Smith Barney
MANAGED MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION NOVEMBER 7, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney Managed
Municipals Fund Inc. (the "Fund") dated November 7, 1994, as amended or
supplemented from time to time, and should be read in conjunction with the
Fund's Prospectus. The Fund's Prospectus may be obtained from a Smith Bar-
ney Financial Consultant or by writing or calling the Fund at the address
or telephone number set forth above. This Statement of Additional Informa-
tion, although not in itself a prospectus, is incorporated by reference
into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both the Pro-
spectus and this Statement of Additional Information, except where shown
below.
<TABLE>
<S>
<C>
Management of the Fund
1
Investment Objective and Management Policies
5
Municipal Bonds
10
Purchase of Shares
12
Redemption of Shares
13
Distributor
14
Valuation of Shares
15
Exchange Privilege
15
Performance Data (See in the Prospectus "The Fund's Performance")
16
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")
19
Additional Information
21
Financial Statements
21
Appendix
A-1
</TABLE>
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the organi-
zations that provide services to the Fund. These organizations are the
following:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc.
("Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc.
("SBMFM") Investment Adviser and
Administrator
The Boston Company Advisors, Inc.
("Boston Advisors") Sub-Administrator
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
The Shareholder Services Group, Inc.
("TSSG"),
a subsidiary of First Data Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Fund are dis-
cussed in the Prospectus and in this Statement of Additional Information.
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The names of the Directors and executive officers of the Fund, together
with information as to their principal business occupations during the
past five years, are shown below. Each Director who is an "interested per-
son" of the Fund, as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), is indicated by an asterisk.
Herbert Barg, Director. Private investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director. Retired; formerly Senior Consultant to
Dean Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey, New
Jersey 17466.
Martin Brody, Director. Vice Chairman of the Board of Restaurant Associ-
ates Industries, Corp.; a Director of Jaclyn, Inc. His address is HMK As-
sociates, Three ADP Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director. Professor, Graduate School of Business Adminis-
tration, Harvard University; a Director of Peer Review Analysis, Inc. His
address is Graduate School of Business Administration, Harvard University,
Boston, Massachusetts 02163.
James J. Crisona, Director. 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.
Burt N. Dorsett, Director. Managing Partner of Dorsett McCabe Management,
Inc., an investment counselling firm; Director of Research Corporation
Technologies Inc., a non-profit patent-clearing and licensing firm. His
address is 201 East 62nd Street, New York, New York 10021.
Robert A. Frankel, Director. Management Consultant; retired Vice President
of The Reader's Digest Association, Inc. His address is 102 Grand Street,
Croton-on-Hudson, New York 10520.
Elliot S. Jaffe, Director. Chairman of the Board and President of The
Dress Barn, Inc. His address is 88 Hamilton Avenue, Stamford, Connecticut
06904.
Dr. Paul Hardin, Director. Chancellor of the University of North Carolina
at Chapel Hill; a Director of The Summit Bancorporation. His address is
University of North Carolina, 103 S. Building, Chapel Hill, North Carolina
27599.
Stephen E. Kaufman, Director. Attorney. His address is 277 Park Avenue,
New York, New York 10017.
Joseph J. McCann, Director. Financial Consultant; formerly, Vice President
of Ryan Homes, Inc., Pittsburgh, Pennsylvania. His address is 200 Oak Park
Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Execu-
tive Vice President of Smith Barney and Chairman of Smith Barney Strategy
Advisers Inc.; prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"); Vice Chairman
of Shearson Asset Management; a Director of PanAgora Asset Management,
Inc. and PanAgora Asset Management Limited. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director. President, Cornelius C. Rose Associates,
Inc., financial consultants, and Chairman and Director of Performance
Learning Systems, an educational consultant. His address is
P.O. Box 335 , Fair Oaks, Enfield, New Hampshire 03748.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and
SBMFM; and Trustee of Corporate
Realty Income Trust I. His address is 388 Greenwich Street, New York, New
York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney; President of Smith Barney Strategy Advisers Inc.; prior to July
1993, Senior Vice President of Shearson Lehman Brothers; Vice President of
Shearson Lehman Investment Strategy Advisors Inc. His address is 388
Greenwich Street, New York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer. Investment Officer
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
David Fare, Investment Officer. Investment Officer of SBMFM; prior to July
1993, Vice President of Shearson Lehman Advisors. His address is 388
Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address
is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich Street, New
York, New York 10013.
Each Director also serves as a director, trustee and/ or general
partner
of certain other mutual funds for which Smith Barney serves as
distributor. As of October 31, 1994, the Directors and officers of the
Fund,
as a group, owned less than 1.00% of the outstanding common stock of the
Fund.
No officer, director or employee of Smith Barney or any parent or
subsidiary
receives any compensation from the Fund for serving as an of-
ficer or Director of the Fund. The Fund pays each Director who is not an
officer, director or employee of Smith Barney or any of its affiliates a
fee of $2,000 per annum plus $500 per meeting attended and reimburses them
for travel and out-of-pocket expenses. For the fiscal year ended February
28, 1994, such fees and expenses totalled $66,951.
INVESTMENT ADVISER AND ADMINISTRATOR -- SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a transfer
of the investment advisory agreement effective November 7, 1994 from its
affiliate,
Mutual Management Corp. (Mutual Management Corp. and SBMFM are both
wholly owned subsidiaries of Smith Barney Holdings Inc. ("Holdings").)
Holdings is a
wholly owned subsidiary of The Travelers Inc. ("Travelers"). The
advisory
agreement is dated July 30, 1993 (the "Advisory Agreement") and was
first
approved by the Board of Directors, including a majority of those Direc-
tors who are not "interested persons" of the Fund or Smith Barney, on
April 7, 1993. The services provided by SBMFM under the Advisory Agreement
are described in the Prospectus under "Management of the Fund." SBMFM
pays the
salary of any officer and employee who is employed by both it and the
Fund.
SBMFM bears all expenses in connection with the performance of its
services.
As compensation for investment advisory services, the Fund pays
SBMFM a fee computed daily and paid monthly at
the following annual rates of the Fund's average daily net assets:
0.35% up to $500 million; 0.32% of the next $1 billion; and 0.29% in
excess
of $1.5 billion. For the 1994, 1993 and 1992 fiscal years, the Fund
incurred
$6,502,360, $5,458,117 and $5,074,028, respectively, in investment
advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the "Administration Agreement") ,
which was most recently approved by the Fund's Board of Directors,
including a ma-
jority of Directors who are not "interested persons" of the Fund or
SBMFM
, on July 20, 1994. The services provided by SBMFM under the
Administration
Agreement are described in the Prospectus under "Management of the Fund."
SBMFM
pays the salary of any officer and employee who is employed by both it and
the Fund
and bears all expenses in connection with the performance of its
services.
As compensation for administrative services rendered to
the Fund, SBMFM receives a fee paid at the following annual rates of
average
daily net assets: 0.20% up to $500 million; 0.18% of the next $1 billion;
and 0.16% in excess of $1.5 billion.
SUB-ADMINISTRATOR - BOSTON ADVISORS
Boston Advisors serves as sub-administrator to the Fund
pursuant to a written agreement (the "Sub-Administration Agreement")
dated April 20, 1994, which was most recently approved by the Fund's Board
of Directors, including a majority of Directors who are not "interested
persons"
of the Fund or Boston Advisors, on July 20, 1994. Under the Sub-
Administration
Agreement, Boston Advisors is paid a portion of the administration fee paid
by the
Fund to SBMFM at a rate agreed upon from time to time between Boston
Advisors
and SBMFM. Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc. ("TBC"), a financial services holding company, which is in
turn
a wholly owned subsidiary of Mellon Bank Corporation ("Mellon").
Prior to April 20, 1994, Boston Advisors served as the Fund's sub-
investment
adviser and/or administrator. For the 1994, 1993 and 1992 fiscal years,
the Fund
paid Boston Advisors, $3,656,475, $3,083,709 and $2,869,731, respectively,
in sub-
investment advisory and/or administration fees.
Certain of the services provided to the Fund by Boston Advisors
pursuant to the Sub-Administration Agreement are described in the
Prospectus
under "Management of the Fund." In addition to those services,
Boston Advisors pay the salaries of all officers and employees who are em-
ployed by both it and the Fund, maintains office
facilities for the Fund, furnishes the Fund with statistical and research
data, clerical help and accounting, data processing, bookkeeping, internal
auditing and legal services and certain other services required by the
Fund, prepares reports to the Fund's shareholders and prepares tax returns
and reports to and filings with the Securities and Exchange Commission
(the "SEC") and state Blue Sky authorities. Boston Advisors
bears all expenses in connection with the performance of its
services.
The Fund bears expenses incurred in its operation, including: taxes, in-
terest, brokerage fees and commissions, if any; fees of Directors who are
not officers, directors, shareholders or employees of Smith Barney ,
SBMFM
or Boston Advisors ; 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 of 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 Directors of the Fund.
SBMFM and Boston Advisors have agreed that if in any fiscal year the ag-
gregate expenses of the Fund (including fees pursuant to the Advisory
Agreement, Administration and Sub-Administration Agreements, but excluding
interest, taxes, brokerage fees paid pursuant to the Fund's services and
distribution plan, and, with the prior written consent of the nec-
essary state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Fund, SBMFM
and Boston Advisors will, to the extent required by state law, reduce
their fees by the amount of such excess expenses, such amount to be allo-
cated between them in the proportion that their respective fees bear to
the aggregate of such fees paid by the Fund. Such fee reductions, if any,
will be reconciled on a monthly basis. The most restrictive state limita-
tion currently applicable to the Fund would require SBMFM and Boston
Advisors to reduce their fees in any
year that such expenses exceed 2.50% of the first $30 million of average
daily net assets, 2.00% of the next $70 million of average daily net as-
sets and 1.50% of the remaining average daily net assets. No fee reduction
was required for the 1994, 1993 and 1992 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. The Direc-
tors who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan as their legal counsel.
KPMG Peat Marwick L.L.P. , independent accountants, 345 Park Avenue,
New York, New
York 10154, serve as auditors of the Fund and render an opinion on the
Fund's financial statements annually. Prior to October 19, 1994, Coopers
& Lybrand L.L.P., independent auditors, served as auditors of the Fund and
rendered an opinion on the financial statements for the fiscal year ended
February 28, 1994.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies
it employs to achieve its objective. The following discussion supplements
the description of the Fund's investment objective and management policies
in the Prospectus. For purposes of this Statement of Additional Informa-
tion, intermediate- and long-term debt obligations issued by or on behalf
of states, territories and possessions of the United States and the Dis-
trict of Columbia and their political subdivisions, agencies or instrumen-
talities, or multistate agencies or authorities, are collectively referred
to as "Municipal Bonds."
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") represent the opinions of those
agencies as to the quality of the Municipal Bonds and short-term invest-
ments which they rate. It should be emphasized, however, that such ratings
are relative and subjective, are not absolute standards of quality and do
not evaluate the market risk of securities. These ratings will be used by
the Fund as initial criteria for the selection of portfolio securities,
but the Fund also will rely upon the independent advice of SBMFM to evalu-
ate potential investments. Among the factors that will be considered are
the long-term ability of the issuer to pay principal and interest and gen-
eral economic trends. To the extent the Fund invests in lower-rated and
comparable unrated securities, the Fund's achievement of its investment
objective may be more dependent on SBMFM's credit analysis of such securi-
ties than would be the case for a portfolio consisting entirely of higher-
rated securities. The Appendix contains further information concerning the
ratings of Moody's and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds may
cease to be rated or its rating may be reduced below the rating given at
the time the securities were acquired by the Fund. Neither event will re-
quire the sale of such Municipal Bonds by the Fund, but SBMFM will con-
sider such event in its determination of whether the Fund should continue
to hold such Municipal Bonds. In addition, to the extent the ratings
change as a result of changes in such organizations in their rating sys-
tems or due to a corporate restructuring of Moody's or S&P, the Fund will
attempt to use comparable ratings as standards for its investments in ac-
cordance with its investment objective and policies.
The Fund may invest up to 25% of its total assets in securities rated
below A, MIG 3 or Prime-1 (P-1) by Moody's or A, SP-2 or A-3 by S&P, or in
unrated securities of comparable quality. Such securities (a) will likely
have some quality and protective characteristics that, in the judgment of
rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation.
TEMPORARY INVESTMENTS
When the Fund is maintaining a defensive position, the Fund may invest in
short-term investments ("Temporary Investments") consisting of (a) the
following tax-exempt securities: notes of municipal issuers having, at the
time of purchase, a rating within the three highest grades of Moody's or
S&P or, if not rated, having an issue of outstanding Municipal Bonds rated
within the three highest grades by Moody's or S&P and (b) the following
taxable securities: obligations of the United States government, its agen-
cies or instrumentalities ("U.S. government securities"), repurchase
agreements, other debt securities rated within the three highest grades by
Moody's and S&P, commercial paper rated in the highest grade by either of
such rating services, and certificates of deposit of domestic banks with
assets of $1 billion or more. The Fund may invest in Temporary Investments
for defensive reasons in anticipation of a market decline. At no time will
more than 20% of the Fund's total assets be invested in Temporary Invest-
ments unless the Fund has adopted a defensive investment policy. The Fund
intends, however, to purchase tax-exempt Temporary Investments pending the
investment of the proceeds of the sale of portfolio securities or shares
of the Fund's common stock, or in order to have highly liquid securities
available to meet anticipated redemptions. Since the commencement of its
operations, the Fund has not found it necessary to purchase taxable Tempo-
rary Investments.
Repurchase Agreements. The Fund may engage in repurchase agreements with
banks which are the issuers of instruments acceptable for purchase by the
Fund and with certain dealers on the Federal Reserve Bank of New York's
list of reporting dealers. A repurchase agreement is a contract under
which the buyer of a security simultaneously commits to resell the secu-
rity to the seller at an agreed-upon price on an agreed-upon date. Under
the terms of a typical repurchase agreement, the Fund would acquire an un-
derlying debt obligation for a relatively short period (usually not more
than one week) 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 Fund's holding period. This ar-
rangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including interest. Repurchase agreements could in-
volve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability
to dispose of the underlying securities, the risk of a possible decline in
the value of the underlying securities during the period in which the Fund
seeks to assert its rights to them, the risk of incurring expenses associ-
ated with asserting those rights and the risk of losing all or part of the
income from the agreement. SBMFM or Boston Advisors, acting under the su-
pervision of the Fund's Board of Directors, reviews on an ongoing basis
the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for the protec-
tion of shareholders. Restrictions 1 through 8 cannot be changed without
approval by the holders of a majority of the outstanding shares of the
Fund, defined as the lesser of (a) 67% of the Fund's shares present at a
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 the
Fund's outstanding shares. The remaining restrictions may be changed by
the Board of Directors at any time. The Fund may not:
1. With respect to 75% of the value of its total assets, invest more
than 5% of its total assets in securities of any one issuer, except
securities issued or guaranteed by the United States government, or
purchase more than 10% of the outstanding voting securities of such
issuer.
2. Issue senior securities as defined in the 1940 Act and any rules
and orders thereunder, except insofar as the Fund may be deemed to
have issued senior securities by reason of: (a) borrowing money or
purchasing securities on a when-issued or delayed-delivery basis; (b)
purchasing or selling futures contracts and options on futures con-
tracts and other similar instruments; and (c) issuing separate classes
of shares.
3. Invest more than 25% of its total assets in securities, the issu-
ers of which are in the same industry. For purposes of this limita-
tion, U.S. government securities and securities of state or municipal
governments and their political subdivisions are not considered to be
issued by members of any industry.
4. Borrow money, except that the Fund may borrow from banks for tem-
porary or emergency (not leveraging) purposes, including the meeting
of redemption requests which might otherwise require the untimely dis-
position of securities, in an amount not exceeding 10% of the value of
the Fund's total assets (including the amount borrowed) valued at mar-
ket less liabilities (not including the amount borrowed) at the time
the borrowing is made. Whenever borrowings exceed 5% of the value of
the Fund's total assets, the Fund will not make additional invest-
ments.
5. Make loans. This restriction does not apply to: (a) the purchase
of debt obligations in which the Fund may invest consistent with its
investment objectives and policies; (b) repurchase agreements; and (c)
loans of its portfolio securities.
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 or sell real estate, real estate mortgages, real estate
investment trust securities, commodities or commodity contracts, but
this shall not prevent the Fund from: (a) investing in securities of
issuers engaged in the real estate business 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 (c)
trading in futures contracts and options on futures contracts.
8. Purchase any securities on margin (except for such short-term cred-
its as are necessary for the clearance of purchases and sales of port-
folio securities) or sell any securities short (except against the
box). For purposes of this restriction, the deposit or payment by the
Fund of initial or maintenance margin in connection with futures con-
tracts and related options and options on securities is not considered
to be the purchase of a security on margin.
9. Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid.
10. Invest more than 5% of the value of its total assets in the secu-
rities of issuers having a record, including predecessors, of less
than three years of continuous operation, except U.S. government secu-
rities. (For purposes of this restriction, issuers include predeces-
sors, sponsors, controlling persons, general guarantors and origina-
tors of underlying assets .)
11. Invest in companies for the purpose of exercising control.
12. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of
assets and except for the purchase, to the extent permitted by Section
12 of the 1940 Act, of shares of registered unit investment trusts
whose assets consist substantially of Municipal Bonds.
13. Purchase or sell oil and gas interests.
14. Engage in the purchase and sale of put, call, straddle or spread
options or in writing of such options, except that the Fund may pur-
chase and sell options on interest rate futures contracts.
Certain restrictions listed above permit the Fund without shareholder ap-
proval to engage in investment practices that the Fund does not currently
pursue. The Fund has no present intention of altering its current invest-
ment practices as otherwise described in the Prospectus and this Statement
of Additional Information and any future change in those practices would
require Board approval and appropriate disclosure to investors.
For the purposes of Investment Restriction 3, private activity bonds,
where the payment of principal and interest is the ultimate responsibility
of companies within the same industry, are grouped together as an "indus-
try."
If any percentage restriction described above is complied with at the time
of investment, a later increase or decrease in percentage resulting from a
change in the value of the assets will not constitute a violation of such
restriction. In order to permit the sale of the Fund's shares in certain
states, the Fund may make commitments more restrictive than the restric-
tions listed above. Should the Fund determine that any such commitment is
no longer in the best interests of the Fund and its shareholders, it will
revoke the commitment by terminating sales of its shares in the state in-
volved.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as a principal. Other purchases and sales usu-
ally are placed with those dealers from which it appears that the best
price or execution will be obtained; those dealers may be acting as either
agents or principals. The purchase price paid by the Fund to underwriters
of newly issued securities usually includes a concession paid by the is-
suer to the underwriter, and purchases of after-market securities from
dealers normally are executed at a price between the bid and asked prices.
For the fiscal year ended February 28, 1994, the Fund paid $167,464 in
brokerage commissions. For the fiscal years ended February 28, 1993 and
February 29, 1992, the Fund paid no brokerage commissions.
Allocation of transactions, including their frequency, to various dealers
is determined by SBMFM in its best judgment and in a manner deemed fair
and reasonable to shareholders. The primary considerations are the avail-
ability of the desired security and the prompt execution of orders in an
effective manner at the most favorable prices. Subject to these consider-
ations, dealers which provide supplemental investment research and statis-
tical or other services to SBMFM may receive orders for transactions by
the Fund. Information so received enables SBMFM to supplement its own re-
search and analysis with the views and information of other securities
firms. Such information may be useful to SBMFM in serving both the Fund
and its other clients, and, conversely, supplemental information obtained
by the placement of business of other clients may be useful to SBMFM in
carrying out its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the existence of any un-
derwriting or selling group relating thereto of which SBMFM is a member,
except to the extent permitted by the SEC. Under certain circumstances,
the Fund may be at a disadvantage because of this limitation in comparison
with other investment companies which have a similar investment objective
but which are not subject to this limitation.
While investment decisions for the Fund are made independently from those
of the other accounts managed by SBMFM, investments of the type the Fund
may make also may be made by such other accounts. When the Fund and one or
more other accounts managed by SBMFM are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by SBMFM to be equitable
to each. In some cases this procedure may adversely affect the price paid
or received by the Fund or the size of the position obtained or disposed
of by the Fund.
PORTFOLIO TURNOVER
While the Fund's portfolio turnover rate (the lesser of purchases or sales
of portfolio securities during the year, excluding purchases or sales of
short-term securities, divided by the monthly average value of portfolio
securities) is generally not expected to exceed 100%, it has in the past
exceeded 100%. The rate of turnover will not be a limiting factor, how-
ever, when the Fund deems it desirable to sell or purchase securities.
This policy should not result in higher brokerage commissions to the Fund,
as purchases and sales of portfolio securities are usually effected as
principal transactions. Securities may be sold in anticipation of a rise
in interest rates (market decline) or purchased in anticipation of a de-
cline in interest rates (market rise) and later sold. In addition, a secu-
rity 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 re-
lated to the investment quality of particular issues or the general move-
ment of interest rates, such as changes in the overall demand for, or sup-
ply of, various types of tax-exempt securities. For the 1994 and 1993 fis-
cal years, the Fund's portfolio turnover rates were 131% and 206%,
respectively. This higher level of turnover was due to significant changes
in the portfolio in response to the unusual volatility experienced in mu-
nicipal bond markets during this period.
MUNICIPAL BONDS
GENERAL INFORMATION
Municipal Bonds generally are understood to include debt obligations is-
sued to obtain funds for various public purposes, including construction
of a wide range of public facilities, refunding of outstanding obliga-
tions, 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 various privately oper-
ated facilities are included within the term Municipal Bonds if the inter-
est paid thereon qualifies as excluded from gross income (but not neces-
sarily from alternative minimum taxable income) for Federal income tax
purposes in the opinion of bond counsel to the issuer.
In order to be classified as a diversified investment company under the
1940 Act, the Fund may not, with respect to 75% of its assets, invest more
than 5% of its total assets in the securities of any one issuer (except
U.S. government securities) or own more than 10% of the outstanding voting
securities of any one issuer. For the purposes of diversification under
the 1940 Act, the identification of the issuer of Municipal Bonds depends
upon the terms and conditions of the security. When the assets and reve-
nues of an agency, authority, instrumentality or other political subdivi-
sion are separate from those of the government creating the issuing entity
and the security is backed only by the assets and revenues of such entity,
such entity is deemed to be the sole issuer. Similarly, in the case of a
private activity bond, if that bond is backed only by the assets and reve-
nues of the nongovernmental user, then such nongovernmental user is deemed
to be the sole issuer. If, however, in either case, the creating govern-
ment or some other entity guarantees a security, such a guarantee would be
considered a separate security and is to be treated as an issue of such
government or other entity.
The yield on Municipal Bonds is dependent on a variety of factors, includ-
ing general economic and monetary conditions, general money market fac-
tors, general conditions of the Municipal Bond market, the financial con-
dition of the issuer, the size of a particular offering, maturity of the
obligation offered and the rating of the issue.
Municipal Bonds also may be subject to the provisions of bankruptcy, in-
solvency and other laws affecting the rights and remedies of creditors,
such as the Federal Bankruptcy Code, and laws, if any, which may be en-
acted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon en-
forcement of such obligations or upon the ability of municipalities to
levy taxes. The possibility also exists that, as a result of litigation or
other conditions, the power or ability of any one or more issuers to pay,
when due, the principal of and interest on, its or their Municipal Bonds
may be materially and adversely affected.
WHEN-ISSUED SECURITIES
The Fund may purchase Municipal Bonds on a "when-issued" basis (i.e., for
delivery beyond the normal settlement date at a stated price and yield).
The payment obligation and the interest rate that will be received on the
Municipal Bonds purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment. Although the Fund will purchase
Municipal Bonds on a when-issued basis only with the intention of actually
acquiring the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment strat-
egy.
Municipal Bonds are subject to changes in value based upon the public's
perception of the creditworthiness of the issuers and changes, real or an-
ticipated, in the level of interest rates. In general, Municipal Bonds
tend to appreciate when interest rates decline and depreciate when inter-
est rates rise. Purchasing Municipal Bonds on a when-issued basis, there-
fore, can involve the risk that the yields available in the market when
the delivery takes place actually may be higher than those obtained in the
transaction itself. To account for this risk, a segregated account of the
Fund consisting of cash or liquid debt securities equal to the amount of
the when-issued commitments will be established at the Fund's custodian
bank. For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value.
If the market or fair value of such securities declines, additional cash
or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of such commitments by the
Fund. Placing securities rather than cash in the segregated account may
have a leveraging effect on the Fund's net assets. That is, to the extent
the Fund remains substantially fully invested in securities at the same
time it has committed to purchase securities on a when-issued basis, there
will be greater fluctuations in its net assets than if it had set aside
cash to satisfy its purchase commitments. Upon the settlement date of the
when-issued securities, the Fund will meet its obligations from then-
available cash flow, sale of securities held in the segregated account,
sale of other securities or, although it normally would not expect to do
so, from the sale of the when-issued securities themselves (which may have
a value greater or less than the Fund's payment obligations). Sales of se-
curities to meet such obligations may involve the realization of capital
gains, which are not exempt from Federal income taxes.
When the Fund engages in when-issued transactions, it relies on the seller
to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price con-
sidered to be advantageous.
MUNICIPAL LEASES
Municipal leases are municipal securities that may take the form of a
lease or an installment purchase contract issued by state and local gov-
ernment 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 possi-
ble 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 nor-
mally associated with Municipal Bonds. These obligations frequently con-
tain "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 Mu-
nicipal Bonds; moreover, although the obligations will be secured by the
leased equipment, the disposition of the equipment in the event of fore-
closure 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 Moody's or S&P or (b) unrated municipal leases that are pur-
chased 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 pe-
riod after demand by the Fund.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedule of sales charges on Class A shares described in the Prospec-
tus applies to purchases made by any "purchaser," which is defined to in-
clude the following: (a) an individual; (b) an individual's spouse and his
or her children purchasing shares for his or her own account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; (d) a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and qualified employee benefit plans of
employers who are "affiliated persons" of each other within the meaning of
the 1940 Act; (e) tax-exempt organizations enumerated in Section 501(c)(3)
or (13) of the Code; and (f) a trustee or other professional fiduciary
(including a bank, or an investment adviser registered with the SEC under
the Investment Advisers Act of 1940, as amended) purchasing shares of the
Fund for one or more trust estates or fiduciary accounts. 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 schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A shares of the Fund and in Class A shares of other funds of the
Smith Barney Mutual Funds that are offered with a sales charge,
including the purchase being made, of any purchaser is $25,000 or more.
The reduced sales charge is subject to confirmation of the shareholder's
holdings through a check of appropriate records. The Fund 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 Con-
sultant.
DETERMINATION OF PUBLIC OFFERING PRICE
The Fund offers its shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of the 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 B and
Class C share (and Class A share purchases, including applicable
rights of accumulation, equalling 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 B and 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 the Fund's
financial statements, incorporated by reference in their
entirety
into this Statement of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the New York Stock Exchange, Inc. ("NYSE")
is closed (other than for customary weekend and holiday closings), (b)
when trading in markets the Fund normally utilizes is restricted, or an
emergency exists, as determined by the SEC, so that disposal of the Fund's
investments or determination of net asset value is not reasonably practi-
cable or (c) for such other periods as the SEC by order may permit for
protection of the Fund's shareholders.
DISTRIBUTION IN KIND
If the Board of Directors of the Fund determines that it
would
be detrimental to the best interests of the remaining shareholders
to make a redemption payment wholly in cash, the Fund may pay, in
accordance with
SEC rules , any portion of a redemption in excess of the
lesser of $250,000 or 1% of the Fund's 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 who own shares with a value of at least $10,000 and who wish
to receive specific amounts of cash monthly or quarterly. Withdrawals of
at least $100 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 shareholder's
shares at the time the Withdrawal Plan commences. (With respect to With-
drawal Plans in effect prior to November 7, 1994, any applicable CDSC will
be waived on amounts withdrawn that do not exceed 2.00% per month of the
value of a shareholder's shares at the time the Withdrawal Plan com-
mences.) To the extent withdrawals exceed dividends, distributions and ap-
preciation of a shareholder's investment in the Fund, there will be a re-
duction in the value of the shareholder's investment, and continued with-
drawal payments will reduce the shareholder's investment and may
ultimately exhaust it. Withdrawal payments should not be considered as in-
come from investment in the 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 who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with TSSG as agent for Withdrawal Plan members. All dividends and distri-
butions on shares in the Withdrawal Plan are reinvested automatically at
net asset value in additional shares of the Fund. Effective November 7,
1994, Withdrawal Plans should be set up with a Smith Barney
Financial
Consultant. A shareholder who purchases shares directly through TSSG may
continue to do so and applications for participation in the Withdrawal
Plan must be received by TSSG no later than the eighth day of the month to
be eligible for participation beginning with that month's withdrawal. For
additional information, shareholders should contact a Smith Barney Finan-
cial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis pur-
suant to a written agreement dated July 30, 1993 (the "Distribution Agree-
ment"), which was most recently approved by the Fund's Board of Directors
on July 20, 1994. For the 1992, 1993 and 1994 fiscal years, Smith Barney
or its predecessor Shearson Lehman Brothers received $5,689,320,
$54,735,968 and $4,194,780, respectively, in sales charges for the sale of
the Fund's Class A shares, and did not reallow any portion thereof to
dealers. For the period from November 6, 1992 through February 28, 1993
and for the fiscal year ended February 28, 1994 , Smith Barney or
Shearson
Lehman Brothers received $2,721 and $264,245, respectively, representing
CDSC on redemption of the Fund's Class B shares.
When payment is made by the investor before settlement date, unless other-
wise noted by the investor, the funds will be held as a free credit bal-
ance in the investor's 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 mar-
ket fund (other than Smith Barney Exchange Reserve Fund) of the Smith Bar-
ney Mutual Funds. If the investor instructs Smith Barney to invest the
funds in a Smith Barney money market fund , the amount of the
in-
vestment 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 they are receiving fees from both such
investment
companies for managing these assets , computed on the basis of their
average daily net assets. The
Fund's Board of Directors 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 Distri-
bution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and for the ex-
pense it bears under the Distribution Agreement, the Fund has adopted a
services and distribution plan (the "Plan") pursuant to Rule 12b-1 under
the 1940 Act. Under the Plan, the Fund pays Smith Barney a service fee,
accrued daily and paid monthly, calculated at the annual rate of 0.15% of
the value of the Fund's average daily net assets attributable to the Class
A, Class B and Class C shares. In addition, the Fund pays Smith Barney
a
distribution fee with respect to Class B and Class C shares
primarily
intended to compensate Smith Barney for its ini-
tial expense of paying its Financial Consultants a commission upon sales
of those shares. The Class B distribution fee is calculated at
the annual rate of 0.50% of the value of the Fund's average net assets at-
tributable to the shares of the Class. The Class C distribution fee is
calculated at the annual rate of 0.55% of the value of the Fund's average
net assets attributable to the shares of the Class.
For the period from November 6, 1992 through February 28, 1993, the
Class A and Class B shares incurred $790,591 and $12,635, respectively,
in service fees. For the same period, the Class B shares incurred $42,119
in distribution fees. For the fiscal year ended February 28, 1994,
the Class A and Class B shares incurred $2,749,652 and $303,293,
respectively, in service fees. For the same period, the Class B shares
incurred $1,010,976 in distribution fees. No comparable information is
available for 1992 because that was the year that the variable pricing
system was implemented.
For the fiscal year ended February 28, 1994, Smith Barney
incurred distribution expenses totaling approximately $7,422,000,
consisting
of approximately $15,000 for advertising, $21,000 for printing and
mailing of Prospectuses, $1,762,000 for support services, 5,423,000
to Smith Barney Financial Consultants, and $201,000 in accruals for
interest on the excess of Smith Barney expenses incurred in distributing
the Fund's
shares over the sum of the distribution fees and CDSC received by Smith
Barney
from the Fund.
Under its terms, the Plan continues from year to year, provided such con-
tinuance is approved annually by vote of the Board of Directors, including
a majority of the Directors who are not interested persons of the Fund and
who have no direct or indirect financial interest in the operation of the
Plan or in the Distribution Agreement (the "Independent Directors"). The
Plan may not be amended to increase the amount of the service and distri-
bution fees without shareholder approval, and all amendments of the Plan
also must be approved by the Directors and the Independent Directors 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 Directors or by vote of a majority of the outstanding
voting
securities of the Class (as defined in the 1940 Act). Pursuant to the Plan,
Smith Barney will provide the Board of Directors with periodic reports of
amounts expended under the Plan and the purpose for which such expendi-
tures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Year's 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 de-
scription of the procedures used by the Fund in valuing its assets.
The valuation of the Fund's assets is made by Boston Advisors after con-
sultation with an independent pricing service (the "Service") approved by
the Board of Directors. When, in the judgment of the 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 and asked prices. Investments for which, in the judgment of
the Service, there is no readily obtainable market quotation (which may
constitute a majority of the portfolio securities) are carried at fair
value as determined by the Service. For the most part, such investments
are liquid and may be readily sold. The Service may employ electronic data
processing techniques and/or a matrix system to determine valuations. The
procedures of the Service are reviewed periodically by the officers of the
Fund under the general supervision and responsibility of the Board of Di-
rectors, which may replace any such Service at any time if it determines
it to be in the best interests of the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same
class of other funds in the Smith Barney Mutual Funds, to the extent
such
shares are offered for sale in the shareholder's state of residence, on
the basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any fund purchased with a sales charge may be
exchanged for Class A shares of any of the other funds and the sales
charge differential, if any, will be applied. Class A shares of any
fund may be exchanged without a sales charge for shares of the funds
that are offered without a sales charge. Class A shares of any fund
purchased without a sales charge may be exchanged for shares sold with
a sales charge, and the appropriate sales charge differential will be
applied.
B. Class A shares of any fund acquired by a previous exchange of
shares purchased with a sales charge may be exchanged for Class A
shares of any of the other funds, and the sales charge differential,
if any, will be applied.
C. Class B shares of any fund may be exchanged without a sales
charge. Class B shares of the Fund exchanged for Class B shares of an-
other fund will be subject to the higher applicable CDSC of the two
funds and, for purposes of calculating CDSC rates and conversion peri-
ods, will be deemed to have been held since the date the shares being
exchanged were deemed to be purchased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of Smith Barney
High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe
that 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 cur-
rent 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 docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds are immedi-
ately 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 Fund may quote yield or total return of a Class in
advertisements or in reports and other communications to shareholders. The
Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include the
following industry and financial publications: Barron's, Business Week,
CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune, Insti-
tutional 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 the Fund describes the expenses
or performance of any Class it will also disclose such information for the
other Classes.
YIELD
The 30-day yield figure described below is calculated according to a for-
mula prescribed by the SEC. The formula can be expressed as follows:
YIELD = 2[(a-b/cd +1)6 -1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimburse-
ment).
c = the average daily number of shares outstanding dur-
ing 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 the 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.
The Fund's equivalent taxable 30-day yield for a Class is computed by di-
viding 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 mu-
nicipal 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, the Fund's yield for each
Class of shares will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates the Fund's 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 the Fund from the con-
tinuous sale of its shares will likely be invested in portfolio instru-
ments producing lower yields than the balance of the Fund's portfolio,
thereby reducing the current yield of the Fund. In periods of rising in-
terest rates, the opposite can be expected to occur.
The Fund's yield for Class A and Class B shares for the 30-day period
ended February 28, 1994 was 4.26% and 3.92%, respectively. The equivalent
taxable yield for the same period was 6.17% and 5.68%, respectively assum-
ing the payment of Federal income taxes at a rate of 31%.
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures, as described below, are 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 the 1-, 5-, or 10-
year period (or fractional portion thereof), as-
suming reinvestment of all dividends and distribu-
tions.
The following total return figures assume that the maximum 4.00% 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
Fund's average total return for Class A shares were as follows for the pe-
riods indicated:
(1.98)% for the one-year period beginning September 1, 1993 through August
31, 1994;
8.52% per annum during the five-year period beginning on September 1, 1989
through August 31, 1994;
10.51% per annum during the ten-year period beginning on September 1, 1984
through August 31, 1994; and
11.31% per annum during the period from commencement of operations (March
4, 1981) through August 31, 1994.
The Fund's average total return for Class B shares assuming the maximum
applicable CDSC was as follows for the periods indicated:
(2.55)% for the one year period beginning March 1, 1993 through August
31, 1994;
7.81% per annum during the period from commencement (November 6, 1992)
through August 31,
1994.
The Fund's average total return for Class B shares without the CDSC was as
follows for the periods indicated:
1.58% for the one year period beginning September 1, 1993 through August
31, 1994.
9.85% per annum during the period from commencement (November 6, 1992)
through August 31, 1994.
AGGREGATE TOTAL RETURN
Aggregate total return figures, as described below, represent the cumula-
tive change in the value of an investment in the Class for the specified
period and are 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 a 1-, 5-, or
10-year period at the end of the 1-, 5-, or 10-
year period (or fractional portion thereof), as-
suming reinvestment of all dividends and distribu-
tions.
The aggregate total returns for Class A shares were as follows for the pe-
riods indicated:
2.11% for the one-year period beginning September 1, 1993 through August
31, 1994;
56.74% for the five-year period beginning September 1, 1989 through August
31, 1994; and
182.96% for the ten-year period beginning September 1, 1984 through August
31, 1994.
These aggregate total return figures do not assume that the maximum 4.00%
sales charge has been deducted from the investment at the time of pur-
chase. If the sales charge had been deducted at the time of purchase, the
aggregate total return for its Class A shares for those same periods would
have been (1.98)%, 50.47%, and 171.64%, respectively. The total
return fig-
ures have been restated to show the change in the maximum sales charge.
The Fund's aggregate total return for Class B shares was as follows for
the periods indicated:
1.58% for the one year period beginning September 1, 1993 through August
31, 1994.
18.60% for the period from November 6, 1992 through August 31, 1994.
These figures do not assume that the maximum 4.50% CDSC assessed by the
Fund has been deducted from the investment at the time of purchase. If the
maximum CDSC had been deducted at the time of purchase, the Fund's aggre-
gate total return for the same periods would have been (2.55)% and
14.64%,
respectively.
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 per-
formance. Each Class' net investment income changes in response to fluctu-
ation in interest rates and the expenses of the Fund. Performance will
vary from time to time depending upon market conditions, the composition
of the Fund's portfolio and operating expenses and the expenses exclu-
sively attributable to the Class. Consequently, any given performance quo-
tation 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 cer-
tain 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 matu-
rity of the respective investment companies' portfolio securities.
TAXES
The following is a summary of selected Federal income tax considerations
that may affect the Fund and its shareholders. The summary is not intended
as a substitute for individual tax advice and investors are urged to con-
sult their own tax advisors as to the tax consequences of an investment in
the Fund.
As described above and in the Prospectus, the Fund is designed to provide
shareholders with current income which is excluded from gross income for
Federal income tax purposes. The Fund is not intended to constitute a bal-
anced investment program and is not designed for investors seeking capital
gains or maximum tax-exempt income irrespective of fluctuations in princi-
pal. Investment in the Fund would not be suitable for tax-exempt institu-
tions, qualified retirement plans, H.R. 10 plans and individual retirement
accounts because such investors would not gain any additional tax benefit
from the receipt of tax-exempt income.
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Provided that the Fund (a) is
a regulated investment company and (b) distributes at least 90% of its
taxable net investment income (including, for this purpose, its net real-
ized short-term capital gains) and 90% of its tax-exempt interest income
(reduced by certain expenses), the Fund will not be liable for Federal in-
come taxes to the extent its taxable net investment income and its net re-
alized long-term and short-term capital gains, if any, are distributed to
its shareholders. Any such taxes paid by the Fund would reduce the amount
of income and gains available for distribution to shareholders.
Because the Fund will distribute exempt-interest dividends, interest on
indebtedness incurred by a shareholder to purchase or carry Fund shares is
not deductible for Federal income tax purposes. If a shareholder receives
exempt-interest dividends with respect to any share and if such share is
held by the shareholder for six months or less, then any loss on the sale
or exchange of such share may, to the extent of such exempt-interest divi-
dends, be disallowed. In addition, the Code may require a shareholder, if
he or she receives exempt-interest dividends, to treat as Federal taxable
income a portion of certain otherwise non-taxable social security and
railroad retirement benefit payments. Furthermore, that portion of any
exempt-interest dividend paid by the Fund which 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 fa-
cility financed by such bonds, or a "related person" thereof. Moreover, as
noted in the Fund's Prospectus, (a) some or all of the Fund's 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 Fund dividends and distributions may affect a
corporate shareholder's Federal "environmental" tax liability. In addi-
tion, the receipt of Fund dividends and distributions may affect a foreign
corporate shareholder's Federal "branch profits" tax liability and the
Federal "excess net passive income" tax liability of a shareholder of a
Subchapter S corporation. Shareholders should consult their own tax advi-
sors as to whether they are (a) substantial users with respect to a facil-
ity or related to such 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 "excess net passive income"
tax.
As described above and in the Fund's Prospectus, the Fund may invest in
municipal bond index futures and financial futures contracts and options
on interest rate futures and financial futures contracts. The Fund antici-
pates that these investment activities will not prevent the Fund from
qualifying as a regulated investment company; however, in order to con-
tinue to qualify as a regulated investment company, the Fund might have to
limit its investments in futures contracts and options on futures con-
tracts. As a general rule, these investment activities will increase or
decrease the amount of long- and short-term capital gains or losses real-
ized by the Fund and, accordingly, will affect the amount of capital gains
distributed to the Fund's shareholders.
For Federal income tax purposes, gain or loss on the futures contracts and
options described above (collectively referred to as "section 1256 con-
tracts") is taxed pursuant to a special "mark-to-market system." Under the
mark-to-market system, these instruments are treated as if sold at the
Fund's fiscal year end for their fair market value. As a result, the Fund
will be recognizing gains or losses before they are actually realized. As
a general rule, gain or loss on section 1256 contracts is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss
and, accordingly, the mark-to-market system generally will affect the
amount of capital gains or losses taxable to the Fund and the amount of
distributions taxable to a shareholder. Moreover, if the Fund invests in
both section 1256 contracts and offsetting positions in such contracts,
which together constitute a straddle, then the Fund may be required to
defer certain realized losses. The Fund expects that its activities with
respect to section 1256 contracts and offsetting positions in those con-
tracts will not cause it to be treated as recognizing a materially greater
amount of capital gains than actually realized and will permit it to use
substantially all of its losses in those fiscal years in which such losses
actually occur.
While the Fund does not expect to realize a significant amount of net
long-term capital gains, any such gains realized will be distributed as
described in the Fund's Prospectus. Such distributions ("capital gain div-
idends"), if any, will be taxable to shareholders as long-term capital
gains, regardless of how long they have held Fund shares, and will be des-
ignated as capital gain dividends in a written notice mailed by the Fund
to the shareholders after the close of the Fund's prior taxable year. If a
shareholder receives a capital gain dividend with respect to any share and
if the share has been held by the shareholder for six months or less, then
any loss (to the extent not disallowed pursuant to the six-month rule de-
scribed above relating to exempt-interest dividends) on the sale or ex-
change of such share, to the extent of the capital gain dividend, shall be
treated as a long-term capital loss.
If a shareholder incurs a sales charge when acquiring shares of the Fund,
disposes of those shares within 90 days and then acquires shares in a mu-
tual fund for which the otherwise applicable sales charge is reduced by
reason of a reinvestment right (that is, exchange privilege), the original
sales charge will not be taken into account in computing gain/loss on
original shares to the extent the subsequent sales charge is reduced. In-
stead, it will be added to the tax basis in the newly acquired shares.
Furthermore, the same rule also applies to a disposition of the newly ac-
quired shares made within 90 days of the second acquisition. This provi-
sion prevents a shareholder from immediately deducting the sales charge by
shifting his or her investment within a family of mutual funds.
Each shareholder will receive after the close of the calendar year an an-
nual statement as to the Federal income tax status of his or her dividends
and distributions from the Fund for the prior calendar year. These state-
ments also will designate the amount of exempt-interest dividends that is
a specific preference item for purposes of the Federal individual and cor-
porate alternative minimum taxes. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior
taxable year as to the Federal income tax status of his or her dividends
and distributions which were received from the Fund during the Fund's
prior taxable year. Shareholders should consult their tax advisors as to
any state and local taxes that may apply to these dividends and distribu-
tions. The dollar amount of dividends excluded from Federal income taxa-
tion and the dollar amount subject to Federal income taxation, if any,
will vary for each shareholder depending upon the size and duration of
each shareholder's investment in the Fund. To the extent the Fund earns
taxable net investment income, it intends to designate as taxable divi-
dends the same percentage of each day's dividend as its taxable net in-
vestment income bears to its total net investment income earned for the
year.
Investors considering buying shares of the Fund just prior to a record
date for a capital gain distribution should be aware that, regardless of
whether the price of the Fund shares to be purchased reflects the amount
of the forthcoming distribution payment, any such payment will be a dis-
tribution payment.
If a shareholder fails to furnish a correct taxpayer identification num-
ber, fails to fully report dividend and interest income, or fails to cer-
tify that he or she has provided a correct taxpayer identification number
and that he or she is not subject to such withholding, the shareholder may
be subject to a 31% "backup withholding" tax with respect to (a) taxable
dividends and distributions and (b) any proceeds of any redemptions of
Fund shares. An individual's taxpayer identification number is his or her
social security number. The backup withholding tax is not an additional
tax and may be credited against a shareholder's regular Federal income tax
liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substi-
tute for careful tax planning. Individuals are often exempt from state and
local personal income taxes on distributions of tax-exempt interest income
derived from obligations of issuers located in the state in which they re-
side when these distributions are received directly from these issuers,
but are usually subject to such taxes on income derived from obligations
of issuers located in other jurisdictions. Shareholders are urged to con-
sult their tax advisors with specific reference to their own tax situa-
tions.
ADDITIONAL INFORMATION
The Fund was incorporated on September 16, 1980 under the name Shearson
Managed Municipals Inc. Prior to December 15, 1988, the Fund's name was
Shearson Managed Municipals Inc. On December 15, 1988, November 6, 1992,
July 30, 1993 and October 14, 1994, the Fund's name was changed to SLH
Managed Municipals Fund Inc., Shearson Lehman Brothers Managed Municipals
Fund Inc., Smith Barney Shearson Managed Municipals Fund Inc. and Smith
Barney Managed Municipals Fund Inc., respectively.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as the custodian
of the Fund. Under the custody agreement, Boston Safe holds the Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end mar-
ket value of securities held in custody and also receives securities
transaction charges. The assets of the Fund are held under bank custodian-
ship in compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Fund's transfer agent. Under its transfer agency agreement, TSSG
maintains the shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and distributes dividends
and distributions payable by the Fund. For these services, TSSG receives a
monthly fee computed on the basis of the number of shareholder accounts it
maintains for the Fund during the month, and is reimbursed for out-of-
pocket expenses.
FINANCIAL STATEMENTS
The Fund's Semi-Annual and Annual Reports for the semi-annual period ended
August 31, 1994 and the fiscal year ended February 28, 1994 accompany this
Statement of Additional Information and are incorporated herein by refer-
ence in their entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P RATINGS FOR MUNICIPAL BONDS
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue
bonds. General obligation bonds are usually secured by all resources
available to the municipality and the factors outlined in the rating defi-
nitions below are weighed in determining the rating. Because revenue bonds
in general are payable from specifically pledged revenues, the essential
element in the security for a revenue bond is the quantity and quality of
the pledged revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality
of general obligation bond credit is usually appropriate in the rating
analysis of a revenue bond, other factors are important, including partic-
ularly the competitive position of the municipal enterprise under review
and the basic security covenants. Although a rating reflects S&P's judg-
ment as to the issuer's capacity for the timely payment of debt service,
in certain instances it may also reflect a mechanism or procedure for an
assured and prompt cure of a default, should one occur, i.e., an insurance
program, Federal or state guarantee or the automatic withholding and use
of state aid to pay the defaulted debt service.
AAA
Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible
to autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Qual-
ity of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to re-
main, substantial. Stability of the pledged revenues is also exceptionally
strong, due to the competitive position of the municipal enterprise or to
the nature of the revenues. Basic security provisions (including rate cov-
enant, earnings test for issuance of additional bonds, and debt service
reserve requirements) are rigorous. There is evidence of superior manage-
ment.
AA
High Grade -- The investment characteristics of general obligation and
revenue bonds in this group are only slightly less marked than those of
the prime quality issues. Bonds rated "AA" have the second strongest ca-
pacity for payment of debt service.
A
Good Grade -- Principal and interest payments on bonds in this category
are regarded as safe. This rating describes the third strongest capacity
for payment of debt service. It differs from the two higher ratings be-
cause:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expen-
ditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional. Sta-
bility of the pledged revenues could show some variations because of in-
creased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of
debt service. The difference between "A" and "BBB" ratings is that the
latter shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among
the factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged rev-
enues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC AND CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
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 CC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating cat-
egories, except in the AAA-Prime Grade category.
S&P RATINGS FOR MUNICIPAL NOTES
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) by S&P to distinguish more
clearly the credit quality of notes as compared to bonds. Notes rated SP-1
have a very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics are given
the designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to
pay principal and interest.
MOODY'S RATINGS FOR MUNICIPAL BONDS
AAA
Bonds which are Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective ele-
ments are likely to change, such changes as can be visualized are most un-
likely to impair the fundamentally strong position of such issues.
AA
Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because mar-
gins 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 which make the long-term risks appear somewhat larger
than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving se-
curity to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA
Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments 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 in-
terest 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 that are rated Caa are of poor standing. These issues may be in de-
fault or present elements of danger may exist with respect to principal or
interest.
CA
Bonds that are rated Ca represent obligations that are speculative in a
high degree. These issues are often in default or have other marked short-
comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Baa. The modifier 1 indicates that the se-
curity ranks in the higher end of its generic rating category; the modi-
fier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
MOODY'S RATINGS FOR MUNICIPAL NOTES
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and for variable rate de-
mand obligations are designated Variable Moody's Investment Grade
("VMIG"). This distinction is in recognition of the differences between
short-term credit risk and long-term risk. Loans bearing the designation
MIG 1 or VMIG 1 are of the best quality, enjoying strong protection by es-
tablished cash flows of funds for their servicing, superior liquidity sup-
port or from established and broad-based access to the market for refi-
nancing or both. Loans bearing the designation MIG 2 or VMIG 2 are of high
quality, with ample margins of protection although not as large as the
preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of fa-
vorable quality, with all security elements accounted for, but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow may
be narrow and market access for refinancing is likely to be less well es-
tablished.
DESCRIPTION OF S&P A-1+ AND A-1 COMMERCIAL PAPER RATING
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the direct
credit support of an issuer or guarantor that possesses excellent long-
term operating and financial strengths combined with strong liquidity
characteristics (typically, such issuers or guarantors would display
credit quality characteristics which would warrant a senior bond rating of
"AA-" or higher), or the direct credit support of an issuer or guarantor
that possesses above average long-term fundamental operating and financing
capabilities combined with ongoing excellent liquidity characteristics.
Paper rated A-1 by S&P has the following characteristics: liquidity ratios
are adequate to meet cash requirements; long-term senior debt is rated "A"
or better; the issuer has access to at least two additional channels of
borrowing; basic earnings and cash flow have an upward trend with allow-
ance made for unusual circumstances; typically, the issuer's industry is
well established and the issuer has a strong position within the industry;
and the reliability and quality of management are unquestioned.
DESCRIPTION OF MOODY'S PRIME-1 COMMERCIAL PAPER RATING
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (a) evaluation of the management of the issuer; (b) eco-
nomic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (c)
evaluation of the issuer's products in relation to competition and cus-
tomer acceptance; (d) liquidity; (e) amount and quality of long-term debt;
(f) trend of earnings over a period of ten years; (g) financial strength
of a parent company and the relationships which exist with the issuer; and
(h) recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to
meet such obligations.
SMITH BARNEY
MANAGED MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
Smith Barney
MANAGED
MUNICIPALS
FUND INC.
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
