sub-Trust and class thereof held from time to
time by each such Shareholder.
Section IV.4 Investments in the Trust tc \l2 "Section IV.4
Investments in the Trust . The Trustees may accept investments in the
Trust and each Sub-Trust thereof from such persons and on such terms and for
such consideration, not inconsistent with the provisions of the 1940 Act, as
they authorize from time to time. The Trustees may authorize any
distributor, principal underwriter, custodian, transfer agent or other
person to accept orders for the purchase of Shares that conform to such
authorized terms and to reject any purchase orders for Shares whether or not
conforming to such authorized terms.
Section IV.5 No Pre-emptive Rights tc \l2 "Section IV.5 No
Pre-emptive Rights . Shareholders shall have no pre-emptive or other right
to subscribe to any additional Shares or other securities issued by the
Trust.
Section IV.6 Status of Shares and Limitation of Personal
Liability tc \l2 "Section IV.6 Status of Shares and Limitation of
Personal Liability . Shares shall be deemed to be personal property giving
only the rights provided in this instrument. Every Shareholder by virtue of
having become a Shareholder shall be held to have expressly assented and
agreed to the terms hereof and to have become a party hereto. The death of a
Shareholder during the continuance of the Trust shall not operate to
terminate the Trust or any Sub-Trust thereof nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court
or elsewhere against the Trust or the Trustees, but only to the rights of
said decedent under this Trust. Ownership of Shares shall not entitle the
Shareholder to any title in or to the whole or any part of the Trust property
or right to call for a partition or division of the same or for an
accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust shall have any power to bind personally any Shareholder,
nor except as specifically provided herein to call upon any Shareholder for
the payment of any sum of money or assessment whatsoever other than such as
the Shareholder may at any time personally agree to pay.
ARTICLE V
SHAREHOLDERS VOTING POWERS AND MEETINGS tc \l1 "ARTICLE V
SHAREHOLDERS VOTING POWERS AND MEETINGS
Section V.1 Voting Powers tc \l2 "Section V.1 Voting Powers . The
Shareholders shall have power to vote only (i) for the election or removal of
Trustees as provided in Section 3.1, (ii) with respect to any contract with a
Contracting Party as provided in Section 3.3 as to which Shareholder approval
is required by the 1940 Act, (iii) with respect to any termination or
reorganization of the Trust or any Sub-Trust to the extent and as provided in
Sections 7.1 and 7.2, (iv) with respect to any amendment of this Declaration
of Trust to the extent and as provided in Section 7.3, (v) to the same extent
as the stockholders of a Massachusetts business corporation as to whether or
not a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or any
Sub-Trust thereof or the Shareholders (provided, however, that a shareholder
of a particular Sub-Trust shall not be entitled to a derivative or class
action on behalf of any other Sub-Trust (or shareholder of any other
Sub-Trust) of the Trust) and (vi) with respect to such additional matters
relating to the Trust as may be required by the 1940 Act, this Declaration of
Trust, the By-Laws or any registration of the Trust with the Commission (or
any successor agency) or any state, or as the Trustees may consider necessary
or desirable. There shall be no cumulative voting in the election of
Trustees. Shares may be voted in person or by proxy. A proxy with respect
to Shares held in the name of two or more persons shall be valid if executed
by any one of them unless at or prior to exercise of the proxy the Trust
receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be
deemed valid unless challenged at or prior to its exercise and the burden of
proving invalidity shall rest on the challenger. Until Shares are issued,
the Trustees may exercise all rights of Shareholders and may take any action
required by law, this Declaration of Trust or the By-Laws to be taken by
Shareholders.
Section V.2 Meetings tc \l2 "Section V.2 Meetings . Meetings of
Shareholders may be called by the Trustees from time to time for the purpose
of taking action upon any matter requiring the vote or authority of the
Shareholders as herein provided or upon any other matter deemed by the
Trustees to be necessary or desirable. Written notice of any meeting of
Shareholders shall be given or caused to be given by the Trustees by mailing
such notice at least seven days before such meeting, postage prepaid, stating
the time, place and purpose of the meeting, to each Shareholder at the
Shareholders address as it appears on the records of the Trust. The Trustees
shall promptly call and give notice of a meeting of Shareholders for the
purpose of voting upon removal of any Trustee of the Trust when requested to
do so in writing by Shareholders holding not less than 10% of the Shares then
outstanding. If the Trustees fail to call or give notice of any meeting of
Shareholders for a period of 30 days after written application by
Shareholders holding at least 10% of the Shares then outstanding requesting a
meeting be called for any other purpose requiring action by the Shareholders
as provided herein or in the By-Laws, then Shareholders holding at least 10%
of the Shares then outstanding may call and give notice of such meeting, and
thereupon the meeting shall be held in the manner provided for herein in case
of call thereof by the Trustees.
Section V.3 Record Dates tc \l2 "Section V.3 Record Dates . For the
purpose of determining the Shareholders who are entitled to vote or act at
any meeting or any adjournment thereof, or who are entitled to participate in
any dividend or distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding 30 days (except at or in connection with the termination of the
Trust), as the Trustees may determine; or without closing the transfer books
the Trustees may fix a date and time not more than 60 days prior to the date
of any meeting of Shareholders or other action as the date and time of record
for the determination of Shareholders entitled to vote at such meeting or any
adjournment thereof or to be treated as Shareholders of record for purposes
of such other action, and any shareholder who was a Shareholder at the date
and time so fixed shall be entitled to vote at such meeting or any
adjournment thereof or to be treated as a Shareholder of record for purposes
of such other action, even though he has since that date and time disposed of
his Shares, and no Shareholder becoming such after that date and time shall
be so entitled to vote at such meeting or any adjournment thereof or to be
treated as a Shareholder of record for purposes of such other action.
Section V.4 Quorum and Required Vote tc \l2 "Section V.4 Quorum and
Required Vote . A majority of the Shares entitled to vote shall be a quorum
for the transaction of business at a Shareholders meeting, but any lesser
number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting without the necessity of further notice. A majority of the
Shares voted, at a meeting of which a quorum is present, shall decide any
questions and a plurality shall elect a Trustee, except when a different vote
is required or permitted by any provision of the 1940 Act or other applicable
law or by this Declaration of Trust or the By-Laws.
Section V.5 Action by Written Consent tc \l2 "Section V.5 Action by
Written Consent . Subject to the provisions of the 1940 Act and other
applicable law, any action taken by Shareholders may be taken without a
meeting if a majority of Shareholders entitled to vote on the matter (or such
larger proportion thereof as shall be required by the 1940 Act or by any
express provision of this Declaration of Trust or the By-Laws) consent to the
action in writing and such written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Section V.6 Inspection of Records tc \l2 "Section V.6 Inspection of
Records . The records of the Trust shall be open to inspection by
Shareholders to the same extent as is permitted stockholders of a
Massachusetts business corporation under the Massachusetts Business
Corporation Law.
Section V.7 Additional Provisions tc \l2 "Section V.7 Additional
Provisions . The By-Laws may include further provisions for Shareholders
votes and meeting and related matters not inconsistent with the provisions
hereof.
Section V.8 Shareholder Communications tc \l2 "Section V.8 Shareholder
Communications . Whenever ten or more Shareholders of record who have been
such for at least six months preceding the date of application, and who hold
in the aggregate either Shares having a net asset value of at least $25,000
or at least 1% of the outstanding Shares, whichever is less, shall apply to
the Trustees in writing, stating that they wish to communicate with other
Shareholders with a view to obtaining signatures to a request for a
Shareholder meeting and accompanied by a form of communication and request
which they wish to transmit, the Trustees shall within five business days
after receipt of such application either (i) afford to such applicants access
to a list of the names and addresses of all Shareholders as recorded on the
books of the Trust or (ii) inform such applicants as to the approximate
number of Shareholders of record, and the approximate cost of mailing to them
the proposed communication and form of request.
If the Trustees elect to follow the course specified in item (ii)
above, the Trustees, upon the written request of such applicants, accompanied
by a tender of the material to be mailed and of the reasonable expense of
mailing, shall, with reasonable promptness, mail such material to all
Shareholders of record at their addresses as recorded on the books unless
within five business days after such tender the Trustees shall mail to such
applicants and file with the Commission, together with a copy of the material
to be mailed, a written statement signed by at least a majority of the
Trustees to the effect that in their opinion either such material contains
untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion. The Trustees shall
thereafter comply with the requirements of the 1940 Act.
ARTICLE VI
LIMITATION OF LIABILITY; INDEMNIFICATION tc \l1 "ARTICLE VI
LIMITATION OF LIABILITY; INDEMNIFICATION
Section VI.1 Trustees, Shareholders, etc. Not Personally Liable;
Notice tc \l2 "Section VI.1 Trustees, Shareholders, etc. Not Personally
Liable; Notice . All persons extending credit to, contracting with or having
any claim against the Trust shall look only to the assets of the Sub-Trust
with which such person dealt for payment under such credit, contract or
claim; and neither the Shareholders of any Sub-Trust nor the Trustees nor any
of the Trusts officers, employees or agents, whether past, present or future,
nor any other Sub-Trust shall be personally liable therefor. Every note,
bond, contract, instrument, certificate or undertaking and every other act or
thing whatsoever executed or done by or on behalf of the Trust, any Sub-Trust
or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only by or for the Trust
(or the Sub-Trust) or the Trustees and not personally. Nothing in this
Declaration of Trust shall protect any Trustee or officer against any
liability to the Trust or the Shareholders to which such Trustee or officer
would otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee or of such officer.
Every note, bond, contract, instrument, certificate or undertaking made
or issued by the Trustees or by any officers or officer shall give notice
that this Declaration of Trust is on file with the Secretary of The
Commonwealth of Massachusetts and shall recite to the effect that the same
was executed or made by or on behalf of the Trust or by them as Trustees or
Trustee or as officers or officer and not individually and that the
obligations of such instrument are not binding upon any of them or the
Shareholders individually but are binding only upon the assets and property
of the Trust, or the particular Sub-Trust in question, as the case may be,
but the omission thereof shall not operate to bind any Trustees or Trustee or
officers or officer or Shareholders or Shareholder individually.
Section VI.2 Trustees Good Faith Action; Expert Advice; No Bond or
Surety tc \l2 "Section VI.2 Trustees Good Faith Action; Expert Advice; No
Bond or Surety . The exercise by the Trustees of their powers and
discretions hereunder shall be binding upon everyone interested. A Trustee
shall be liable for his own wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of the office of
Trustee, and for nothing else, and shall not be liable for errors of judgment
or mistakes of fact or law. Subject to the foregoing, (a) the Trustees shall
not be responsible or liable in any event for any neglect or wrongdoing of
any officer, agent, employee, consultant, adviser, administrator, distributor
or principal underwriter, custodian or transfer, dividend disbursing,
shareholder servicing or accounting agent of the Trust, nor shall any Trustee
be responsible for the act or omission of any other Trustee; (b) the Trustees
may take advice of counsel or other experts with respect to the meaning and
operation of this Declaration of Trust and their duties as Trustees, and
shall be under no liability for any act or omission in accordance with such
advice or for failing to follow such advice; and (c) in discharging their
duties, the Trustees, when acting in good faith, shall be entitled to rely
upon the books of account of the Trust and upon written reports made to the
Trustees by any officer appointed by them, any independent public accountant,
and (with respect to the subject matter of the contract involved) any
officer, partner or responsible employee of a Contracting Party appointed by
the Trustees pursuant to Section 3.3. The Trustees as such shall not be
required to give any bond or surety or any other security for the performance
of their duties.
Section VI.3 Indemnification of Shareholders tc \l2 "Section VI.3
Indemnification of Shareholders . In case any Shareholder (or former
Shareholder) of any Sub-Trust of the Trust shall be charged or held to be
personally liable for any obligation or liability of the Trust solely by
reason of being or having been a Shareholder and not because of such
Shareholders acts or omissions or for some other reason, said Sub-Trust (upon
proper and timely request by the Shareholder) shall assume the defense
against such charge and satisfy any judgment thereon, and the Shareholder or
former Shareholder (or his or her heirs, executors, administrators or other
legal representatives or in the case of a corporation or other entity, its
corporate or other general successor) shall be entitled out of the assets of
said Sub-Trust estate to be held harmless from and indemnified against all
loss and expense arising from such liability.
Section VI.4 Indemnification of Trustees, Officers, etc. tc \l2
"Section VI.4 Indemnification of Trustees, Officers, etc. The Trust
shall indemnify (from the assets of the Sub-Trust or Sub-Trusts in question)
each of its Trustees and officers (including persons who serve at the Trusts
request as directors, officers or trustees of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise
(hereinafter referred to as a Covered Person) against all liabilities,
including but not limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and expenses, including reasonable
accountants and counsel fees, incurred by any Covered Person in connection
with the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or legislative
body, in which such Covered Person may be or may have been involved as a
party or otherwise or with which such person may be or may have been
threatened, while in office or thereafter by reason of being or having been
such a Trustee or officer, director or trustee, except with respect to any
matter as to which it has been determined that such Covered Person (i) did
not act in good faith in the reasonable belief that such Covered Persons
action was in or not opposed to the best interests of the Trust or (ii) had
acted with wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such Covered Persons
office (either and both of the conduct described in (i) and (ii) being
referred to hereafter as Disabling Conduct). A determination that the
Covered Person is entitled to indemnification may be made by (i) a final
decision on the merits by a court or other body before whom the proceeding
was brought that the person to be indemnified was not liable by reason of
Disabling Conduct, (ii) dismissal of a court action or an administrative
proceeding against a Covered Person for insufficiency of evidence of
Disabling Conduct or (iii) a reasonable determination, based upon a review of
the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of a majority of a quorum of Trustees who are neither
interested persons of the Trust as defined in section 2(a)(19) of the 1940
Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. Expenses, including accountants and counsel fees so
incurred by any such Covered Person (but excluding amounts paid in
satisfaction of judgments, in compromise or as fines or penalties), may be
paid from time to time by the Sub-Trust in question in advance of the final
disposition of any such action, suit or proceeding, provided that the Covered
Person shall have undertaken to repay the amounts so paid to the Sub-Trust in
question if it is ultimately determined that indemnification of such expenses
is not authorized under this Article VI and (i) the Covered Person shall have
provided security for such undertaking, (ii) the Trust shall be insured
against losses arising by reason of any lawful advances or (iii) a majority
of a quorum of the disinterested Trustees who are not a party to the
proceeding, or an independent legal counsel in a written opinion, shall have
determined, based on a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
Section VI.5 Compromise Payment tc \l2 "Section VI.5 Compromise
Payment . As to any matter disposed of by a compromise payment by any such
Covered Person referred to in Section 6.4, pursuant to a consent decree or
otherwise, no such indemnification either for said payment or for any other
expenses shall be provided unless such indemnification shall be approved (a)
by a majority of the disinterested Trustees who are not a party to the
proceeding or (b) by an independent legal counsel in a written opinion.
Approval by the Trustees pursuant to clause (a) or by independent legal
counsel pursuant to clause (b) shall not prevent the recovery from any
Covered Person of any amount paid to such Covered Person in accordance with
any of such clauses as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction not to have acted in good
faith in the reasonable belief that such Covered Persons action was in or not
opposed to the best interests of the Trust or to have been liable to the
Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
such Covered Persons office.
Section VI.6 Indemnification Not Exclusive, etc. tc \l2 "Section
VI.6 Indemnification Not Exclusive, etc. The right of indemnification
provided by this Article VI shall not be exclusive of or affect any other
rights to which any such Covered Person may be entitled. As used in this
Article VI, Covered Person shall include such persons heirs, executors and
administrators, an interested Covered Person is one against whom the action,
suit or other proceeding in question or another action, suit or other
proceeding on the same or similar grounds is then or has been pending or
threatened, and a disinterested person is a person against whom none of such
actions, suits or other proceedings or another action, suit or other
proceeding on the same or similar grounds is then or has been pending or
threatened. Nothing contained in this article shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under
law, nor the power of the Trust to purchase and maintain liability insurance
on behalf of any such person.
Section VI.7 Liability of Third Persons Dealing with Trustees tc
\l2 "Section VI.7 Liability of Third Persons Dealing with Trustees . No
person dealing with the Trustees shall be bound to make any inquiry
concerning the validity of any transaction made or to be made by the Trustees
or to see to the application of any payments made or property transferred to
the Trust or upon its order.
ARTICLE VII
MISCELLANEOUS tc \l1 "ARTICLE VII MISCELLANEOUS
Section VII.1 Duration and Termination of Trust tc \l2 "Section
VII.1 Duration and Termination of Trust . Unless terminated as provided
herein, the Trust shall continue without limitation of time and, without
limiting the generality of the foregoing, no change, alteration or
modification with respect to any Sub-Trust or class thereof shall operate to
terminate the Trust. The Trust may be terminated at any time by a majority
of the Trustees then in office subject to a favorable vote of a majority of
the outstanding voting securities, as defined in the 1940 Act, Shares of each
Sub-Trust voting separately by Sub-Trust.
Upon termination, after paying or otherwise providing for all charges,
taxes, expenses and liabilities, whether due or accrued or anticipated as may
be determined by the Trustees, the Trust shall in accordance with such
procedures as the Trustees consider appropriate reduce the remaining assets
to distributable form in cash, securities or other property, or any
combination thereof, and distribute the proceeds to the Shareholders, in
conformity with the provisions of subsection (d) of Section 4.2.
Section VII.2 Reorganization tc \l2 "Section VII.2
Reorganization . The Trustees may sell, convey, merge and transfer the
assets of the Trust, or the assets belonging to any one or more Sub-Trusts,
to another trust, partnership, association or corporation organized under the
laws of any state of the United States, or to the Trust to be held as assets
belonging to another Sub-Trust, in exchange for cash, shares or other
securities (including, in the case of a transfer to another Sub-Trust of the
Trust, Shares of such other Sub-Trust or any class thereof) with such
transfer being made subject to, or with the assumption by the transferee of,
the liabilities belonging to each Sub-Trust the assets of which are so
transferred; provided, however, that no assets belonging to any particular
Sub-Trust shall be so transferred unless the terms of such transfer shall
have first been approved at a meeting called for the purpose by the
affirmative vote of the holders of a majority of the outstanding voting
Shares, as defined in the 1940 Act, of that Sub-Trust. Following such
transfer, the Trustees shall distribute such cash, shares or other securities
(taking into account the differences among the classes of Shares thereof, if
any, and giving due effect to the assets and liabilities belonging to and any
other differences among the various Sub-Trusts the assets belonging to which
have so been transferred) among the Shareholders of the Sub-Trust the assets
belonging to which have been so transferred; and if all of the assets or the
Trust have been so transferred, the Trust shall be terminated.
Section VII.3 Amendments tc \l2 "Section VII.3 Amendments . All
rights granted to the Shareholders under this Declaration of Trust are
granted subject to the reservation of the right to amend this Declaration of
Trust as herein provided, except that no amendment shall repeal the
limitations on personal liability of any Shareholder or Trustee or repeal the
prohibition of assessment upon the Shareholders without the express consent
of each Shareholder or Trustee involved. Subject to the foregoing, the
provisions of this Declaration of Trust (whether or not related to the rights
of Shareholders) may be amended at any time, so long as such amendment does
not adversely affect the rights of any Shareholder with respect to which such
amendment is or purports to be applicable and so long as such amendment is
not in contravention of applicable law, including the 1940 Act, by an
instrument in writing signed by a majority of the then Trustees (or by an
officer of the Trust pursuant to the vote of a majority of such Trustees).
Any amendment to this Declaration of Trust that adversely affects the rights
of Shareholders may be adopted at any time by an instrument in writing signed
by a majority of the then Trustees (or by an officer of the Trust pursuant to
the vote of a majority of such Trustees) when authorized to do so by the vote
in accordance with subsection (e) of Section 4.2 of Shareholders holding a
majority of the Shares entitled to vote. Subject to the foregoing, any such
amendment shall be effective as provided in the instrument containing the
terms of such amendment or, if there is no provision therein with respect to
effectiveness, upon the execution of such instrument and of a certificate
(which may be a part of such instrument) executed by a Trustee or officer of
the Trust to the effect that such amendment has been duly adopted.
Section VII.4 Filing of Copies; References; Headings tc \l2
"Section VII.4 Filing of Copies; References; Headings . The original or a
copy of this instrument and of each amendment hereto shall be kept at the
office of the Trust where it may be inspected by any Shareholder. A copy of
this instrument and of each amendment hereto shall be filed by the Trust with
the Secretary of The Commonwealth of Massachusetts and with the Boston City
Clerk, as well as any other governmental office where such filing may from
time to time be required, but the failure to make any such filing shall not
impair the effectiveness of this instrument or any such amendment. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust
as to whether or not any such amendments have been made, as to the identities
of the Trustees and officers, and as to any matters in connection with the
Trust hereunder; and, with the same effect as if it were the original, may
rely on a copy certified by an officer of the Trust to be a copy of this
instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like herein,
hereof and hereunder shall be deemed to refer to this instrument as a whole
as the same may be amended or affected by any such amendments. The masculine
gender shall include the feminine and neuter genders. Headings are placed
herein for convenience of reference only and shall not be taken as a part
hereof or control or affect the meaning, construction or effect of this
instrument. This instrument may be executed in any number of counterparts
each of which shall be deemed an original.
Section VII.5 Applicable Law tc \l2 "Section VII.5 Applicable
Law . This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth, including the
Massachusetts Business Corporation Law as the same may be amended from time
to time, to which reference is made with the intention that matters not
specifically covered herein or as to which an ambiguity may exist shall be
resolved as if the Trust were a business corporation organized in
Massachusetts, but the reference to said Business Corporation Law is not
intended to give the Trust, the Trustees, the Shareholders or any other
person any right, power, authority or responsibility available only to or in
connection with an entity organized in corporate form. The Trust shall be of
the type referred to in Section 1 of Chapter 182 of the Massachusetts General
Laws and of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers
which are ordinarily exercised by such a trust.
Section 7.6 Resident Agent. Philip H. Newman, Esq., Exchange Place,
Boston, Massachusetts is hereby designated as the resident agent of the Trust
in Massachusetts.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and
seals for themselves and their assigns, as of the day and year first above
written.
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon
Cornelius C. Rose Jr.
DOCSC\577314.3
Words surrounding the definitions in Section 1.2 should be deleted
after regenerating (e.g. The
Trust delete The)
27
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Smith Barney Investment Trust:
We consent to the use of our reports dated January 15, 1998 for Smith Barney
Intermediate Maturity New York Municipals Fund, Smith Barney Intermediate
Maturity California Municipals Fund and Smith Barney Large Capitalization
Growth Fund of Smith Barney Investment Trust incorporated herein by
reference and to the references to our Firm under the headings "Financial
Highlights" in the Prospectuses and Counsel and Auditors in the Statements
of Additional Information.
KPMG Peat Marwick LLP
New York, New York
March 27, 1998
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<NAME> SB LARGE CAPITALIZATION GROWTH FUND, CLASS A
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0000880366
<NAME> SMITH BARNEY INVESTMENT TRUST
<SERIES>
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<NAME> SB LARGE CAPITALIZATION GROWTH FUND, CLASS B
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> SMITH BARNEY INVESTMENT TRUST
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<NAME> SMITH BARNEY INVESTMENT TRUST
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0000880366
<NAME> SMITH BARNEY INVESTMENT TRUST
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<NAME> INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND, CLASS A
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<NAME> SMITH BARNEY INVESTMENT TRUST
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<NAME> INTERMEDIATE MATURITY NEW YORK MUNICIPALS FUND, CLASS C
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