Smith Barney
INVESTMENT TRUST
388 Greenwich Street
New York, New York 10013
(800) 451-2010
March 30, 1998 as amended June 17, 1998
This Statement of Additional Information (the SAI) supplements the
information contained in the current Prospectuses of the Smith Barney
Intermediate Maturity California Municipals Fund (the California Fund) and
the Smith Barney Intermediate Maturity New York Municipals Fund (the New York
Fund) dated March 30, 1998, as amended or supplemented from time to time, and
should be read in conjunction with the Prospectuses. The Prospectuses may be
obtained by contacting a Smith Barney Financial Consultant, or by writing or
calling Smith Barney Investment Trust (the Trust), of which each of the
California Fund and the New York Fund (individually referred to as a Fund and
collectively referred to as the Funds) is a series, at the address or
telephone number set forth above. This SAI, although not in itself a
prospectus, is incorporated by reference into each Prospectus in its
entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings used in this SAI are
identical to those used in each Prospectus except as noted in parentheses
below:
Management of the Trust and the Funds
1
Investment Objectives and Management Policies the New York &
California Fund
6
Purchase of Shares
24
Redemption of Shares
25
Distributor
26
Valuation of Shares
28
Exchange Privilege
29
Performance Data (See in the Prospectuses Performance )
29
Taxes (See in the Prospectuses Dividend, Distribution and Taxes)
33
Additional Information
34
Financial Statements
35
Appendix
36
MANAGEMENT OF THE TRUST AND THE FUNDS
The executive officers of the Funds are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
NAME SERVICE
Smith Barney Inc. (Smith Barney or the
Distributor)
Mutual Management Corp.
Distributor
(MMC Adviser Administrator)
Investment Adviser and
Administrator
PNC Bank, National Association (PNC or the
Custodian)
Custodian
First Data Investor Services Group, Inc.,
(First Data or the Transfer Agent)
Transfer Agent
These organizations and the functions they perform for the Funds are
discussed in the Prospectuses and in this SAI.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The names of the Trustees of the Trust and executive officers of the Funds,
together with information as to their principal business occupations, are set
forth below. The executive officers of the Funds are employees of
organizations that provide services to the Funds. Each Trustee who is an
interested person of the Trust, as defined in the Investment Company Act of
1940, as amended (the 1940 Act), is indicated by an asterisk.
Herbert Barg (Age 74). Private Investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 75). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 07466.
Martin Brody, Trustee (Age 76). Consultant, HMK Associates; Retired
Vice Chairman of the Board of Restaurant Associates Corp. His address is c/o
HMK Associates, 30 Columbia Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane, Trustee (Age 60). Professor, Harvard Business School.
His address is c/o Harvard Business School, Soldiers Field Road, Boston,
Massachusetts 02163.
Burt N. Dorsett, Trustee (Age 67). Managing Partner of Dorsett McCabe
Management. Inc., an investment counseling firm; Trustee of Research
Corporation Technologies, Inc., a nonprofit patent clearing and licensing
firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee (Age 71). Chairman of the Board and President
of The Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New York
10901.
Stephen E. Kaufman, Trustee (Age 66). Attorney. His address is 277
Park Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 67). Financial Consultant; Retired
Financial Executive, Ryan Homes, Inc. His address is 200 Oak Park Place,
Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age
64). Managing Director of Smith Barney, Chairman of the Board of Smith
Barney Strategy Advisers Inc. and President of MMC and Travelers Investment
Adviser, Inc. (TIA); prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc., Vice Chairman of Shearson Asset Management.
Mr. McLendon is Chairman of the Board of 42 Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Trustee (Age 64). President, Cornelius C. Rose
Associates, Inc., financial consultants, and Chairman and Trustee of
Performance Learning Systems, an educational consultant. His address is Fair
Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Trustee Emeritus. Attorney; formerly Justice of the
Supreme Court of the State of New York. His address is 118 East 60th Street,
New York, New York 10022
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney, Chief Financial Officer of the Smith
Barney Mutual Funds; Director and Senior Vice President of MMC and TIA. Mr.
Daidone serves as Senior Vice President and Treasurer of 42 Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer (Age 49).
Investment Officer of MMC; Managing Director of Smith Barney; prior to July
1993, Managing Director of Shearson Lehman Advisors. Mr. Deane also serves
as Investment Officer of 5 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Peter Coffey, Vice President and Investment Officer (Age 52).
Investment Officer of MMC; Managing Director of Smith Barney; Mr. Coffey also
serves as Investment Officer of 8 Smith Barney Mutual Funds. His address is
388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 46), Managing Director of Smith
Barney. General Counsel and Secretary of MMC and TIA. Ms. Sydor serves as
secretary of 42 Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
No officer, director or employee of Smith Barney or any of its
affiliates receives any compensation from the Trust for serving as an officer
of the Funds or Trustee of the Trust. The Trust pays each Trustee who is not
an officer, director or employee of Smith Barney or any of its affiliates a
fee of $8,000 per annum plus $500 per in-person meeting and $100 per
telephonic meeting. Each Trustee emeritus who is not an officer, director or
employee of Smith Barney or its affiliates receives a fee of $4,000 per annum
plus $250 per in-person meeting and $50 per telephonic meeting. All Trustees
are reimbursed for travel and out-of-pocket expenses incurred to attend such
meetings.
For the fiscal year ended November 30, 1997, the Trustees of the Fund
were paid the following compensation:
Name of Person
Aggregate
Compensat
ion
from Fund
#
Total
Pension or
Retirement
Benefits
Accured
as part of
Fund Expenses
Compensatio
n
from Fund
and Fund
Complex
Paid to
Trustees
Number of
Funds for
Which
Trustees
Serves
Within
Fund Complex
Herbert Barg
$6,600
$0
$101,600
18
Alfred
Bianchetti**
6,600
0
49,600
13
Martin Brody
6,000
0
119,814
21
Dwight B. Crane
6,600
0
133,850
24
Burt N. Dorsett
6,600
0
49,600
13
Elliot S. Jaffe
6,600
0
48,500
13
Stephen E.
Kaufman
6,600
0
91,964
15
Joseph J.
McCann
6,600
0
49,600
13
Heath B.
McLendon **
- - -
- - -
- - -
42
Cornelius C.
Rose, Jr.
6,600
0
49,600
13
** Designates an interested Trustee.
# Upon attainment of age 80, Fund Trustees are required to change to
emeritus status. Trustees Emeritus are entitled to serve in emeritus
status for a maximum of 10 years, during which time they are paid 50% of
the annual retainer fee and meeting fees otherwise applicable to Fund
Trustees, together with reasonable out-of-pocket expenses for each meeting
attended. Mr. Crisona is a Trustee Emeritus and as such may attend
meetings but has no voting rights. During the Funds last fiscal year,
aggregate compensation paid by the Fund to Trustees achieving emeritus
status totaled $11,423
Investment Adviser and Administrator - MMC
The Adviser serves as investment adviser to each of the Funds pursuant to an
investment advisory agreement (the Investment Advisory Agreement) with the
Trust that was approved by the Board of Trustees, including a majority of
Trustees who are not interested persons of the Trust or the Adviser. The
Adviser is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
(Holdings), which, in turn, is a wholly owned subsidiary of Travelers Group
Inc. (Travelers). The services provided by the Adviser under the Investment
Advisory Agreement are described in the Prospectuses under Management of the
Trust and the Fund. The Adviser pays the salary of any officer and employee
who is employed by both it and the Trust. The Adviser bears all expenses in
connection with the performance of its services.
As compensation for investment advisory services, each Fund pays the Adviser
a fee computed daily and paid monthly at the annual rate of 0.30% of the
Funds average daily net assets.
For the fiscal year ended November 30, 1995, the Funds paid the Adviser
investment advisory fees, and the investment adviser waived fees and
reimbursed expenses as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$22,385
$65,910
New York Fund
82,898
115,831
For the fiscal year ended November 30, 1996, the Funds paid the Adviser
investment advisory fees, and the investment adviser waived fees and
reimbursed expenses as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$ 0
$128,361
New York Fund
32,306
122,796
For the fiscal year ended November 30, 1997, the Funds paid the Adviser
investment advisory fees, and the investment adviser waived fees and
reimbursed expenses as follows:
Fund
Fees Paid
Fees Waived
California Fund
$20,278
$63,087
New York Fund
59,523
90,299
MMC also serves as administrator to the New York and California Funds
pursuant to a written agreement (the Administration Agreement), which was
approved by the Trustees of the Trust, including a majority of Trustees who
are not interested persons of the Trust or the Administrator. The services
provided by the Administrator under the Administration Agreement are
described in the Prospectuses under Management of the Trust and the Fund. The
Administrator pays the salary of any officer and employee who is employed by
both it and the Trust and bears all expenses in connection with the
performance of its services.
As compensation for administrative services rendered to each Fund, the
Administrator receives a fee computed daily and paid monthly at the annual
rate of 0.20% of the Funds average daily net assets.
Prior to June 26, 1995, and July 10, 1995, for New York Fund and California
Fund, respectively, The Boston Company Advisors, Inc. (Boston Advisors), an
indirect wholly owned subsidiary of Mellon Bank Corporation, served as the
Funds sub-administrator.
For the fiscal year ended November 30, 1995 the Funds paid the Administrator
administration fees and the Administrator waived fees as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$17,121
$37,626
New York Fund
47,695
65,864
For the fiscal year ended November 30, 1996 the Funds paid the Administrator
administration fees and the Administrator waived fees as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$ 0
$85,575
New York Fund
10,906
92,495
For the fiscal year ended November 30, 1997 the Funds paid the Administrator
administration fees and the Administrator waived fees as follows:
Fees Waived
and Expenses
Fund
Fees Paid
Reimbursed
California Fund
$13,518
$42,058
New York Fund
33,023
66,858
The Trust bears expenses incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees who are
not officers, directors, shareholders or employees of Smith Barney or MMC,
Securities and Exchange Commission (SEC) fees and state Blue Sky
qualification fees; charges of custodians; transfer and dividend disbursing
agent fees; certain insurance premiums; outside auditing and legal expenses;
costs of maintaining corporate existence; costs of investor services
(including allocated telephone and personnel expenses); costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders; costs of shareholders reports and shareholder
meetings; and meetings of the officers or Board of Trustees of the Trust.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Trust. The Trustees
who are not interested persons of the Trust have selected Stroock & Stroock &
Lavan LLP as their counsel.
KPMG Peat Marwick LLP, independent auditors, 345 Park Avenue, New York, New
York 10154, have been selected to serve as auditors of the Trust and to
render opinions on the Funds financial statements for the fiscal year ended
November 30, 1998.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES FOR THE NEW YORK AND
CALIFORNIA FUND
The Prospectuses discuss the investment objective of each Fund and the
principal policies to be employed to achieve that objective. Supplemental
information is set out below concerning the types of securities and other
instruments in which the Funds may invest, the investment policies and
strategies that the Funds may utilize and certain risks attendant to those
investments, policies and strategies.
United States Government Securities
Securities issued or guaranteed by the United States government or one of its
agencies, authorities or instrumentalities (U.S. government securities) in
which each of the California Fund and the New York Fund may invest include
debt obligations of varying maturities issued by the United States Treasury
or issued or guaranteed by an agency or instrumentality of the United States
government, including the Federal Housing Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal National Mortgage Association, Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board, Student Loan
Marketing Association, Resolution Trust Corporation and various institutions
that previously were or currently are part of the Farm Credit System (which
has been undergoing a reorganization since 1987). Direct obligations of the
United States Treasury include a variety of securities that differ in their
interest rates, maturities and dates of issuance. Because the United States
government is not obligated by law to provide support to an instrumentality
that it sponsors, neither of the Funds will invest in obligations issued by
an instrumentality of the United States government unless the Adviser
determines that the instrumentalitys credit risk does not make its securities
unsuitable for investment by the Fund.
Municipal Obligations
Each of the Funds invests principally in debt obligations issued by, or on
behalf of, states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies and
instrumentalities or multistate agencies or authorities, the interest from
which debt obligations is, in the opinion of bond counsel to the issuer,
excluded from gross income for Federal income tax purposes (Municipal
Obligations). Municipal Obligations generally are understood to include debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities, refunding of outstanding
obligations, payment of general operating expenses and extensions of loans to
public institutions and facilities. Private activity bonds that are issued
by or on behalf of public authorities to finance privately operated
facilities are considered to be Municipal Obligations if the interest paid on
them qualifies as excluded from gross income (but not necessarily from
alternative minimum taxable income) for Federal income tax purposes in the
opinion of bond counsel to the issuer. Municipal Obligations may be issued
to finance life care facilities, which are an alternative form of long-term
housing for the elderly that offer residents the independence of a
condominium life-style and, if needed, the comprehensive care of nursing home
services. Bonds to finance these facilities have been issued by various
state industrial development authorities. Because the bonds are secured only
by the revenues of each facility and not by state or local government tax
payments, they are subject to a wide variety of risks, including a drop in
occupancy levels, the difficulty of maintaining adequate financial reserves
to secure estimated actuarial liabilities, the possibility of regulatory cost
restrictions applied to health care delivery and competition from alternative
health care or conventional housing facilities.
Municipal Leases
Municipal leases are Municipal Obligations that may take the form of a lease
or an installment purchase issued by state and local government authorities
to obtain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
These obligations have evolved to make it possible for state and local
government authorities to acquire property and equipment without meeting
constitutional and statutory requirements for the issuance of debt. Thus,
municipal leases have special risks not normally associated with Municipal
Obligations. These obligations frequently contain non-appropriation clauses
that provide that the governmental issuer of the municipal lease has no
obligation to make future payments under the lease or contract unless money
is appropriated for such purposes by the legislative body on a yearly or
other periodic basis. In addition to the non-appropriation risk, municipal
leases represent a type of financing that has not yet developed the depth of
marketability associated with Municipal Obligations; moreover, although the
obligations will be secured by the leased equipment, the disposition of the
equipment in the event of foreclosure might prove difficult. In order to
limit the risks, the Fund will purchase either (a) municipal leases that are
rated in the four highest categories by Moodys Investor Services, Inc.
(Moodys) or Standard & Poors Corporation (S&P) or (b) unrated municipal
leases that are purchased principally from domestic banks or other
responsible third parties that have entered into an agreement with the Fund
providing the seller will either remarket or repurchase the municipal leases
within a short period after demand by the Fund.
From time to time, proposals to restrict or eliminate the Federal income tax
exemption for interest on Municipal Obligations have been introduced before
Congress. Similar proposals may be introduced in the future. In addition,
the Internal Revenue Code of 1986, as amended, (the Code) currently provides
that small issue private activity bonds will not be tax-exempt if the bonds
were issued after December 31, 1986, and the proceeds were used to finance
projects other than manufacturing facilities.
Special Considerations Relating To California Exempt Obligations
As indicated in its Prospectus, the California Fund seeks its objective by
investing principally in a portfolio of Municipal Obligations, the interest
from which is exempt from California State personal income taxes (California
Exempt Obligations).
Some of the significant financial considerations relating to the California
Funds investments in California Exempt Obligations are summarized below.
This summary information is derived principally from official statements and
prospectuses relating to securities offerings of the State of California and
various local agencies in California, available as of the date of this SAI
and does not purport to be a complete description of any of the
considerations mentioned herein. It is also based on the disclosure
statement filed in the County of Orange bankruptcy case. The accuracy and
completeness of the information contained in such official statements and
disclosure statement has not been independently verified.
Risk Factors
Beginning in the 1990-91 fiscal year, California faced the worst economic,
fiscal and budget conditions since the 1930s. Construction, manufacturing
(especially aerospace), exports and financial services, among others, were
severely affected. Job losses were the worst of any post-war recession and
have been estimated to exceed 800,000.
The recession seriously affected State tax revenues. It also caused
increased expenditures for health and welfare programs. The State has also
faced a structural imbalance in its budget with the largest programs
supported by the General Fund?K-12 schools and community colleges, health,
welfare and corrections?growing at rates higher than the growth rates for the
principal revenue sources of the General Fund. (The General Fund, the States
main operating fund, consists of revenues which are not required to be
credited to any other fund.) The State experienced recurring budget
deficits. The State Controller reported that expenditures exceeded revenues
for the four of the six fiscal years ending with 1992-93, and were
essentially equal in 1993-94. According to the Department of Finance, the
State suffered a continuing budget deficit of approximately $2.8 billion in
the Special Fund for Economic Uncertainties. (Special Funds account for
revenues obtained from specific revenue sources, and which are legally
restricted to expenditures for specified purposes.) The 1993-94 Budget Act
incorporated a Deficit Reduction Plan to repay this deficit over two years.
The original budget for 1993-94 reflected revenues which exceeded
expenditures by approximately $2.8 billion. As a result of continuing
recession, the excess of revenues over expenditures for the 1993-94 fiscal
year was less than $300 million. The accumulated budget deficit at June 30,
1994 was not able to be retired by June 30, 1995 as planned. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan was
implemented in 1994-95. The accumulated budget deficits over the past
several years, together with expenditures for school funding which have not
been reflected in the budget, and the reduction of available internal
borrowable funds, have combined to significantly deplete the States 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, Californias 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 Californias recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services, and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. As a result of these factors, average 1994 non-farm
employment exceeded expectations and grew beyond 1993 levels.
Many California counties continue to be under severe fiscal stress. Such
stress has impacted smaller, rural counties and larger urban counties such as
Los Angeles, and Orange County which declared bankruptcy in 1994. Orange
County has implemented significant reductions in services and personnel, and
continues to face fiscal constraints in the aftermath of its bankruptcy.
However, California has experienced recent economic expansion, with growth in
employment and in early 1998 the state recorded its lowest unemployment rate
since 1990. There can be no assurance this growth trend will continue.
1995-96 Budget
The state began the 1995-96 Fiscal Year with strengthening revenues based on
an improving economy and the smallest nominal budget gap to be closed in many
years.
The 1995-96 Budget Act, signed by the Governor on August 3, 1995, projects
General Fund revenues and transfers of $44.1 billion, about $2.2 billion
higher than projected revenues in 1994-95. The Budget Act projects Special
Fund revenues of $12.7 billion, an increase from $12.1 billion projected in
1994-95.
The Department of Finance released updated projections for the 1995-96 fiscal
year in May, 1996, estimating that revenues and transfers to be $46.1
billion, approximately $2 billion over the original fiscal year estimate.
Expenditures also increased, to an estimated $45.4 billion, as a result of
the requirement to expend revenues for schools under Proposition 98, and,
among other things, failure of the federal government to budget new aid for
illegal immigrant costs which had been counted on to allow reductions in
costs.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community colleges will increase
by about $1 billion (General Fund) and $1.2 billion total above revised
1994-95 levels. Because of higher than projected revenues in 1994-95, an
additional $543 million in appropriated to the 1994-95 Proposition 98
entitlement. A significant component of this amount is block grant of
about $54 per pupil for any one-time purpose. Per-pupil expenditures are
projected to increase by another $126 in 1995-96 to $4,435. A full 2.7%
cost of living allowance is funded for the first time in several years.
The budget comprise anticipated a settlement of the CTA v. Gould
litigation.
2. Cuts in health and welfare costs totaling about $900 million, some of
which would require federal legislative approval.
3. A 3.5% increase in funding for the University of California ($90
million General Fund) and the California State University system ($24
million General Fund), with no increase in student fees.
4. The updated Budget assumes receipt of $494 million in new federal aid
for costs of illegal immigrants, in excess of federal government
commitments.
5. General Fund support for the Department of Corrections is increased by
about 8 percent over 1994-95, reflecting estimates of increased prison
population. This amount is less than was proposed in the 1995 Governors
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 Governors four-year Compact with
the States 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 States General Fund
to approximately $50.3 billion. The Governor announced a proposal to
restructure the States 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 Governors 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
States 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 Governors 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 States system of schools, water supply, prisons, natural resources,
and other Infrastructure.
In addition, the Budget includes approximately $40 billion to be devoted to
Californias 999 school districts and 58 county offices of education,
resulting on estimated total per-pupil expenditures from all sources of
$6,620 in fiscal year 1997-98 and $6,749 in 1998-99. Projected state
revenues will contribute to a 7 percent increase in Proposition 98 General
Fund support for K-12 education in 1998-99. This level of resources result
in K-12 Proposition 98 per-pupil expenditures of $5,636 in 1998-99, up from
$5,114 in 1996-97 and $5,414 in 1997-98. In addition, approximately $350
million has been allocated to lengthen the school year to 180 days while
maintaining sufficient funds for staff development days. The State Budget
included a 2.22% COLA for revenue limit, special education, and child
development in an amount of $657.4 million which includes school district and
county office of education apportionments ($470.6 million), summer school
($4.0 million), special education ($57.8 million), child development ($14.6
million), class size reduction ($33.6 million), and categorical program COLA
and growth ($73.7 million); enrollment growth funding of $564.4 million;
class size reduction funding in the amount of $547 billion for all pupils in
grades K-3 at $818 per pupil; and approximately $2 billion in state bonds for
the 1998 election and $2.0 billion for each two years thereafter in 2000,
2002 and 2004 and an additional $135 million for deferred maintenance to be
matched locally.
It cannot be predicted what actions will be taken in the future by the State
Legislature and the Governor to deal with changing State revenues and
expenditures. The State budget will be affected by national and state
economic conditions and other factors.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE STATE OF CALIFORNIA. THE STATE HAS INDICATED
THAT ITS DISCUSSION OF BUDGETARY INFORMATION IS BASED ON ESTIMATES AND
PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST
NOT BE CONSTRUED AS STATEMENTS OF FACT; THE ESTIMATES AND PROJECTIONS ARE
BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS FACTORS,
INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THERE
CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.
Recent Voter Initiative
Proposition 218 or the Right to vote on Taxes Act (the Proposition) was
approved by the California electorate at the November, 1996 general election.
Officially titled Voter Approval For Local Government Taxes, Limitation on
Fees, Assessments and Charges Initiative Constitutional Amendment, the Act
was approved by a majority of the voters voting at the election and adds
Articles XIIIC and XIIID to the California Constitution.
The Proposition, among other things, requires local government to follow
certain procedures in imposing or increasing any fee or charge as defined.
Fee or charge is defined to mean any levy other than an ad valorem tax, a
special tax or an assessment imposed by an agency upon a parcel or upon a
person as an incident of property ownership, including user fees or charges
for a property related service.
The procedure required by the Proposition to impose or increase any fee or
charge include a public hearing upon the proposed fee or charge and the
opportunity to present written protests by the owners of the parcels subject
to the proposed fee or charge. If written protests against the proposed fee
or charge are presented by a majority of owners of the identified parcels,
the local government shall not impose the fee or charge.
The Proposition further provides as follows:
Except for fees or charges for sewer, water, and refuse collection
services, no property related fee or charge shall be imposed or increased
unless and until such fee or charge is submitted and approved by a
majority vote of the property owners of the property subject to the fee or
charge or, at the option of the agency, by a two thirds vote of the
electorate residing in the affected area.
Additionally, the Proposition provides, with respect to standby charges, as
follows:
No fee or charge may be imposed for a service unless that service is
actually used by, or immediately available to, the owner of the property
in question. Fees or charges based on potential or future use of a
service are not permitted. Standby charges, whether characterized as
charges or assessments, shall be classified as assessments and shall not
be imposed without compliance with Section 4 of this Article.
The Proposition provides that beginning July 1, 1997, all fees and charges
shall comply with the Propositions requirements.
The Proposition is silent with respect to future increases of pre-existing
fees or charges which are pledged to payment of indebtedness or obligations
previously incurred by the local government. Presumably, the Proposition
cannot preempt outstanding contractual obligations protected by the contract
impairment clause of the federal constitution. However, with respect to any
given situation or case, litigation may be the method which will settle any
question concerning the authority of a local government to increase fees or
charges outside of the strictures of the Proposition in order to meet
contractual obligations.
Proposition 218 also contains a new provision subjecting matters of reducing
or repealing any local tax, assessments and charges to the initiative power.
This means that no city or local agency revenue source is safe from reduction
or repeal pursuant to the initiative process.
Litigation concerning various elements of the Proposition may ultimately
ensue and clarifying legislation may be enacted.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the Appropriations Limit), and is prohibited
from spending appropriations subject to limitation in excess of the
Appropriations Limit. Article XIIIB originally adopted in 1979, was modified
substantially by Propositions 98 and 111 in 1988 and 1990, respectively.
Appropriations subject to limitation are authorizations to spend proceeds of
taxes, which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent
that such proceeds exceed the reasonable cost of providing the regulation,
product or service. The Appropriations Limit is based on the limit for the
prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period above the combined Appropriation Limits
for those two years is divided equally between transfers to K-14 districts
and refunds to taxpayers.
Exempted from the Appropriation Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax
revenues dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in cases of
emergency arising from civil disturbance or natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so declared
and approved, the Appropriations Limit for the next three years must be
reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in proposition 98. During fiscal year 1991-1992
revenues were smaller than expected, thus reducing the payment owed to
schools in 1991-92 under alternate test provisions. In response to the
changing revenue situation, and to fully fund the Proposition 98 guarantee in
the 1991-1992 and 1992-1993 fiscal years without exceeding it, the
Legislature enacted legislation to reduce 1991-92 appropriations. The amount
budgeted to schools but which exceeded the reduced appropriations treated as
a non-Proposition 98 short-term loan in 1991-92. As part of the 1992-93
Budget, $1.083 billion of the amount budgeted to K-14 schools was designated
to repay the prior year loan, thereby reducing cash outlays in 1992-93 by
that amount. To maintain per-average daily attendance (ADA) funding, the
1992-93 Budget included loans of $732 million to K-12 schools and $241
million to community colleges, to be repaid from future Proposition 98
entitlements. The 1993-94 Budget also provided new loans to $609 million to
K-12 schools and $178 million to community colleges to maintain ADA funding.
These loans have been combined with the 1992-93 fiscal year loans into one
loan of $1.760 billion, to be repaid from future years Proposition 98
entitlements, and conditioned upon maintaining current funding levels per
pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers Association, et al.
v Gould, et al., ruled that the 1992-93 loans to K-12 schools and community
colleges violate Proposition 98. As part of the negotiations leading to the
1995-96 Budget Act, an oral agreement was reached to settle this case. The
parties reached a conditional final settlement of the case in April, 1996.
The settlement required adoption of legislation satisfactory to the parties
to implement its terms, which has occurred, and final approval by the court,
which was pending in early July, 1996.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as expenditures above the
current Proposition 98 base circulation. The schools share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from below the current base. Repayments are to be spread over
the eight-year period beginning 1994-95 through 2002-03. Once the Director
of Finance certifies that a settlement has occurred, approximately $377
million in appropriations from the 1995-96 fiscal year to schools will be
disbursed.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Trust cannot predict the impact of this or related legislation on the bonds
in the Trust Portfolio. Other Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If any
such initiatives are adopted, the state could be pressured to provide
addition financial assistance to local governments or appropriate revenues as
mandated by such initiatives. Propositions such a Proposition 98 and others
that may be adopted in the future, may place increasing pressure on the
States 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 States 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
Californias 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 States use of Public
Employee Retirement System funds to offset future State and local pension
contributions. Other cases which could significantly impact revenue or
expenditures involve challenges of payments of wages under the Fair Labor
Standards Act, the method of determining gross insurance premiums involving
health insurance, property tax challenges, challenges of transfer of moneys
from State Treasury special fund accounts to the States General Fund pursuant
to its Budget Acts for certain fiscal years. Because of the prospective
nature of these proceedings, it is not presently possible to predict the
outcome of such litigation or estimate the potential impact on the ability of
the State to pay debt service on its obligation.
Ratings
During 1996, the ratings of Californias general obligation bonds was upgraded
by the following rating agencies. Recently Standard & Poors Ratings Group
upgraded its rating of such debt to A+; the same rating has been assigned to
such debt by Fitch Investors Service. Moodys Investors Service has assigned
such debt an A1 rating. Any explanation of the significance of such ratings
may be obtained only from the rating agency furnishing such ratings. There
is no assurance that such ratings will continue for any given period of time
or that they will not be revised downward or withdrawn entirely if, in the
judgment of the particular rating agency, circumstances so warrant.
The Trust believes the information summarized above describes some of the
more significant aspects relating to the California Trust. The sources of
such information are Preliminary Official Statements and Official Statements
relating to the States general obligation bonds and the States revenue
anticipation notes, or obligations of other issuers located in the State of
California, or other publicly available documents. Although the Trust has
not independently verified this information, it has no reason to believe that
such information is not correct in all material respects.
California Taxes -
In the opinion of LeBoeuf, Lamb, Greene & MacRae L.L.P., Los Angeles,
California, special counsel on California tax matters, under existing law:
The California Trust is not taxable as corporation for California tax
purposes. Interest on the underlying Securities owned by the California
Trust that is exempt from personal income taxes imposed by the State of
California will retain its status as interest exempt from personal income tax
imposed by the State of California.
Each Unit Holder of the California Trust will recognize gain or loss on the
sale, redemption or other disposition of Securities within the California
Trust, or on the sale or other disposition of Unit Holders interest in the
California Trust. As a result, a Unit Holder may incur California tax
liability upon the sale, redemption or other disposition of Securities within
the California Trust or upon the sale or other disposition of his or her
Units.
Special Consideration Relating to New York Exempt Obligations
Risk Factors. The information set forth below is derived from the official
statements and/or preliminary drafts of official statements prepared in
connection with the issuance of New York State and New York City municipal
bonds. The Trust has not independently verified this information.
Economic Trends. Over the long term, the State of New York (the State) and
the City of New York (the City) face serious economic problems. The City
accounts for approximately 41% of the States population and personal income,
and the Citys 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 Citys total employment
earnings. Additionally, the City is the nations leading tourist destination.
The Citys 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 Citys 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 Citys 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 Citys 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 Citys capital, revenue and expense projections and
outlines proposed gap-closing programs for years with projected budget gaps.
The Citys 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 States 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 Citys 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
Citys cash flow or revenues.
The Mayor is responsible for preparing the Citys four-year financial plan,
including the Citys current financial plan for the 1998 through 2001 fiscal
years (the 1998-2001 Financial Plan or Financial Plan). The Citys
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 Citys 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 Citys ability
to market its securities successfully. The Citys 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 Citys effort to assist in keeping the Citys 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 Citys 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 Citys operation results for the 1996 fiscal year were balanced in
accordance with GAAP, after taking into account a discretionary transfer of
$224 million, the sixteen the consecutive year of GAAP balanced results.
The most recent quarterly modification to the Citys financial plan for the
1997 fiscal year, which was submitted to the Control Board on June 10, 1997
(the 1997 Modification), projects a balanced budget in accordance with GAAP
for the 1997 fiscal year, after taxing into account an increase in projected
tax revenues of $1.2 billion during the 1997 fiscal year and a discretionary
prepayment in the 1997 fiscal of $1.3 billion of debt service due in the 1998
and 1999 fiscal years.
On June 10, 1997, the City submitted to the Control Board the financial Plan
for the 1998 through 2001 fiscal years, which relates to the City, BOE and
the City University to New York (CUNY) and reflects the Citys expense and
capital budgets for the 1998 fiscal year, which were adopted on June 6, 1997.
The Financial Plan projects revenues and expenditures for the 1998 fiscal
year balanced in accordance with GAAP. The Financial Plan includes increased
tax revenue projections; reduced debt service costs; the assumed restoration
of Federal funding for programs, assisting certain legal aliens; additional
expenditures for textbooks, computers, improved education programs and
welfare reform, law enforcement, immigrant naturalization, initiative
proposed by the City Council and other initiatives; and a proposed
discretionary transfer to the 1998 fiscal year of $300 million of debt
service due in the 1999 fiscal year for budget stabilization purposes. In
addition, the Financial Plan reflects the discretionary transfer to the 1997
fiscal year of $1.3 billion of debt service due in the 1998 and 199 fiscal
years, and includes actions to eliminate a previously projected budget gap
for the 1998 fiscal year. These gap closing actions include (I) additional
agency actions totaling $621 million; (ii) the proposed sale of various
assets; (iii) additional State aid of $294 million, including a proposal that
the State accelerate a $142 million revenue sharing payment to the City from
March 1999; and (iv) entitlement savings of $128 million which would result
from certain of the reductions in Medicaid spending proposed in the Governors
1997-1998 Executive Budget and the State making available to the City $77
million of additional Federal block grant aid, as proposed in the Governors
1997-1998 Executive Budget. The Financial Plan also sets forth projections
for the 1999 through 2001 fiscal years and projects gaps of $1.8 billion,
$2.8 billion for the 1999 through 2001 fiscal years, respectively.
The Financial Plan assumes approval by the State Legislature and the Governor
of (i) a tax reduction program proposed by the City totaling $272 million,
$435 million, $465 million and $481 million in the 1998 through 2001 fiscal
years, respectively, which includes a proposed elimination of the 4% City
sales tax on clothing items under $500 as of December 1, 1997, and (ii) a
proposed State tax relief program, which would reduce the City property tax
and personal income tax, and which the Financial Plan assumes will be offset
by proposed increased State aid totaling $47 million, $254 million, $472
million and $722 million in the 1998 through 2001 fiscal years, respectively.
The Financial Plan also assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which
is scheduled to expire on December 31, 1999 and the extension of which is
projected to provide revenue of $166 million and $494 million in the 2000
and 2001 fiscal years, respectively, and of the extension of the 12.5%
personal income tax surcharge, which is scheduled to expire on December 31,
1998 and the extension of which is projected to provide revenue of $188
million, $527 million and $554 million in the 1999 through 2001 fiscal years,
respectively; (ii) collection of the projected rent payments for the Citys
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
Citys 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
Governors 1997-1998 Executive Budget. The Financial Plan reflects the
increased costs which the City is prepared to incur as a result of welfare
legislation recently enacted by Congress. The Financial Plan provides no
additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001. In addition, the economic and financial
condition of the City may be affected by various financial, social, economic
and political factors which could have material effect on the City.
The City annually prepares a modification to its financial plan in October or
November which amends the financial plan to accommodate any revisions to
forecast revenues and expenditures and to specify any additional gap-closing
initiatives to the extent required to offset decreases in projected revenues
or increases in projected revenues or increases in projected expenditures.
The Mayor is expected to publish the first quarter modification (the
Modification) for the 1998 fiscal year in November. Since the preparation of
the Financial Plan, the State has adopted its budget for the 1997-1998 fiscal
year. The State budget enacted a smaller sales tax reduction than the tax
reduction program assumed by the City in the Financial Plan, which will
increase projected City sales tax revenues; provided for State aid to the
City which was less than assumed in the Financial Plan; and enacted a State
funded tax relief program which begins a year later than reflected I the
Financial Plan. In addition, the net effect of tax law changes made in the
Federal Balanced Budget Act of 1997 are expected to increase tax revenues in
the 1998 fiscal year. These changes will be reflected in the Modification.
The projections for the 1998 through 2001 fiscal years reflect the costs of
the settlements with the United Federation of Teachers (UFT) and a coalition
of unions headed by District Council 37 of the American Federation of State,
County and Municipal Employees (District Council 37), which together
represent approximately two-thirds of the Citys 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 Citys workforce.
In 1975, Standard & Poors 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 & Poors. On July 2,
1985, Standard & Poors revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 10, 1995, Standard & Poors revised its
rating of City bonds downward to BBB+.
Moodys 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, Moodys
changed its outlook on City bonds to positive from stable. Since July 15,
1993, Fitch has rated City bonds A-. since July 8, 1997, IBCA Limited has
rated City bonds A.
New York State and its Authorities. The States budget for the States 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 States budget as enacted by the Legislature, as well as actual
results for the first quarter of the current fiscal year. The 1997-1998
State Financial Plan is expected to be updated in October and January. The
1997-1998 State Financial Plan is projected to be balanced on a cash basis.
Total General Fund receipts and transfers from other funds are projected to
be $35.09 billion, while total General Fund disbursements and transfers to
other funds are projected to be $34.60 billion. The adopted 1997-1998 budget
projects a year-over-year increase in General Fund disbursements of 5.2
percent. As compared to the Governors proposed budget amended in February
1997, the States 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 States
1999-2000 fiscal year.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. In addition, the State Financial
Plan is based upon forecasts of national and State economic activity.
Economic forecasts have frequently failed to predict accurately the timing
and magnitude of changes in the national and the State economics. Actual
results could differ materially and adversely from projections and those
projections may be changed materially and adversely from time to time.
The State closed projected budget gaps of $5.0 billion, $3.9 billion and $2.3
billion for its 1995-1996, 1996-1997 and 1997-1998 fiscal years,
respectively. The 1998-1999 budget gap was projected at $1.68 billion
(before the application of any assumed efficiencies) in the out-year
projections submitted to the Legislature in February 1997. As a result of
changes made in the adopted budget, the 1998-1999 gap is now expected by the
State to be about the same or smaller than the amount previously projected,
after application of the $530 million reserve for future needs. The Governor
has indicated that he will propose to close any potential imbalance primarily
through General Fund expenditure reductions and without increases in taxes or
deferrals of scheduled tax reductions. The revised expectations for the
1998-199 fiscal year reflect the loss of $1.4 billion in surplus resources
from 1996-1997 operations that are being utilized to finance current year
spending, an incremental effect of approximately $300 million in legislated
State and local tax reductions in the out-year and other factors.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy,
actions of the Federal government and other factors have created structural
budget gaps for the State. These gaps resulted from a significant disparity
between recurrent revenues and the costs of maintaining or increasing the
level of support for State programs. To address a potential imbalance in any
given fiscal year, the State would be required to take actions to increase
receipts and/or reduce disbursements as it enacts the budget for that year,
and under the State Constitution, the Governor is required to propose a
balanced budget each year. There can be no assurance, however, that the
Legislature will enact the Governors proposals or that the States 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 States 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based
on current economic conditions and current law for taxes and spending, showed
a gap in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion
in the 2001-2001 State fiscal year. The report noted that these gaps would
be smaller if recurring spending reductions produce savings in earlier years.
The State Comptroller has also state that if Wall Street earnings moderate
and the State experiences a moderate recession, the gap for the 2001-2002
State fiscal year could grow to nearly $12 billion.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A prolonged delay in the adoption of the
States 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 & Poors revised its ratings on the States
general obligation bonds from A- to A and, in addition, revised its ratings
on the States moral obligation, lease purchase, guaranteed and contractual
obligation debt. On January 6, 1992, Moodys reduced its ratings on
outstanding limited-liability State lease purchase and contractual
obligations from A to Baa1. On February 10, 1997, Moodys confirmed its A2
rating on the States 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 States 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 Citys ability to carry
out the 1998-2001 Financial Plan. The City has estimated that its potential
future liability on account of outstanding claims against it as of June 30,
1996 amounted to approximately $2.8 billion.
New York Taxes -
Under the income tax laws of the State and City of New York, the Trust is not
an association taxable as a corporation and income received by the Trust will
be treated as the income of the Holders in the same manner as for Federal
income tax purposes. Accordingly, each Holder will be considered to have
received the interest on his pro rata portion of each Bond when interest will
be exempt from New York State and City personal income taxes except where
such interest is subject to Federal income taxes (see Taxes). A noncorporate
Holder who is not a New York State resident will not be subject to New York
State or City personal income taxes on any such gain unless such Units are
attributable to a business, trade, profession or occupation carried on in New
York. A New York State (and City) resident should determine his tax
purposes. Interest income on, as well as any gain recognized on the
disposition of, a Holders pro rata portion of the Bonds is generally not
excludable from income in computing New York State and City corporate
franchise taxes.
Ratings as Investment Criteria
In general, the ratings of Moodys, S&P and Fitch IBCA, Inc. (Fitch) represent
the opinions of those agencies as to the quality of debt obligations that
they rate. These ratings, however, are relative and subjective, are not
absolute standards of quality and do not evaluate the market risk of
securities. Ratings will be used with respect to the Funds as initial
criteria for the selection of portfolio securities; the Funds will also rely
upon the independent advice of the Adviser to evaluate potential investments.
Among the factors that will be considered by the Adviser are the long-term
ability of the issuer to pay principal and interest and general economic
trends. The Appendix to this SAI contains further information concerning the
ratings of Moodys, S&P and Fitch, together with a brief discussion of the
significance of those ratings.
An issue of debt obligations may, subsequent to its purchase by a Fund, cease
to be rated or its ratings may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt
obligation by a Fund, but the Adviser will consider the event in its
determination of whether the Fund should continue to hold the obligation. In
addition, to the extent that ratings change as a result of changes in rating
organizations or their rating systems or as a result of a corporate
restructuring of Moodys, S&P or Fitch, the Adviser will attempt to use
comparable ratings as standards for each Funds investments.
Miscellaneous Investment Policies
Each Fund may invest up to an aggregate amount equal to 10% of its net assets
of illiquid securities, which term includes securities subject to contractual
or other restrictions on resale and other instruments that lack readily
available markets.
Repurchase Agreements
Both the Funds may engage in repurchase agreement transactions with banks
which are the issuers of instruments acceptable for purchase by the Fund and
certain dealers on the Federal Reserve Bank of New Yorks list of reporting
dealers. A repurchase agreement is a contract under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price on an agreed-upon date.
Under the terms of a typical repurchase agreement, a Fund would acquire an
underlying debt obligation for a relatively short period subject to an
obligation of the seller to repurchase, and the Fund to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Funds holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Funds holding
period. Under each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Although the amount of a
Funds assets that may be invested in purchase agreements terminable in less
than seven days is not limited, repurchase agreements maturing in more than
seven days, together with other securities lacking readily available markets
held by the Fund, will not exceed 10% of the Funds net assets.
The value of the securities underlying a repurchase agreement of a Fund will
be monitored on an ongoing basis by the Adviser to ensure that the value is
at least equal at all times to the total amount of the repurchase obligation,
including interest. The Adviser will also monitor, on an ongoing basis to
evaluate potential risks, the creditworthiness of the banks and dealers with
which a Fund enters into repurchase agreements.
When-Issued and Delayed-Delivery Transactions - Both Funds
When a Fund engages in when-issued or delayed-delivery securities
transactions, it will rely on the other party to consummate the trade.
Failure of the seller to do so may result in a Funds incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
Investment Restrictions
The investment restrictions numbered 1 through 6 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. The remaining restrictions 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. 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.
2. 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.
3. 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
4. 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.
5. 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.
6. 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.
7. 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.
8. No Fund will invest in oil, gas or other mineral leases or exploration or
development programs.
9. 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.
10. 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.
11. No Fund may make investments for the purpose of exercising control of
management.
Portfolio Transactions
Decisions to buy and sell securities for each Fund are made by the Adviser,
subject to the overall review of the Trusts Board of Trustees. Although
investment decisions for each Fund are made independently from those of the
other accounts managed by the Adviser, investments of the type that a Fund
may make also may be made by those other accounts. When a Fund and one or
more other accounts managed by the Adviser are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the Adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by a Fund or the size of the position obtained or
disposed of by a Fund. The Trust has paid no brokerage commissions since its
commencement of operations.
Allocation of transactions on behalf of the Funds, including their frequency,
to various dealers is determined by the Adviser in its best judgment and in a
manner deemed fair and reasonable to the Funds shareholders. The primary
considerations of the Adviser in allocating transactions are availability of
the desired security and the prompt execution of orders in an effective
manner at the most favorable prices. Subject to these considerations,
dealers that provide supplemental investment research and statistical or
other services to the Adviser may receive orders for portfolio transactions
by a Fund. Information so received is in addition to, and not in lieu of,
services required to be performed by the Adviser, and the fees of the Adviser
are not reduced as a consequence of their receipt of the supplemental
information. The information may be useful to the Adviser in serving both a
Fund and other clients, and conversely, supplemental information obtained by
the placement of business of other clients may be useful to the Adviser in
carrying out its obligations to a Fund.
No Fund will purchase U.S. government securities or Municipal Obligations
during the existence of any underwriting or selling group relating to the
securities, of which the Adviser is a member, except to the extent permitted
by the SEC. Under certain circumstances, a Fund may be at a disadvantage
because of this limitation in comparison with other funds that have similar
investment objectives but that are not subject to a similar limitation.
Portfolio Turnover
While a Funds portfolio turnover rate (the lesser of purchases or sales of
portfolio securities during the year, excluding purchases or sales of short-
term securities, divided by the monthly average value of portfolio
securities) is generally not expected to exceed 100%, it has in the past
exceeded 100% with respect to these funds. The rate of turnover will not be
a limiting factor, however, when a Fund deems it desirable to sell or
purchase securities. This policy should not result in higher brokerage
commissions to a Fund, as purchases and sales of portfolio securities are
usually effected as principal transactions. Securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of comparable quality
purchased at approximately the same time to take advantage of what the Fund
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the overall demand
for, or supply of, various types of tax-exempt securities.
The portfolio turnover rates are as follows:
Year
Year
Ended
Ended
Fund
11/30/97
11/30/96
California Fund
9%
15%
New York Fund
52%
67%
PURCHASE OF SHARES
Volume Discounts
The schedules of sales charges described in the Prospectuses apply to
purchases of shares of each Fund made by any purchaser, which term is defined
to include the following: (a) an individual; (b) an individuals spouse and
his or her children purchasing shares for his or her own account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; (d) any other organized group of persons, provided
that the organization has been in existence for at least six months and was
organized for a purpose other than the purchase of investment company
securities at a discount. Purchasers who wish to combine purchase orders to
take advantage of volume discounts should contact a Smith Barney Financial
Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedules in the Prospectuses,
apply to any purchase of shares of a Fund by any purchaser (as defined
above). The reduced sales charge is subject to confirmation of the
shareholders holdings through a check of appropriate records. The Trust
reserves the right to terminate or amend the combined right of accumulation
at any time after written notice to shareholders. For further information
regarding the right of accumulation, shareholders should contact a Smith
Barney Financial Consultant.
Determination of Public Offering Price
The Funds offer their shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of a Fund is equal to the net
asset value per share at the time of purchase, plus for Class A shares an
initial sales charge based on the aggregate amount of the investment. The
public offering price for a Class C share (and Class A share purchases,
including applicable rights of accumulation, equaling or exceeding $500,000)
is equal to the net asset value per share at the time of purchase and no
sales charge is imposed at the time of purchase. A contingent deferred sales
charge (CDSC), however, is imposed on certain redemptions of Class C shares,
and Class A shares when purchased in amounts exceeding $500,000. The method
of computation of the public offering price is shown in each Funds financial
statements, incorporated by reference in their entirety into this SAI.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the Funds is included in the
Prospectuses. The right of redemption of shares of each Fund may be
suspended or the date of payment postponed (a) for any periods during which
the New York Stock Exchange, Inc. (the NYSE) is closed (other than for
customary weekend and holiday closings), (b) when trading in the markets the
Fund normally utilizes is restricted, or an emergency exists, as determined
by the SEC, so that disposal of the Funds investments or determination of its
net asset value is not reasonably practicable or (c) for any other periods as
the SEC by order may permit for the protection of the Funds shareholders.
Distribution in Kind
If the Board of Trustees of the Trust determines that it would be detrimental
to the best interests of the remaining shareholders to make a redemption
payment wholly in cash, a Fund may pay, in accordance with SEC rules, any
portion of a redemption in excess of the lesser of $250,000 or 1.00% of the
Funds net assets by a distribution in kind of portfolio securities in lieu of
cash. Securities issued as a distribution in kind may incur brokerage
commissions when shareholders subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the Withdrawal Plan) is available to
shareholders of any Fund who own shares of the Fund with a value of at least
$10,000 and who wish to receive specific amounts of cash monthly or
quarterly. Withdrawals of at least $50 may be made under the Withdrawal Plan
by redeeming as many shares of the Fund as may be necessary to cover the
stipulated withdrawal payment. Any applicable CDSC will not be waived on
amounts withdrawn by shareholders that exceed 1.00% per month of the value of
a shareholders shares at the time the Withdrawal Plan commences. (With
respect to Withdrawal Plans in effect prior to November 7, 1994, any
applicable CDSC will be waived on amounts withdrawn that do not exceed 2.00%
per month of the value of a shareholders shares at the time the Withdrawal
Plan commences). To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholders investment in a Fund,
continued withdrawal payments will reduce the shareholders investment, and
may ultimately exhaust it. Withdrawal payments should not be considered as
income from investment in a Fund. Furthermore, as it generally would not be
advantageous to a shareholder to make additional investments in the Fund at
the same time he or she is participating in the Withdrawal Plan, purchases by
such shareholders in amounts of less than $5,000 ordinarily will not be
permitted.
Shareholders of a Fund who wish to participate in the Withdrawal Plan and who
hold their shares of the Fund in certificate form must deposit their share
certificates with the Transfer Agent as agent for Withdrawal Plan members.
All dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the Fund
involved. A shareholder who purchases shares directly through the Transfer
Agent may continue to do so and applications for participation in the
Withdrawal Plan must be received by the Transfer Agent no later than the
eighth day of the month to be eligible for participation beginning with that
months withdrawal. For additional information, shareholders should contact a
Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trusts distributor on a best efforts basis
pursuant to a written agreement (the Distribution Agreement), which was
approved by the Trusts Board of Trustees.
For the fiscal years ended November 30, 1995, 1996, and 1997, the Distributor
or its predecessor Shearson Lehman Brothers received approximately the
following in sales charges for the sale of each Funds Class A shares, and did
not reallow any portion thereof to dealers:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/97
11/30/96
11/30/95
California Fund
$37,000
$39,000
$22,000
New York Fund
$46,000
48,000
32,000
For the fiscal years ended November 30, 1995, 1996, and 1997, the Distributor
or Shearson Lehman Brothers received approximately the following representing
CDSC on redemption of each Funds Class A shares:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/97
11/30/96
11/30/95
California Fund
$--
- - --
$3,800
New York Fund
$1,000
2,000
8,000
For the fiscal years ended November 30, 1995, 1996, and 1997, the Distributor
or Shearson Lehman Brothers received approximately the following representing
CDSC on redemption of each Funds Class C shares:
Year
Year
Year
Ended
Ended
Ended
Fund
11/30/97
11/30/96
11/30/95
California Fund
$1,000
- - --
$200
New York Fund
$1,000
* The inception dates for Class C shares of California Fund and New York Fund
are November 8, 1994 and December 5, 1994, respectively
When payment is made by the investor before the settlement date, unless
otherwise requested in writing by the investor, the funds will be held as a
free credit balance in the investors brokerage account and Smith Barney may
benefit from the temporary use of the funds. The investor may designate
another use for the funds prior to settlement date, such as an investment in
a money market fund (other than Smith Barney Exchange Reserve Fund) of the
Smith Barney Mutual Funds. If the investor instructs Smith Barney to invest
the funds in a Smith Barney money market fund, the amount of the investment
will be included as part of the average daily net assets of both the Fund and
the money market fund, and affiliates of Smith Barney that serve the funds in
an investment advisory or administrative capacity will benefit from the fact
that they are receiving fees from both such investment companies for managing
these assets, computed on the basis of their average daily net assets. The
Trusts Board of Trustees has been advised of the benefits to Smith Barney
resulting from these settlement procedures and will take such benefits into
consideration when reviewing the Advisory, Administration and Distribution
Agreements for continuance.
For the fiscal year ended November 30, 1997, Smith Barney incurred
distribution expenses totaling approximately $184,083 consisting of
approximately $16,558 for advertising, $26,243 for printing and mailing of
prospectuses, $56,767 for support services, $83,151 to Smith Barney Financial
Consultants, and $1,334 in accruals for interest on the excess of Smith
Barney expenses incurred in distribution of the Funds shares over the sum of
the distribution fees and CDSC received by Smith Barney from the Fund.
Distribution Arrangements for the New York and California Fund
To compensate Smith Barney for the services it provides and for the expense
it bears under the Distribution Agreement, the Trust has adopted a services
and distribution plan (the Plan) pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, both the New York and California Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate of
0.15% of the value of the Funds average daily net assets attributable to the
Funds Class A and Class C shares. In addition, each Fund pays Smith Barney a
distribution fee with respect to the Class C shares primarily intended to
compensate Smith Barney for its initial expense of paying its Financial
Consultants a commission upon sales of those shares. The Class C
distribution fee is calculated at the annual rate of 0.20% of the value of
each Funds average net assets attributable to the shares of the Class.
The following service and distribution fees were incurred during the periods
indicated:
SERVICE FEES
California Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/97
11/30/96
11/30/95
Class A
37,151
$37,644
$36,511
Class C
4,112
3,583
1,017
New York Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/97
11/30/96
11/30/95
Class A
72,443
$76,380
$84,263
Class C*
2,468
1,171
203
*The inception dates for Class C of California Fund and New York Fund are
November 8, 1994 and December 5, 1994, respectively.
DISTRIBUTION FEES
California Fund:
Year
Year
Year
Ended
Ended
Ended
11/30/97
11/30/96
11/30/95
Class C
5,484
$4,778
$1,356
New York Fund:
Year
Year
Ended
Ended
11/30/97
11/30/96
11/30/95*
Class C
$3,290
$1,562
$271
* The inception dates for Class C shares of California Fund and New York Fund
are November 8, 1994 and December 5, 1994, respectively.
For the fiscal years ended November 30, 1995, 1996 and 1997 Smith Barney,
received $123,621, $125,117, and $124,948 respectively, in the aggregate from
the Plan.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Board of Trustees, including
a majority of the Trustees who are not interested persons of the Trust and
who have no direct or indirect financial interest in the operation of the
Plan or in the Distribution Agreement (the Independent Trustees). The Plan
may not be amended to increase the amount of the service and distribution
fees without shareholder approval, and all amendments of the Plan also must
be approved by the Trustees including all of the Independent Trustees in the
manner described above. The Plan may be terminated with respect to a Class
at any time, without penalty, by vote of a majority of the Independent
Trustees or, with respect to any Fund, by vote of a majority of the
outstanding voting securities of a Fund (as defined in the 1940 Act).
Pursuant to the Plan, Smith Barney will provide the Board of Trustees with
periodic reports of amounts expended under the Plan and the purpose for which
such expenditures were made.
VALUATION OF SHARES
The net asset value per share of each Funds Classes is calculated on each
day, Monday through Friday, except days on which the NYSE is closed. The
NYSE currently is scheduled to be closed on New Years Day, Martin Luther
King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or Sunday,
respectively. Because of the differences in distribution fees and Class-
specific expenses, the per share net asset value of each Class may differ.
The following is a description of the procedures used by the Trust in valuing
its assets.
In carrying out valuation policies adopted by the Trusts Board of Trustees
for the New York and California Fund the Administrator, may consult with an
independent pricing service (the Pricing Service) retained by the Trust.
Debt securities of domestic issuers (other than U.S. government securities
and short-term investments), including Municipal Obligations, are valued by
the Adviser after consultation with the Pricing Service. U.S. government
securities will be valued at the mean between the closing bid and asked
prices on each day, or, if market quotations for those securities are not
readily available, at fair value, as determined in good faith by the Trusts
Board of Trustees. With respect to other securities held by the Fund, when,
in the judgment of the Pricing Service, quoted bid prices for investments are
readily available and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid prices and asked
prices. Investments for which no readily obtainable market quotations are
available, in the judgment of the Pricing Service, are carried at fair value
as determined by the Pricing Service. The procedures of the Pricing Service
are reviewed periodically by the officers of the Trust under the general
supervision and responsibility of the Board of Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any of the Smith Barney Mutual Funds
may exchange all or part of their shares for shares of the same Class of
other Smith Barney Mutual Funds, on the basis of relative net asset value per
share at the time of exchange as follows:
A. Class A shares of the Fund may be exchanged without a sales charge
for Class A shares of any of the Smith Barney Mutual Funds.
B. Class C shares of any fund may be exchanged without a sales charge.
For purposes of CDSC applicability, Class C shares of the Fund
exchanged for Class C shares of another Smith Barney Mutual Fund will
be deemed to have been owned since the date the shares being exchanged
were deemed to be purchased.
Dealers other than Smith Barney must notify the Transfer Agent of the
investors prior ownership of Class A shares of Smith Barney High Income Fund
and the account number in order to accomplish an exchange of shares of Smith
Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders in any Smith Barney Mutual Fund
to acquire shares of the same Class in a fund with different investment
objectives when they believe a shift between funds is an appropriate
investment decision. This privilege is available to shareholders residing in
any state in which the fund shares being acquired may legally be sold. Prior
to any exchange, the shareholder should obtain and review a copy of the
current prospectus of each fund into which an exchange is being considered.
Prospectuses may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset
value and, subject to any applicable CDSC, the proceeds are immediately
invested, at a price as described above, in shares of the fund being
acquired. Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after
written notice to shareholders.
PERFORMANCE DATA
From time to time, the Trust may quote a Funds yield or total return in
advertisements or in reports and other communications to shareholders. The
Trust may include comparative performance information in advertising or
marketing each Funds shares. Such performance information may include the
following industry and financial publications- Barrons, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values, The New
York Times, USA Today and The Wall Street Journal. To the extent any
advertisement or sales literature of a Fund describes the expenses or
performance of any Class it will also disclose such information for the other
Classes.
Yield and Equivalent Taxable Yield
A Funds 30-day yield described in the Prospectuses is calculated according to
a formula prescribed by the SEC, expressed as follows:
Where: a = Dividends and interest earned during the
period
b = Expenses accrued for the period (net of
reimbursements)
c = The average daily number of shares outstanding during
the period
that were entitled to receive dividends
d = The maximum offering price per share on the last day
of the period
For the purpose of determining the interest earned (variable a in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
A Funds equivalent taxable 30-day yield for a Class is computed by dividing
that portion of the Class 30-day yield which is tax-exempt by one minus a
stated income tax rate and adding the product to that portion, if any, of the
Class yield that is not tax-exempt.
The yield on municipal securities is dependent upon a variety of factors,
including general economic and monetary conditions, conditions of the
municipal securities market, size of a particular offering, maturity of the
obligation offered and rating of the issue. Investors should recognize that,
in periods of declining interest rates, a Funds yield for each Class of
shares will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates a Funds yield for each Class of shares will
tend to be somewhat lower. In addition, when interest rates are falling, the
inflow of net new money to a Fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Funds portfolio, thereby reducing the current yield of the
Fund. In periods of rising interest rates, the opposite can be expected to
occur.
The yields for the 30-day period ended November 30, 1997 for California Funds
Class A, Class C and Class Y shares were 6.13 %, 5.92% and 6.52%,
respectively. The yields for the 30-day period ended November 30, 1997 for
New York Funds Class A and Class C shares were 6.46% and 6.27%, respectively.
The equivalent taxable yields for the 30-day period ended November 30, 1997
assuming payment of Federal income taxes at the rate of 31.0%; California
income taxes at the rate of 9.3% for the California Fund shareholders; and
New York State and City income taxes at a rate of 10.5% for the New York Fund
shareholders would have been as follows: California Funds Class A, Class C
and Class Y shares: 4.65%, 4.54% and 4.62%, respectively, and New York Funds
Class A and Class C shares: 4.61% and 4.5%, respectively.
Average Annual Total Return
A Funds average annual total return, as described below, is computed
according to a formula prescribed by the SEC. The formula can be expressed
as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of a 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the end
of the measuring period. A Funds net investment income changes in response
to fluctuations in interest rates and the expenses of the Fund.
The following total returns assume that the maximum Class A 2.00% sales
charge has been deducted from the investment at the time of purchase and have
been restated to show the change in the maximum sales charge. The Funds
average annual total return for Class A shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
6.13%
New York Fund
6.23%
The Funds average annual total return for Class C shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
5.92%
New York Fund*
6.00%
* For the period from December 5, 1994 (inception date) to November 30, 1995
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(NOVEMBER 8, 1994) THROUGH NOVEMBER 30, 1997
Total Return
Fund
(Without Sales Charge)
California Fund
8.36%
New York Fund
7.83%
The Funds average annual total return for Class Y shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales Charge)
California Fund*
6.20%
* For the period from September 8, 1995 (inception date) to November 30,
1997.
** As of November 30, 1997, no Class Y shares of New York Fund had been sold.
Aggregate Total Return
A Funds aggregate total return, as described below, represents the cumulative
change in the value of an investment in the Fund for the specified period and
is computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5- or
10-year period at the end of the 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the end
of the measuring period.
The Funds aggregate total return for Class A shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
6.13%
New York Fund
6.23%
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(DECEMBER 31, l991)THROUGH NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
45.21%
New York Fund
45.73%
The Funds aggregate total return for Class C shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
5.92%
New York Fund*
6.00%
* For the period from December 5, 1994 (inception date) to November 30, l997
PER ANNUM FOR THE PERIOD FROM
COMMENCEMENT OF OPERATIONS
(NOVEMBER 8, 1994) THROUGH NOVEMBER 30, 1997
Total Return
Fund
(Without Sales
Charge)
California Fund
27.90%
New York Fund
25.36%
The Funds aggregate total return for Class Y shares were as follows:
ONE YEAR PERIOD
ENDED NOVEMBER 30, 1997
Total Return
Fund
(Without Sales Charge)
California Fund
15.01%
* For the period from September 8, 1995 (inception date) to November 30,
l997.
** As of November 30, 1997, no Class Y shares of New York Fund had been sold.
It is important to note that the total return figures set forth above are
based on historical earnings and are not intended to indicate future
performance. Each Class net investment income changes in response to
fluctuations in interest rates and the expenses of the Fund. Performance
will vary from time to time depends upon market conditions, the composition
of the Funds portfolio and operating expenses and the expenses exclusively
attributable to the Class. Consequently, any given performance quotation
should not be considered representative of the Class performance for any
specified period in the future. Because performance will vary, it may not
provide a basis for comparing an investment in the Class with certain bank
deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing a Class performance with that of other mutual
funds should give consideration to the quality and maturity of the respective
investment companies portfolio securities.
TAXES
The following is a summary of selected Federal income tax considerations that
may affect the Trust and its shareholders. The summary is not intended as a
substitute for individual tax advice and investors are urged to consult their
own tax advisors as to the tax consequences of an investment in the Trust.
As described above and in the Prospectuses, each Fund is designed to provide
investors with current income which is excluded from gross income for Federal
income tax purposes, and the California Fund and the New York Fund are
designed to provide investors with current income exempt from otherwise
applicable state and/or local personal income taxes. The Trust is not
intended to be a balanced investment program and is not designed for
investors seeking capital gains or maximum tax-exempt income irrespective of
fluctuations in principal. Investment in the Trust would not be suitable for
tax-exempt institutions, qualified retirement plans, H.R. 10 plans and
individual retirement accounts because those investors would not gain any
additional tax benefit from the receipt of tax-exempt income.
Each Fund has qualified and intends tocontinue to qualify each year as a
regulated investment company under the Code. Provided that a Fund (a) is a
regulated investment company and (b) distributes to its shareholders at least
90% of its taxable net investment income (including, for this purpose, its
net realized short-term capital gains) and 90% of its tax-exempt interest
income (reduced by certain expenses), the Fund will not be liable for Federal
income taxes to the extent its taxable net investment income and its net
realized long-term and short-term capital gains, if any, are distributed to
its shareholders. Any such taxes paid by a Fund would reduce the amount of
income and gains available for distribution to shareholders.
Because the Fund may distribute exempt-interest dividends, interest on
indebtedness incurred by a shareholder to purchase or carry shares of a Fund
is not deductible for Federal income tax purposes. In addition, the
indebtedness is not deductible by a shareholder of the California Fund for
California State personal income tax purposes, nor by a New York Fund
shareholder for New York State and New York City personal income tax
purposes. If a shareholder receives exempt-interest dividends with respect
to any share of a Fund and if the share is held by the shareholder for six
months or less, then any loss on the sale or exchange of the share may, to
the extent of the exempt-interest dividends, be disallowed. In addition, the
Code may require a shareholder that receives exempt-interest dividends to
treat as taxable income a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. Furthermore, the portion
of any exempt-interest dividend paid by a Fund that represents income derived
from private activity bonds held by the Fund may not retain its tax-exempt
status in the hands of a shareholder who is a substantial user of a facility
financed by the bonds, or a related person of the substantial user.
Moreover, as noted in the Prospectuses (a) some or all of a Funds exempt-
interest dividends may be a specific preference item, or a component of an
adjustment item, for purposes of the Federal individual and corporate
alternative minimum taxes and (b) the receipt of a Funds dividends and
distributions may affect a corporate shareholders Federal environmental tax
liability if the environment tax is reinstated as proposed by President
Clinton. In addition, the receipt of a Funds dividends and distributions may
affect a foreign corporate shareholders Federal branch profits tax liability
and the Federal and California excess net passive income tax liability of a
Subchapter S corporation. Shareholders should consult their own tax advisors
to determine whether they are (a) substantial users with respect to a
facility or related to those users within the meaning of the Code or (b)
subject to a Federal alternative minimum tax, the Federal environmental tax,
the Federal branch profits tax, or the Federal or California excess net
passive income tax. As a general rule, a Funds gain or loss on a sale or
exchange of an investment will be a long-term capital gain or loss if the
Fund has held the investment for more than one year and will be a short-term
capital gain or loss if it has held the investment for one year or less.
Furthermore, as a general rule, a shareholders gain or loss on a sale or
redemption of shares of a Fund will be a long-term capital gain or loss if
the shareholder has held his or her Fund shares for more than one year and
will be a short-term capital gain or loss if he or she has held the Fund
shares for one year or less. Shareholders of each Fund will receive, as more
fully described in the Prospectuses, an annual statement as to the income tax
status of his or her dividends and distributions for the prior calendar year.
Each shareholder will also receive, if appropriate, various written notices
after the close of a Funds prior taxable year as to the Federal income tax
status of certain dividends or distributions which were received from the
Fund during the Funds prior taxable year.
The dollar amount of dividends paid by a Fund that is excluded from Federal
income taxation and the dollar amount of dividends paid by a Fund that is
subject to federal income taxation, if any, will vary for each shareholder
depending upon the size and duration of each shareholders investment in a
Fund.
If a shareholder incurs a sales charge in acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in mutual
fund for which the otherwise applicable sales charge is reduced by reason of
an reinvestment right (that is exchange privilege), the original sales charge
will not be taken into account in computing gain/loss on the original shares
to the extent the subsequent sales charge is reduced. Instead, it will be
added to the tax basis in the newly acquired shares. Furthermore, the same
rule also applies to disposition of the newly acquired or redeemed shares
made within 90 days of the second acquisition. This provision prevents a
shareholder from immediately deducting the sales charge by shifting his or
her investment in a family of mutual funds.
Investors considering buying shares of a Fund on or just prior to the record
date for a capital gain distribution should be aware that the amount of the
forthcoming distribution payment will be a taxable distribution payment.
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income or fails to certify that he
or she has provided a correct taxpayer identification number and that he or
she is not subject to backup withholding, then the shareholder may be subject
to a 31% backup withholding tax with respect to (a) taxable dividends and
distributions and (b) the proceeds of any redemptions of shares of a Fund.
An individuals taxpayer identification number is his or her social security
number. The backup withholding tax is not an additional tax and may be
credited against a taxpayers regular Federal income tax liability.
The discussion above is only a summary of certain tax considerations
generally affecting a Fund and its shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their
tax advisors with specific reference to their own tax situations, including
their state and local tax liabilities.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust on October 17,
1991 under the name Shearson Lehman Brothers Intermediate-Term Trust. On
November 20, 1991, July 30, 1993, October 14, 1994 and August 16, 1995, the
Trusts name was changed to Shearson Lehman Brothers Income Trust, Smith
Barney Shearson Income Trust, Smith Barney Income Trust and Smith Barney
Investment Trust, respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania, 19103,
serves as the custodian of the Fund. Under its custody agreement with the
Fund, PNC holds the Funds securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon the month-
end market value of securities held in custody and also receives securities
transactions charges. The assets of the Fund are held under bank
custodianship in compliance with the 1940 Act.
First Data, is located at Exchange Place, Boston, Massachusetts 02109, and
serves as the Trusts transfer agent. Under the transfer agency agreement,
the Transfer Agent maintains the shareholder account records for the Trust,
handles certain communications between shareholders and the Trust and
distributes dividends and distributions payable by the Trust. For these
services, the Transfer Agent receives a monthly fee computed on the basis of
the number of shareholder accounts it maintains for the Trust during the
month, and is reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Funds Annual Report for the fiscal year ended November 30, 1997 is
incorporated herein by reference in its entirety.
APPENDIX
RATINGS ON DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moodys Investors Service, Inc.
Aaa - Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as gilt edged. Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present that make the long term risks appear somewhat larger than in
Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present that suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
Standard & Poors
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poors. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated `BB, `B, `CCC, `CC or `C is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
`BB indicates the lowest degree of speculation and `C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from `AA to `B may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter p indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L - The letter L indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully
insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp.
+ - Continuance of the rating is contingent upon S&Ps receipt of
closing documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&Ps receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the lowest expectation of credit
risk. The obligor has an exceptionally strong capacity for timely payment of
financial commitments which is highly unlikely to be adversely affected by
foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitment. This capacity is not significantly vulnerable to foreseeable
events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but may be more vulnerable to changes in economic
conditions and circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to impair this capacity. This is the
lowest investment grade category assigned by Fitch.
BB - Bonds rated BB by Fitch carry the possibility of credit risk
developing, particularly as the result of adverse economic change over time.
Business or financial alternatives may, however, be available to allow
financial commitments to be met. Securities rated in this category are not
considered by Fitch to be investment grade.
B - Bonds rated B by Fitch carry significant credit risk, however, a
limited margin of safety remains. Although financial commitments are
currently being met, capacity for continued payment depends upon a sustained,
favorable business and economic environment.
CCC, CC, C - Default on bonds rated CCC,CC, and C by Fitch is a real
possibility. The capacity to meet financial commitments depends solely on a
sustained, favorable business and economic environment. Default of some kind
on bonds rated CC appears probable, a C rating indicates imminent default.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus signs however,
are not used in the AAA category.
COMMERCIAL PAPER RATINGS
Moodys Investors Service, Inc.
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return
on funds employed; conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial changes and high internal cash generation; well-
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Standard & Poors
A-1 - This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issuers
determined to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Fitch IBCA, Inc.
Fitchs short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet financial commitment in a
timely manner.
Fitchs short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payments of financial commitments. The + denotes an
exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety is not as
great as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non investment grade.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely payment: short-term
liquidity is clearly outstanding, and safety is just below risk-free United
States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity
factors and company fundamentals are sound.
The Thomson BankWatch (TBW)
TBW-1 - Indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as
high as for issues rated TBW-1.
Smith Barney
Investment
Trust
SMITH BARNEY
INVESTMENT TRUST
388 Greenwich Street
New York, NY 10013
SMITH BARNEY
A Member of Travelers Group
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