Registration No. 2-89548
811-3970
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 19 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 20 X
SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC.
(Exact name of Registrant as Specified in Charter)
Two World Trade Center, New York, New York 10048
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(212) 720-9218
Francis J. McNamara, III
Secretary
Smith Barney Shearson California Municipals Fund Inc.
One Boston Place
Boston, Massachusetts 02108
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485(b)
X on April 29, 1994 pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)
on pursuant to Rule 485(a)
______________________________________________________________________________
______
The Registrant has previously filed a declaration of indefinite registration
of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. Registrant's Rule 24f-2 Notice for the fiscal year ended February
28, 1994 was filed on April 25, 1994.
SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Condensed Financial
Information
Financial Highlights; The Fund's
Performance
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Variable Pricing System;
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund
Management of the Fund;
Distributor;
Additional Information
6. Capital Stock and Other
Securities
Variable Pricing System;
Dividends, Distributions and
Taxes; Additional Information
7. Purchase of Securities Being
Offered
Variable Pricing System; Purchase
of Shares; Valuation of Shares;
Redemption of Shares; Exchange
Privilege; Distributor; Additional
Information
8 Redemption or Repurchase
Variable Pricing System; Purchase
of Shares; Redemption of Shares
9. Legal Proceedings
Not Applicable
Part B
Item No.
Statement of
Additional Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Contents
12. General Information
Distributor
13. Investment Objectives and
Policies
Investment Objective and
Management Policies
14. Management of the Fund
Management of the Fund;
Distributor
15. Control Persons and Principal
Holders of Securities
Management of the Fund
16. Investment Advisory and Other
Services
Management of the Fund;
Distributor
17. Brokerage Allocation
Investment Objective and
Management Policies
18. Capital Stock and Other
Securities
Purchase of Shares; Redemption of
Shares; Taxes
19. Purchase, Redemption and
Pricing of Securities Being
Offered
Purchase of Shares; Redemption of
Shares; Distributor; Valuation of
Shares; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
- ------------------------------------------------------------------------------
- --
April 29, 1994
SMITH BARNEY SHEARSON
California
Municipals
Fund Inc.
Prospectus begins
on page one.
[LOGO OF SMITH BARNEY SHEARSON APPEARS HERE]
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PROSPECTUS April 29, 1994
Two World Trade Center
New York, New York 10048
(212) 720-9218
Smith Barney Shearson California Municipals Fund Inc. (the "Fund") is a non-
diversified municipal fund that seeks to provide California investors with as
high a level of dividend income exempt from Federal income tax and California
state personal income tax as is consistent with prudent investment management
and preservation of capital.
This Prospectus concisely sets forth certain information about the Fund,
including sales charges, distribution and service fees and expenses, which
pro-
spective investors will find helpful in making an investment decision. Invest-
ors are encouraged to read this Prospectus carefully and retain it for future
reference.
Additional information about the Fund is contained in a Statement of Addi-
tional Information dated April 29, 1994, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writ-
ing the Fund at the telephone number or address set forth above or by contact-
ing your Smith Barney Shearson Financial Consultant. The Statement of Addi-
tional Information has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus in its
entirety.
SMITH BARNEY SHEARSON INC.
Distributor
GREENWICH STREET ADVISORS
Investment Adviser
THE BOSTON COMPANY ADVISORS, INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS 9
- ---------------------------------------------------
VARIABLE PRICING SYSTEM 12
- ---------------------------------------------------
THE FUND'S PERFORMANCE 13
- ---------------------------------------------------
MANAGEMENT OF THE FUND 19
- ---------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 20
- ---------------------------------------------------
CALIFORNIA MUNICIPAL SECURITIES 27
- ---------------------------------------------------
PURCHASE OF SHARES 28
- ---------------------------------------------------
REDEMPTION OF SHARES 32
- ---------------------------------------------------
VALUATION OF SHARES 35
- ---------------------------------------------------
EXCHANGE PRIVILEGE 36
- ---------------------------------------------------
DISTRIBUTOR 42
- ---------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 43
- ---------------------------------------------------
ADDITIONAL INFORMATION 46
- ---------------------------------------------------
</TABLE>
2
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospec-
tus. See "Table of Contents."
BENEFITS TO INVESTORS The Fund offers investors several important benefits:
. Dividends consisting primarily of income which is exempt from Federal
income tax and California state personal income tax.
. A professionally managed portfolio comprised primarily of investment-grade
California municipal bonds.
. Investment liquidity through convenient purchase and redemption
procedures.
. A convenient way to invest without the administrative and recordkeeping
burdens normally associated with the direct ownership of municipal
obligations.
. Different methods for purchasing shares that allow investment flexibility
and a wider range of investment alternatives.
. Automatic dividend reinvestment feature, plus exchange privilege within
the same class of shares of most other funds in the Smith Barney Shearson
Group of Funds.
INVESTMENT OBJECTIVE The Fund is an open-end, non-diversified, management
investment company that seeks to provide California investors with as high a
level of dividend income exempt from Federal income taxes and California state
personal income tax as is consistent with prudent investment management and
the
preservation of capital. Its investments consist primarily of intermediate-
and
long-term investment-grade municipal securities issued by the State of
Califor-
nia, local governments in the State of California and certain other municipal
issuers such as the Commonwealth of Puerto Rico ("California Municipal Securi-
ties") that pay interest which is excluded from gross income for Federal
income
tax purposes and exempt from California state personal income taxes.
Intermedi-
ate- and long-term securities have remaining maturities at the time of
purchase
of between three and twenty years. See "Investment Objective and Management
Policies."
3
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
VARIABLE PRICING SYSTEM The Fund offers two classes of shares ("Classes")
designed to provide investors with the flexibility of selecting an investment
best suited to their needs. Class A shares and Class B shares differ princi-
pally in terms of the sales charges and rate of expenses to which they are
sub-
ject. See "Variable Pricing System."
CLASS A SHARES These shares are offered at net asset value per share plus a
max-
imum initial sales charge of 4.50%. The Fund pays an annual service fee of
.15%
of the value of average daily net assets of this Class. See "Purchase of
Shares."
CLASS B SHARES These shares are offered at net asset value per share subject
to
a maximum contingent deferred sales charge ("CDSC") of 4.50% of redemption
pro-
ceeds, declining by .50% after the first year and by 1% each year thereafter
to
zero. The Fund pays an annual service fee of .15% and an annual distribution
fee of .50% of the value of average daily net assets of this Class. See "Pur-
chase of Shares."
CLASS B CONVERSION FEATURE Class B shares will convert automatically to Class
A
shares, based on relative net asset value, eight years after the date of
origi-
nal purchase. Upon conversion, these shares will no longer be subject to an
annual distribution fee. The first of these conversions will commence on or
about September 30, 1994. See "Variable Pricing System--Class B Shares."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith
Barney Shearson Inc. ("Smith Barney Shearson"), or a broker that clears
securi-
ties transactions through Smith Barney Shearson on a fully disclosed basis (an
"Introducing Broker"). Smith Barney Shearson recommends that single
investments
of $250,000 or more should be made in Class A shares. See "Purchase of
Shares."
INVESTMENT MINIMUMS Investors are subject to a minimum initial investment
requirement of $1,000 and a minimum subsequent investment requirement of $200.
See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic
Investment
Plan under which they may authorize the automatic placement of a purchase
order
each month or quarter for Fund shares in an amount not less than $100. See
"Purchase of Shares."
4
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. Class A shares are redeemable at
net asset value and Class B Shares are redeemable at net asset value less any
applicable CDSC. See "Redemption of Shares."
MANAGEMENT OF THE FUND Greenwich Street Advisors, a division of Mutual Manage-
ment Corp. serves as the Fund's investment adviser. Mutual Management Corp.
provides investment advisory and management services to investment companies
affiliated with Smith Barney Shearson. Smith Barney Shearson is a wholly owned
subsidiary of Smith Barney Shearson Holdings Inc., which is in turn a wholly
owned subsidiary of The Travelers Inc. ("Travelers") (formerly Primerica
Corpo-
ration), a diversified financial services holding company principally engaged
in the businesses of providing investment, consumer finance and insurance
serv-
ices.
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's
administrator. Boston Advisors is a wholly owned subsidiary of The Boston Com-
pany, Inc. ("TBC"), which in turn is a wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). See "Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
class of certain other funds in the Smith Barney Shearson Group of Funds and
certain money market funds. Certain exchanges may be subject to a sales charge
differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of each Class is quoted daily in the
finan-
cial section of most newspapers and is also available from your Smith Barney
Shearson Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and paid on the last business day of the Shearson Lehman Brothers state-
ment month. Distributions of net realized long- and short-term capital gains,
if any, are declared and paid annually after the end of the fiscal year in
which they were earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class
will be reinvested automatically unless otherwise specified by an investor in
additional shares of the same Class at current net asset value. Shares
acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribu-
5
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
tion reinvestments will become eligible for conversion to Class A shares on a
pro-rata basis. See "Dividends, Distributions and Taxes" and "Variable Pricing
System."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund
will achieve its investment objective. Assets of the Fund also may be invested
in the municipal securities of non-California municipal issuers. Dividends
paid
by the Fund which are derived from interest attributable to California Munici-
pal Securities will be excluded from gross income for Federal income tax pur-
poses and exempt from California state personal income taxes (but not from
Cal-
ifornia state franchise tax or California state corporate income tax). Divi-
dends derived from interest on obligations of non-California municipal issuers
will be exempt from Federal income taxes, but may be subject to California
state personal income taxes. Dividends derived from certain municipal securi-
ties (including California Municipal Securities), however, may be a specific
tax item for Federal alternative minimum tax purposes. The Fund may invest
without limit in securities subject to the Federal alternative minimum tax.
See
"Investment Objective and Management Policies" and "Dividends, Distributions
and Taxes."
The Fund is more susceptible to factors adversely affecting issuers of Cali-
fornia municipal securities than is a municipal bond fund that does not empha-
size these issuers. See "California Municipal Securities" in the Prospectus
and
"Special Considerations Relating to California Municipal Securities" in the
Statement of Additional Information for further details about the risks of
investing in California obligations.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that
it
may invest in the obligations of a single issuer. The Fund's assumption of
large positions in the obligations of a small number of issuers may cause the
Fund's share price to fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers. See "Investment Objective and Management Policies."
The Fund generally will invest at least 75% of its assets in securities
rated
investment grade, and may invest the remainder of its assets in securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by Stan-
dard & Poor's Corporation ("S&P"), or in unrated obligations of comparable
quali-
6
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
ty. Securities in the fourth highest rating category, though considered to be
investment grade, have speculative characteristics. Securities rated as low as
D are extremely speculative and are in actual default of interest and/or prin-
cipal payments.
There are several risks in connection with the use of certain portfolio
strategies by the Fund, such as the use of when-issued securities, municipal
bond index futures contracts and put and call options on interest rate futures
as hedging devices, municipal leases and securities lending. See "Investment
Objective and Management Policies--Certain Portfolio Strategies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an
investor will incur either directly or indirectly as a shareholder of the
Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses:
<TABLE>
<CAPTION>
CLASS A CLASS B
- -----------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% --
Maximum CDSC (as a percentage of redemption proceeds) -- 4.50%
- -----------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .55% .55%
12b-1 fees* .15 .65
Other expenses** .10 .13
- -----------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES .80% 1.33%
- -----------------------------------------------------------------------
</TABLE>
* Upon conversion, Class B shares will no longer be subject to a distribution
fee.
** All expenses are based on data for the Fund's fiscal year ended February
28,
1994.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
pay actual charges of less than 4.50% depending on the amount purchased and,
in
the case of Class B shares, the length of time the shares are held. See "Pur-
chase of Shares" and "Redemption of Shares." Management fees paid by the Fund
include investment advisory fees paid to Greenwich Street Advisors at the
7
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
following annual rates: .35% of the value of the Fund's average daily net
assets up to $500 million and .32% of the value of its average daily net
assets
in excess of $500 million, and administration fees paid to Boston Advisors at
the following annual rates: .20% of the value of the Fund's average daily net
assets up to $500 million and .18% of the value of its average daily net
assets
in excess of $500 million. The nature of the services for which the Fund pays
management fees is described under "Management of the Fund." Smith Barney
Shearson receives an annual 12b-1 service fee of .15% of the value of average
daily net assets of Class A shares. Smith Barney Shearson also receives with
respect to Class B shares an annual 12b-1 fee of .65% of the value of average
daily net assets of Class B shares, consisting of a .50% distribution fee and
a
.15% service fee. "Other expenses" in the above table include fees for share-
holder services, custodial fees, legal and accounting fees, printing costs and
registration fees.
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumu-
lative expenses that would be incurred over various periods with respect to a
hypothetical $1,000 investment in the Fund assuming a 5% total return. The
example assumes payment by the Fund of operating expenses at the levels set
forth in the above table. The example should not be considered a
representation
of past or future expenses and actual expenses may be greater or less than
those shown. Moreover, while the example assumes a 5% annual return, the
Fund's
actual performance will vary and may result in an actual return greater or
less
than 5%.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares** $53 $69 $87 $140
Class B shares:
Assumes complete redemption at end of each
time period*** $59 $72 $83 $146
Assumes no redemption $14 $42 $73 $146
- ----------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
** Assumes deduction at the time of purchase of the maximum 4.50% sales
charge.
*** Assumes deduction at the time of redemption of the maximum CDSC applicable
for that time period.
8
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS
The following information has been audited by Coopers & Lybrand, independent
accountants, whose report thereon appears in the Fund's Annual Report dated
February 28, 1994. The information set forth below should be read in conjunc-
tion with the financial statements and related notes that also appear in the
Fund's 1994 Annual Report, which is incorporated by reference into the State-
ment of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
2/28/94*** 2/28/93 2/28/92 2/28/91 2/28/90
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning
of year $16.70 $15.78 $15.66 $15.61 $15.33
- ------------------------------------------------------------------------------
- -
Income from investment
operations:
Net investment income 0.86 0.97 1.04 1.07 1.09
Net realized and unrealized
gain/(loss) on investments 0.08 1.25 0.40 0.17 0.26
- ------------------------------------------------------------------------------
- -
Total from investment
operations 0.94 2.22 1.44 1.24 1.35
- ------------------------------------------------------------------------------
- -
Less distributions:
Distributions from net
investment income (0.83) (0.97) (1.05) (1.07)
(1.07)
Distributions in excess of
net investment income (0.01) -- -- -- --
Distributions from net
realized gains (0.65) (0.29) (0.27) (0.12) --
Return of capital -- (0.04) -- -- --
- ------------------------------------------------------------------------------
- -
Total distributions (1.49) (1.30) (1.32) (1.19)
(1.07)
- ------------------------------------------------------------------------------
- -
Net asset value, end of
year $16.15 $16.70 $15.78 $15.66 $15.61
- ------------------------------------------------------------------------------
- -
Total return++ 5.92% 14.76% 9.50% 8.29%
9.02%
- ------------------------------------------------------------------------------
- -
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in
000's) $425,181 $423,504 $364,809 $334,599 $328,938
Ratio of operating expenses
to average net assets 0.80% 0.70% 0.65% 0.65%
0.72%
Ratio of net investment
income to average net
assets 5.20% 6.04% 6.54% 6.85%
6.95%
Portfolio turnover rate 76% 72% 86% 53%
35%
- ------------------------------------------------------------------------------
- -
</TABLE>
* The Fund commenced operations on April 9, 1984. Any shares in existence
prior to November 6, 1992 were designated as Class A shares.
*** Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results of
operations for both classes of shares.
+ Annualized expense ratios before waiver of fees and voluntary
reimbursement
of expenses by investment adviser and sub-investment adviser and
administrator were 0.82% and 0.95% for the fiscal year ended February 28,
1986 and the fiscal period ended February 28, 1985, respectively.
++ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable sales charge.
9
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
2/28/89 2/28/88 2/28/87 2/28/86 2/28/85*
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning
of year $15.49 $16.54 $16.16 $13.94 $14.25
- ------------------------------------------------------------------------------
- -
Income from investment
operations:
Net investment income+++ 1.12 1.09 1.14 1.21 1.14
Net realized and unrealized
gain/(loss) on investments (0.13) (0.98) 0.71 2.22 (0.31)
- ------------------------------------------------------------------------------
- -
Total from investment
operations 0.99 0.11 1.85 3.43 0.83
- ------------------------------------------------------------------------------
- -
Less distributions:
Distributions from net
investment income (1.12) (1.09) (1.14) (1.21) (1.14)
Distributions in excess of
net investment income -- -- -- -- --
Distributions from net
realized capital gains (0.03) (0.07) (0.33) -- --
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------
- -
Total distributions (1.15) (1.16) (1.47) (1.21) (1.14)
- ------------------------------------------------------------------------------
- -
Net asset value, end of year $15.33 $15.49 $16.54 $16.16 $13.94
- ------------------------------------------------------------------------------
- -
Total return++ 6.67% 1.09% 12.13% 25.80% 6.35%
- ------------------------------------------------------------------------------
- -
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in
000's) $313,059 156,464 207,872 111,705 39,739
Ratio of operating expenses
to average net assets 0.67% 0.64% 0.67% 0.73%+
0.33%**+
Ratio of net investment
income to average net assets 7.19% 7.26% 6.99% 8.08% 9.31%**
Portfolio turnover rate 27% 22% 16% 14% 32%
- ------------------------------------------------------------------------------
- -
</TABLE>
* The Fund commenced operations on April 9, 1984. Any shares in existence
prior to November 6, 1992 were designated as Class A shares.
+ Annualized expense ratios before waiver of fees and voluntary
reimbursement
of expenses by investment adviser and sub-investment adviser and
administrator were 0.82% and 0.95% for the fiscal year ended February 28,
1986 and the fiscal period ended February 28, 1985, respectively.
++ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable sales charge.
+++ Net investment income per share before waiver of fees and voluntary
reimbursement of expenses by investment adviser and sub-investment adviser
and administrator was $1.20 and $1.06, for the fiscal year ended February
28, 1986 and the fiscal period ended February 28, 1985, respectively.
10
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
2/28/94*** 2/28/93*
<S> <C> <C>
Operating performance:
Net asset value, beginning of period $16.70 $15.84
- ---------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.77 0.29
Net realized and unrealized gain on investments 0.09 1.15
- ---------------------------------------------------------------------------
Total From investment operations 0.86 1.44
- ---------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.75) (0.28)
Distributions in excess of net investment income (0.01) --
Distributions from net realized gains (0.65) (0.29)
Return of capital -- (0.01)
- ---------------------------------------------------------------------------
Total distributions (1.41) (0.58)
- ---------------------------------------------------------------------------
Net asset value, end of period $16.15 $16.70
- ---------------------------------------------------------------------------
Total Return++ 5.40% 9.27%
- ---------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000s) $107,740 $37,924
Ratio of operating expenses to average net assets 1.33% 1.30%**
Ratio of net investment income to average net assets 4.67% 5.44%**
Portfolio turnover rate 76% 72%
- ---------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class B shares on November 6, 1992.
*** Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since use of the undistributed method does not accord with results of
operations for both classes of shares.
++ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable sales charges.
11
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
VARIABLE PRICING SYSTEM
The Fund offers individual investors two methods of purchasing shares, thus
enabling investors to choose the Class that best suits their needs, given the
amount of purchase and intended length of investment.
Class A Shares.Class A shares are sold at net asset value per share plus a
maximum initial sales charge of 4.50% imposed at the time of purchase. The
ini-
tial sales charge may be reduced or waived for certain purchases. Class A
shares are subject to an annual service fee of .15% of the value of the Fund's
average daily net assets attributable to Class A. The annual service fee is
used by Smith Barney Shearson to compensate its Financial Consultants for
ongo-
ing services provided to shareholders. The sales charge is used to compensate
Smith Barney Shearson for expenses incurred in selling Class A shares. See
"Purchase of Shares."
Class B Shares.Class B shares are sold at net asset value per share subject
to a maximum 4.50% CDSC, which is assessed only if the shareholder redeems
shares within the first five years of investment. This results in 100% of the
investor's assets being used to acquire shares of the Fund. After the first
year after the purchase of a share, the CDSC declines to 4.00%; for each year
of investment thereafter within this five-year time frame, the applicable CDSC
declines by 1%; in year six, the applicable CDSC is reduced to 0%. See "Pur-
chase of Shares" and "Redemption of Shares."
Class B shares are subject to an annual service fee of .15% and an annual
distribution fee of .50% of the value of the Fund's average daily net assets
attributable to the Class. Like the service fee applicable to Class A shares,
the Class B service fee is used to compensate Smith Barney Shearson Financial
Consultants for ongoing services provided to shareholders. Additionally, the
distribution fee paid with respect to Class B shares compensates Smith Barney
Shearson for expenses incurred in selling those shares, including expenses
such
as sales commissions, Smith Barney Shearsons' branch office overhead expenses
and marketing costs associated with Class B shares, such as preparation of
sales literature, advertising and printing and distributing prospectuses,
statements of additional information and other materials to prospective
invest-
ors in Class B shares. A Financial Consultant may receive different levels of
compensation for selling different Classes. Class B shares are subject to a
distribution fee and a higher transfer agency fee than Class A shares which,
in
turn, will cause Class B shares to have a higher expense ratio and pay lower
dividends than Class A shares.
12
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
VARIABLE PRICING SYSTEM (CONTINUED)
Eight years after the date of purchase, Class B shares will convert
automati-
cally to Class A shares, based on the relative net asset values of shares of
each Class, and will no longer be subject to a distribution fee. In addition,
a
certain portion of Class B shares that have been acquired through the
reinvest-
ment of dividends and distributions ("Class B Dividend Shares") will be con-
verted at that time. That portion will be a percentage of the total number of
Class B Dividend Shares owned by the shareholder, equal to the ratio of the
total number of Class B shares owned by the shareholder converting at the time
to the total number of Class B shares (other than Class B Dividend Shares
owned
by the shareholder). The first of these conversions will commence on or about
September 30, 1994. The conversion of Class B shares into Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that such conversions will not constitute taxable events for Federal tax pur-
poses.
THE FUND'S PERFORMANCE
YIELD
From time to time, the Fund may advertise its 30-day "yield" and "equivalent
taxable yield" for each Class. The yield of a Class of the Fund refers to the
income generated by an investment in those shares over the 30-day period iden-
tified in the advertisement and is computed by dividing the net investment
income per share earned by the Class during the period by the maximum public
offering price per share on the last day of the period. This income is
"annualized" by assuming that the amount of income is generated each month
over
a one-year period and is compounded semi-annually. The annualized income is
then shown as a percentage of the net asset value.
The Fund's equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the Fund's tax-
exempt yield for each class of shares. It is calculated by increasing the
yield
shown for the Class to the extent necessary to reflect the payment of taxes at
specified tax rates. Thus, the equivalent taxable yield always will exceed the
Fund's yield. For more information on equivalent taxable yields, refer to the
table under "Dividends, Distributions and Taxes."
The Fund's yield for Class A and Class B shares for the 30-day period ended
February 28, 1994 was 4.28% and 3.92%, respectively. The equivalent taxable
13
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
THE FUND'S PERFORMANCE (CONTINUED)
yield for Class A and Class B shares for the same period was 6.84% and 6.26%,
respectively, assuming the payment of Federal income taxes at a rate of 31%
and
California income taxes at a rate of 9.30%.
TOTAL RETURN
From time to time, the Fund may advertise its "average annual total return"
over various periods of time for each Class. Such total return figures show
the
average percentage change in the value of an investment in the Class from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the Fund's shares and assume
that
any income dividends and/or capital gains distributions made by the Fund with
respect to that Class during the period were reinvested in shares of that
Class
of the Fund. Class A total return figures include the maximum initial 4.50%
sales charge and Class B total return figures include any applicable CDSC.
These figures also take into account the service and distribution fees, if
any,
payable with respect to the Classes.
Total return figures will be given for the recent one-, five- and ten-year
periods, or for the life of a Class to the extent it has not been in existence
for any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering average annual total return figures for
periods longer than one year, it is important to note that the average annual
total return for any one year in the period might have been greater or less
than the average for the entire period. "Aggregate total return" figures may
be
used for various periods, representing the cumulative change in the value of
an
investment in a Class for the specific period (again reflecting changes in
share prices and assuming reinvestment of dividends and distributions). Aggre-
gate total return may be calculated either with or without the effect of the
maximum 4.50% sales charge for the Class A shares or any applicable CDSC for
Class B shares and may be shown by means of schedules, charts or graphs, and
may indicate subtotals of the various components of total return (that is,
changes in the value of initial investment, income dividends and capital gains
distributions). Because of the differences in sales charges and distribution
fees, the performance for each of the Classes will differ.
In reports or other communications to shareholders or in advertising mate-
rial, performance of the Classes may be compared with that of other
14
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
THE FUND'S PERFORMANCE (CONTINUED)
mutual funds or Classes of shares of other funds as listed in the rankings
pre-
pared by Lipper Analytical Services, Inc. or similar independent services that
monitor the performance of mutual funds, or other industry or financial publi-
cations such as Barron's, Business Week, CDA Investment Technologies, Inc.,
Forbes, Fortune, Institutional Investor, Investors Daily, Kiplinger's Personal
Finance, Morningstar Mutual Fund Values, Money, The Wall Street Journal, The
New York Times and USA Today. Performance figures are based on historical
earn-
ings and are not intended to indicate future performance. To the extent that
any advertisement or sales literature of the Fund describes the expenses or
performance of a Class it will also disclose such information for the other
Class. The Statement of Additional Information contains a description of the
methods used to determine performance. Performance figures may be obtained
from
your Smith Barney Shearson Financial Consultant.
From the Fund's commencement of operations on April 9, 1984, through
February
28, 1994, an investment in shares of the Fund (now designated as Class A
shares) of $10,000 (after deducting the maximum sales charge of 4.50%) grew to
$24,277 when all dividends and capital gains distributions were reinvested.
This represents an aggregate total return of 154.21%. Previous and current
con-
ditions affecting the prices of Municipal Bonds held by the Fund may be
differ-
ent from conditions affecting the prices of the Fund's security holdings in
the
future and, therefore, the results shown should not necessarily be considered
representative of the return which may be realized by an investment in the
Class A shares today.
15
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
THE FUND'S PERFORMANCE (CONTINUED)
(CLASS A SHARES)(1)
<TABLE>
<CAPTION>
VALUE OF
VALUE OF REINVESTED
INITIAL DIVIDENDS AND
$10,000 CAPITAL GAINS TOTAL PERIOD
PERIOD ENDED INVESTMENT DISTRIBUTIONS VALUE CHANGE
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
April 9, 1984(2) $ 9,550(3) -- $ 9,550 --
February 1985 9,342 $ 815 10,157 +6%
February 1986 10,830 1,948 12,778 +26
February 1987 11,085 3,243 14,328 +12
February 1988 10,381 4,103 14,484 +1
February 1989 10,274 5,176 15,450 +7
February 1990 10,461 6,382 16,843 +9
February 1991 10,495 7,744 18,239 +8
February 1992 10,575 9,397 19,972 +10
February 1993 11,192 11,728 22,920 +15
February 1994 10,823 13,454 24,277 +6
- -----------------------------------------------------------
</TABLE>
/(1)/ Does not reflect the Class A annual service fee of .15% of average daily
net assets of the Class.
/(2)/ Commencement of operations.
/(3)/ Based on the current maximum sales charge of 4.50% of the offering
price.
16
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
THE FUND'S PERFORMANCE (CONTINUED)
CLASS A SHARES
Illustration of an Assumed Investment of $10,000
with Income Dividends and Capital Gains Distributions Reinvested
From April 9, 1984 /(1)/ through February 28, 1994
This period was one in which municipal bond prices fluctuated, and the results
shown should not be considered as a representation of the dividend income or
capital gain or loss which may be realized from an investment made in the
Class
A shares today.
(MAC CHART)
17
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
THE FUND'S PERFORMANCE (CONTINUED)
The following total return figures assume that the maximum 4.50% sales charge
was deducted from the investment at the time of purchase.
The average annual total returns for Class A shares were as follows for the
periods indicated:
1.15% for the period beginning on March 1, 1993 through February 28,
1994;
8.46% per annum during the five-year period beginning on March 1, 1989
through February 28, 1994; and
9.38% per annum during the period from the Fund's commencement of opera-
tions on April 9, 1984 through February 28, 1994.
The following aggregate total return figures do not assume that the maximum
4.50% sales charge has been deducted from the investment at the time of pur-
chase.
The Fund's aggregate total return for Class A shares was as follows for the
periods indicated:
5.92% for the one-year period beginning on March 1, 1993 through February
28, 1994;
57.14% for the five-year period beginning on March 1, 1989 through Febru-
ary 28, 1994; and
154.21% for the period from the Fund's commencement of operations on
April 9, 1984 through February 28, 1994.
If the maximum sales charge had been deducted at the time of purchase, the
Fund's aggregate total return for Class A shares for those same periods would
have been 1.15%, 50.06% and 142.77%, respectively.
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. The Directors approve all significant
agreements
between the Fund and the companies that furnish services to the Fund,
including
agreements with its distributor, investment adviser and administrator, custo-
dian and transfer agent. The day-to-day operations of the Fund are delegated
to
the Fund's investment adviser and administrator. The Statement of Additional
18
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
MANAGEMENT OF THE FUND
Information contains general background information regarding each Director
and
executive officer of the Fund.
INVESTMENT ADVISER--GREENWICH STREET ADVISORS
Greenwich Street Advisors, located at Two World Trade Center, New York, New
York 10048, serves as the Fund's investment adviser. Greenwich Street Advisors
(through predecessor entities) has been in the investment counselling business
since 1934 and is a division of Mutual Management Corp., which was
incorporated
in 1978. Greenwich Street Advisors renders investment advice to investment
com-
pany clients which had aggregate assets under management as of April 30, 1994,
in excess of $42.9 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
Greenwich Street Advisors manages the Fund's portfolio in accordance with the
Fund's investment objective and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and employs professional
portfolio managers and securities analysts who provide research services to
the
Fund. For the fiscal year ended February 28, 1994, the Fund paid investment
advisory fees to Greenwich Street Advisors in an amount equal to .35% of the
value of the average daily net assets of the Fund.
PORTFOLIO MANAGEMENT
Joseph P. Deane, Managing Director of Greenwich Street Advisors, has served
as Vice President and Investment Officer of the Fund since November 1, 1988,
and manages the day-to-day operations of the Fund including making all invest-
ment decisions.
Mr. Deane's management discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended February 28, 1994,
is included in the Annual Report dated February 28, 1994. A copy of the Annual
Report may be obtained upon request and without charge from your Smith Barney
Shearson Financial Consultant or by writing or calling the Fund at the address
or phone number listed on page one of the Prospectus.
ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's administrator. Boston Advisors provides investment
manage-
19
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
MANAGEMENT OF THE FUND (CONTINUED)
ment and administrative services to investment companies that had aggregate
assets under management as of March 31, 1994, in excess of $89.1 billion.
Boston Advisors calculates the net asset value of the Fund's shares and gen-
erally assists in all aspects of the Fund's administration and operation. For
the fiscal year ended February 28, 1994, the Fund received administration fees
in an amount equal to .20% of the value of the average daily net assets of the
Fund.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is to provide California investors with
as high a level of dividend income exempt from Federal income taxes and Cali-
fornia state personal income tax as is consistent with prudent investment man-
agement and the preservation of capital. This investment objective may not be
changed without the approval of the holders of a majority of the Fund's out-
standing shares. There can be no assurance that the Fund's investment
objective
will be achieved.
The Fund will operate subject to an investment policy providing that, under
normal market conditions, the Fund will invest at least 80% of its net assets
in California Municipal Securities, which pay interest which is excluded from
gross income for Federal income tax purposes and which is exempt from Califor-
nia state personal income tax.
The Fund may invest up to 20% of its net assets in municipal securities of
non-California municipal issuers, the interest on which is excluded from gross
income for Federal income tax purposes (not including the possible applicabil-
ity of a Federal alternative minimum tax), but which is subject to California
state personal income tax. When Greenwich Street Advisors believes that market
conditions warrant adoption of a temporary defensive investment posture, the
Fund may invest without limit in non-California municipal issuers and in "Tem-
porary Investments" as described below.
The Fund generally will invest at least 75% of its total assets in
investment
grade debt obligations rated no lower than Baa, MIG 3 or Prime-1 by Moody's or
BBB, SP-2 or A-1 by S&P, or in unrated obligations of comparable quality.
Unrated securities will be considered to be of investment grade if deemed by
Greenwich Street Advisors to be comparable in quality to instruments so rated,
20
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
or if other outstanding obligations of the issuers thereof are rated Baa or
better by Moody's or BBB or better by S&P. The balance of the Fund's assets
may
be invested in securities rated as low as C by Moody's or D by S&P, or
compara-
ble unrated securities. Securities in the fourth highest rating category,
though considered to be investment grade, have speculative characteristics.
Securities rated as low as D are extremely speculative and are in actual
default of interest and/or principal payments.
The Fund's average weighted maturity will vary from time to time based on
the
judgment of Greenwich Street Advisors. The Fund intends to focus on intermedi-
ate- and long-term obligations, that is, obligations with remaining maturities
at the time of purchase of between three and twenty years. Obligations which
are rated Baa by Moody's or BBB by S&P and those which are rated lower than
investment-grade are subject to greater market fluctuation and more
uncertainty
as to payment of principal and interest, and therefore generate higher yields
than obligations rated above Baa or BBB.
Low and Comparable Unrated Securities.While the market values of low-rated
and comparable unrated securities tend to react less to fluctuations in inter-
est rate levels than the market values of higher-rated securities, the market
values of certain low-rated and comparable unrated municipal securities also
tend to be more sensitive than higher-rated securities to short-term corporate
and industry developments and changes in economic conditions (including reces-
sion) in specific regions or localities or among specific types of issuers. In
addition, low-rated securities and comparable unrated securities generally
present a higher degree of credit risk. During an economic downturn or a pro-
longed period of rising interest rates, the ability of issuers of low-rated
and
comparable unrated securities to service their payment obligations, meet pro-
jected goals or obtain additional financing may be impaired. The risk of loss
due to default by such issuers is significantly greater because low-rated and
comparable unrated securities generally are unsecured and frequently are
subor-
dinated to the prior payment of senior indebtedness. The Fund may incur addi-
tional expenses to the extent it is required to seek recovery upon a default
in
payment of principal or interest on its portfolio holdings.
While the market for municipal securities is considered to be generally ade-
quate, the existence of limited markets for particular low-rated and
comparable
unrated securities may diminish the Fund's ability to (a) obtain accurate mar-
ket quotations for purposes of valuing such securities and calculating its net
asset value and (b) sell the securities at fair value either to meet
redemption
requests
21
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
or to respond to changes in the economy or in the financial markets. The
market
for certain low-rated and comparable unrated securities is relatively new and
has not fully weathered a major economic recession. Any such economic downturn
also could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit
their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during the periods of declining
interest rates, the Fund may have to replace the security with a lower
yielding
security, thus resulting in a decreased return to the Fund. A description of
the rating systems of Moody's and S&P is contained in the Statement of Addi-
tional Information.
The Fund may invest without limit in "municipal leases," which generally are
participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
prop-
erty or equipment. Although lease obligations do not constitute general
obliga-
tions of the municipality for which the municipality's taxing power is
pledged,
a lease obligation is ordinarily backed by the municipality's covenant to bud-
get for, appropriate and make the payments due under the lease obligation.
How-
ever, certain lease obligations contain "non-appropriation" clauses which pro-
vide that the municipality has no obligation to make lease or installment pur-
chase payments in future years unless money is appropriated for such purpose
on
a yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although "non-
appropriation" lease obligations are often secured by the underlying property,
disposition of the property in the event of foreclosure might prove difficult.
There is no limitation on the percentage of the Fund's assets that may be
invested in municipal lease obligations. In evaluating municipal lease obliga-
tions, Greenwich Street Advisors will consider such factors as it deems appro-
priate, which may include: (a) whether the lease can be canceled; (b) the
abil-
ity of the lease obligee to direct the sale of the underlying assets; (c) the
general creditworthiness of the lease obligor; (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property in
the event such property is no longer considered essential by the municipality;
(e) the legal recourse of the lease obligee in the event of such a failure to
appropriate funding; (f) whether the security is backed by a credit
enhancement
such as insurance; and (g) any
22
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
limitations which are imposed on the lease obligor's ability to utilize
substi-
tute property or services rather than those covered by the lease obligation.
The Fund may invest without limits in private activity bonds. Interest
income
on certain types of private activity bonds issued after August 7, 1986 to
finance non-governmental activities is a specific tax preference item for pur-
poses of the Federal individual and corporate alternative minimum taxes. Indi-
vidual and corporate shareholders may be subject to a Federal alternative
mini-
mum tax to the extent the Fund's dividends are derived from interest on those
bonds. Dividends derived from interest income on California Municipal Securi-
ties are a component of the "current earnings" adjustment item for purposes of
the Federal corporate alternative minimum tax.
The Fund is classified as a non-diversified investment company under the
1940
Act, which means that the Fund is not limited by the 1940 Act in the
proportion
of its assets that it may invest in the obligations of a single issuer. The
Fund intends to conduct its operations, however, so as to qualify as a "regu-
lated investment company" for purposes of the Internal Revenue Code of 1986,
as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax and California state franchise tax to the extent its earnings are
distributed to shareholders. To so qualify, among other requirements, the Fund
will limit its investments so that, at the close of each quarter of the
taxable
year, (a) not more than 25% of the market value of the Fund's total assets
will
be invested in the securities of a single issuer and (b) with respect to 50%
of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a sin-
gle issuer. The Fund's assumption of large positions in the obligations of a
small number of issuers may cause the Fund's share price to fluctuate to a
greater extent than that of a diversified company as a result of changes in
the
financial condition or in the market's assessment of the issuers.
The Fund may invest without limit in debt obligations that are repayable out
of revenue streams generated from economically-related projects or facilities.
Sizeable investments in such obligations could involve an increased risk to
the
Fund should any of the related projects or facilities experience financial
dif-
ficulties. In addition, the Fund also may invest up to an aggregate of 15% of
its total assets in securities with contractual or other restrictions on
resale
and other instruments which are not readily marketable. Notwithstanding the
foregoing, the Fund shall not invest more than 10% of its assets in securities
(exclud-
23
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ing those subject to Rule 144A under the Securities Act of 1993, as amended)
that are restricted. The Fund also is authorized to borrow an amount of up to
10% of its total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) in order to meet anticipated
redemptions and to pledge its assets to the same extent in connection with the
borrowings.
Further information about the Fund's investment policies, including a list
of
those restrictions on the Fund's investment activities that cannot be changed
without shareholder approval, appears in the Statement of Additional Informa-
tion.
CERTAIN PORTFOLIO STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among
others, the following portfolio strategies.
When-Issued Securities.New issues of California Municipal Securities (and
other tax-exempt obligations) frequently are offered on a when-issued basis,
which means that delivery and payment for such securities normally take place
within 15 to 45 days after the date of the commitment to purchase. The payment
obligation and the interest rate that will be received on when-issued securi-
ties are fixed at the time the buyer enters into the commitment. California
Municipal Securities, like other investments made by the Fund, may decline or
appreciate in value before their actual delivery to the Fund. Due to fluctua-
tions in the value of securities purchased and sold on a when-issued basis,
the
yields obtained on these securities may be higher or lower than the yields
available in the market on the date when the investments actually are
delivered
to the buyers. The Fund will not accrue income with respect to a when-issued
security prior to its stated delivery date. The Fund will establish a segre-
gated account with the Fund's custodian consisting of cash, obligations issued
or guaranteed by the United States government or its agencies or
instrumentali-
ties ("U.S. government securities") or other high grade debt obligations in an
amount equal to the purchase price of the when-issued securities. Placing
secu-
rities rather than cash in the segregated account may have a leveraging effect
on the Fund's net assets. The Fund generally will make commitments to purchase
California Municipal Securities (and other tax-exempt obligations) on a when-
issued basis only with the intention of actually acquiring the securities, but
the Fund may sell such securities before the delivery date if it is deemed
advisable.
24
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Temporary Investments.Under normal market conditions, the Fund may hold up
to
20% of its total assets in cash or money market instruments, including taxable
money market instruments ("Temporary Investments"). In addition, when
Greenwich
Street Advisors believes that market conditions warrant, including when
accept-
able California Municipal Securities are not available, the Fund may take a
temporary defensive posture and invest without limitation in Temporary Invest-
ments. Tax-exempt securities eligible for short-term investment by the Fund
are
municipal notes 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
outstand-
ing debt securities rated within the three highest grades of Moody's or S&P,
and certain taxable short-term instruments having quality characteristics com-
parable to those for tax-exempt investments. To the extent the Fund holds Tem-
porary Investments, it may not achieve its investment objective. Since the
com-
mencement of its operations, the Fund has not found it necessary to make tax-
able Temporary Investments and it is not expected that such action will be
nec-
essary.
Financial Futures and Options Transactions. The Fund may enter into
financial
futures contracts and invest in options on financial futures contracts that
are
traded on a domestic exchange or board of trade. Such investments, if any, by
the Fund will be made solely for the purpose of hedging against the changes in
the value of its portfolio securities due to anticipated changes in interest
rates and market conditions and where the transactions are economically appro-
priate to the reduction of risks inherent in the management of the Fund. The
futures contract or options on futures contracts that may be entered into by
the Fund will be restricted to those that are either based on a municipal bond
index or relate to debt securities the prices of which are anticipated by
Greenwich Street Advisors to correlate with the prices of the California
Munic-
ipal Securities owned or to be purchased by the Fund.
In entering into a financial futures contract, the Fund will be required to
deposit with the broker through which it undertakes the transaction an amount
of cash or cash equivalents equal to approximately 5% of the contract amount.
This amount, which is known as "initial margin," is subject to change by the
exchange or board of trade on which the contract is traded, and members of the
exchange or board of trade may charge a higher amount. Initial margin is in
the
nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. In accordance with a process
known
25
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
as "marking-to-market," subsequent payments known as "variation margin," to
and
from the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short
positions
in the futures contract more or less valuable. At any time prior to the
expira-
tion of a futures contract, the Fund may elect to close the position by taking
an opposite position, which will operate to terminate the Fund's existing
posi-
tion in the contract.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at
a specified price, date, time and place. Unlike the direct investment in a
futures contract, an option on a financial futures contract gives the
purchaser
the right, in turn for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior to the
expira-
tion date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case
of a put, the exercise price of the option on the futures contract. The poten-
tial loss related to the purchase of an option on financial futures contracts
is limited to the premium paid for the option (plus transaction costs). The
value of the option may change daily and that change would be reflected in the
net asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options
on financial futures contracts be engaged in for bona fide hedging purposes,
if
the Fund enters into futures contracts for speculative purposes, if the aggre-
gate initial margin deposits and premiums paid by the Fund will not exceed 5%
of the market value of its assets. In addition, the Fund will, with respect to
its purchases of financial futures contracts, establish a segregated account
consisting of cash or cash equivalents in an amount equal to the total market
value of the futures contracts, less the amount of initial margin on deposit
for the contracts. The Fund's ability to trade in financial futures contracts
and options on financial futures contracts may be limited to some extent by
the
requirements of the Code, applicable to a regulated investment company that
are
described below under "Dividends, Distributions and Taxes."
Lending of Portfolio Securities.The Fund has the ability to lend securities
from its portfolio to brokers, dealers and other financial organizations. Such
26
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
loans, if and when made, may not exceed 20% of the Fund's total assets, taken
at value. Loans of portfolio securities by the Fund will be collateralized by
cash, letters of credit or U.S. government securities which are maintained at
all times in an amount equal to at least 100% of the current market value (de-
termined by marking to market daily) of the loaned securities. The risks in
lending portfolio securities, as with other extensions of secured credit, con-
sist of possible delays in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the bor-
rower fail financially. Loans will be made to firms deemed by Greenwich Street
Advisors to be of good standing and will not be made unless, in the judgment
of
Greenwich Street Advisors, the consideration to be earned from such loans
would
justify the risk.
CALIFORNIA MUNICIPAL SECURITIES
As used in the Prospectus, the term "California Municipal Securities" gener-
ally refers to intermediate- and long-term debt obligations issued by the
State
of California and local governments in the State of California, together with
certain other governmental issuers such as the Commonwealth of Puerto Rico, to
obtain funds for various public purposes. The interest on such obligations is,
in the opinion of bond counsel to the issuers, excluded from gross income for
Federal income tax purposes and exempt from California state personal income
tax, and for that reason generally is fixed at a lower rate than it would be
if
it were subject to such taxes. Interest income on certain municipal securities
(including California Municipal Securities) is a specific tax preference item
for purposes of the Federal individual and corporate alternative minimum
taxes.
CLASSIFICATIONS
The two principal classifications of California Municipal Securities are
"general obligation bonds" and "revenue bonds." General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable from the
reve-
nues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source, but not from the general taxing power. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
related facilities experience financial difficulties. In addition, certain
types of private activity
27
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
CALIFORNIA MUNICIPAL SECURITIES (CONTINUED)
bonds issued by or on behalf of public authorities to obtain funds for pri-
vately operated facilities are included in the term California Municipal Secu-
rities, provided the interest paid thereon qualifies as excluded from gross
income for Federal income tax purposes and as exempt from California state
per-
sonal income tax. Private activity bonds generally do not carry the pledge of
the credit of the issuing municipality.
SPECIAL CONSIDERATIONS
On July 6, 1992, Moody's, citing the State's deteriorating financial posi-
tion, lowered California's general obligation bond rating from Aa1 to Aa. On
July 15, 1992, S&P, citing the State's deteriorating financial position, low-
ered California's general obligations bond ratings from AA to A+. Investors
should be aware that certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could result in certain adverse consequences affecting California Municipal
Securities. For instance, certain provisions of the California Constitution
and
statutes that limit the taxing and spending authority of California governmen-
tal entities may impair the ability of the issuers of some California
Municipal
Securities to maintain debt service on their obligations. Other measures
affecting the taxing or spending authority of California or its political sub-
divisions may be approved or enacted in the future. Some of the significant
financial considerations relating to the Fund's investments in California
Municipal Securities are summarized in the Statement of Additional
Information.
PURCHASE OF SHARES
Purchases of shares must be made through a brokerage account maintained with
Smith Barney Shearson or with an Introducing Broker. When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A or Class
B
shares. No maintenance fee will be charged in connection with a brokerage
account through which an investor purchases or holds shares. Purchases are
effected at the public offering price next determined after a purchase order
is
received by Smith Barney Shearson or an Introducing Broker (the "trade date").
Payment for Fund shares is generally due to Smith Barney Shearson or an Intro-
ducing Broker on the fifth business day (the "settlement date") after the
trade
date. Investors who make payment prior to the settlement date may permit the
payment to be held in their brokerage accounts or may
28
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
designate a temporary investment (such as a money market fund in the Smith
Bar-
ney Shearson Group of Funds) for such payment until the settlement date. The
Fund reserves the right to reject any purchase order and to suspend the offer-
ing of shares for a period of time.
Purchase orders received by Smith Barney Shearson or an Introducing Broker
prior to the close of regular trading on the NYSE, currently 4:00 p.m., New
York time, on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day. Purchase orders
received after the close of regular trading on the NYSE are priced as of the
time the net asset value is next determined. See "Valuation of Shares."
Systematic Investment Plan.The Fund offers shareholders a Systematic Invest-
ment Plan under which shareholders may authorize Smith Barney Shearson or an
Introducing Broker to place a purchase order each month or quarter for Fund
shares in an amount not less than $100. The purchase price is paid automati-
cally from cash held in the shareholder's Smith Barney Shearson brokerage
account or through the automatic redemption of the shareholder's shares of a
Smith Barney Shearson money market fund. For further information regarding the
Systematic Investment Plan, shareholders should contact their Smith Barney
Shearson Financial Consultants.
Minimum Investments.The minimum initial investment in the Fund is $1,000,
and
the minimum subsequent investment is $200, except that the minimum initial and
subsequent investments for the Systematic Investment Plan are both $100. There
are no minimum investment requirements for Smith Barney Shearson and its
affil-
iates. The Fund reserves the right to vary at any time the initial and subse-
quent investment minimums. Certificates for Fund shares are issued upon
request
to the Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation.
29
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
CLASS A SHARES
The public offering price for Class A shares is the per share net asset
value
of that Class plus a sales charge, which is imposed in accordance with the
fol-
lowing schedule:
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS %
AMOUNT OF INVESTMENT* OF OFFERING PRICE OF NET ASSET VALUE
- ---------------------------------------------------------------------
<S> <C> <C>
Less than $25,000 4.50% 4.71%
$25,000 but under $50,000 4.00% 4.17%
$50,000 but under $100,000 3.50% 3.63%
$100,000 but under $250,000 3.00% 3.09%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $1,000,000 1.50% 1.52%
$1,000,000 or more** 0.00% 0.00%
- ---------------------------------------------------------------------
</TABLE>
* Smith Barney Shearson has adopted guidelines directing its Financial
Consultants and Introducing Brokers that single investments of $250,000 or
more should be made in Class A shares.
** No sales charge is imposed on purchases of Class A shares of $1 million or
more; however, a CDSC of .75% is imposed for the first year after purchase.
The CDSC on Class A shares is payable to Smith Barney Shearson which,
compensates Smith Barney Shearson Financial Consultants upon the sale of
these shares. The CDSC is waived in the same circumstances in which the
CDSC
applicable to Class B shares is waived. See "Redemption of Capital Shares--
Contingent Deferred Sales Charge--Class B Shares--Waiver of CDSC."
REDUCED SALES CHARGES--CLASS A SHARES
Reduced sales charges are available to investors who are eligible to combine
their purchases of Fund shares to receive volume discounts. Investors eligible
to receive volume discounts include individuals and their immediate families,
tax-qualified employee benefit plans and trustees or other professional
fiduci-
aries (including a bank or an investment adviser registered with the SEC under
the Investment Advisers Act of 1940, as amended) purchasing shares for one or
more trust estates or fiduciary accounts even though more than one beneficiary
is involved. The initial sales charge also is reduced to 1% for Smith Barney
Shearson Personal Living Trust program participants for whom Smith Barney
Shearson acts as trustee. Reduced sales charges on Class A shares also are
available under a combined right of accumulation, under which an investor may
combine the value of Class A shares already held in the Fund and in any of the
funds in the Smith Barney Shearson Group of Funds listed below (except those
sold without a sales charge), along with the value of the Class A shares
30
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
being purchased, to qualify for a reduced sales charge. For example, if an
investor owns Class A shares of the Fund and other funds in the Smith Barney
Shearson Group of Funds that have an aggregate value of $22,000, and makes an
additional investment in Class A shares of the Fund of $4,000, the sales
charge
applicable to the additional investment would be 4%, rather than the 4.50%
nor-
mally charged on a $4,000 purchase. Investors interested in further
information
regarding reduced sales charges should contact their Smith Barney Shearson
Financial Consultants.
Class A shares may be offered without any applicable sales charges to: (a)
employees of Smith Barney Shearson and its affiliates and employee benefit
plans for such employees and their immediate families when orders on their
behalf are placed by such employees; (b) accounts managed by registered
invest-
ment advisory subsidiaries of Travelers; (c) directors, trustees or general
partners of any investment company for which Smith Barney Shearson serves as
distributor; (d) any other investment company in connection with the combina-
tion of such company with the Fund by merger, acquisition of assets or other-
wise; (e) shareholders who have redeemed Class A shares in the Fund (or Class
A
shares of another fund in the Smith Barney Shearson Group of Funds that are
sold with a maximum sales charge of at least 4.50%) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made
within
30 days of the redemption; and (f) any client of a newly employed Smith Barney
Shearson Financial Consultant (for a period up to 90 days from the
commencement
of the Financial Consultant's employment with Smith Barney Shearson), on the
condition the purchase is made with the proceeds of the redemption of shares
of
a mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and (iii)
when purchased, such shares were sold with a sales charge.
CLASS B SHARES
The public offering price for Class B shares is the per share net asset
value
of that Class. No initial sales charge is imposed at the time of purchase. A
CDSC is imposed, however, on certain redemptions of Class B shares. See "Re-
demption of Shares" which describes the CDSC in greater detail.
Smith Barney Shearson has adopted guidelines, in view of the relative sales
charges and distribution fees applicable to the Classes, directing Financial
Consultants and Introducing Brokers that all purchases of shares of $250,000
or
31
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
more should be for Class A shares. Smith Barney Shearson reserves the right to
vary these guidelines at any time.
REDEMPTION OF SHARES
Shareholders may redeem their shares on any day that the Fund calculates net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value as next determined. If a shareholder holds shares in more than one
Class,
any request for redemption must specify the Class of shares being redeemed. In
the event of a failure to specify which Class, or if the investor owns fewer
shares of the Class than specified, the redemption request will be delayed
until the Fund's transfer agent receives further instructions from Smith
Barney
Shearson, or if the shareholder's account is not with Smith Barney Shearson,
from the shareholder directly.
The Fund normally transmits redemption proceeds for credit to the sharehold-
er's account at Smith Barney Shearson or to the Introducing Broker at no
charge
(other than any applicable CDSC) within seven days after receipt of a redemp-
tion request. Generally, these funds will not be invested for the
shareholder's
benefit without specific instruction and Smith Barney Shearson will benefit
from the use of temporarily uninvested funds. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the purchase check has been collected, which may take
up to 10 days or more. A shareholder who anticipates the need for more immedi-
ate access to his or her investment should purchase shares with Federal funds,
by bank wire or a certified or cashier's check.
A Fund account that is reduced by a shareholder to a value of $500 or less
may be subject to redemption by the Fund, but only after the shareholder has
been given at least 30 days in which to increase the account balance to more
than $500.
Shares may be redeemed in one of the following ways:
32
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
REDEMPTION THROUGH SMITH BARNEY SHEARSON
Redemption requests may be made through Smith Barney Shearson or an
Introduc-
ing Broker. A shareholder desiring to redeem Fund shares represented by
certif-
icates must also present the certificates to Smith Barney Shearson or the
Introducing Broker endorsed for transfer (or accompanied by an endorsed stock
power), signed exactly as the shares are registered. Redemption requests
involving shares represented by certificates will not be deemed received until
the certificates are received by the Fund's transfer agent in proper form.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request for redemption to:
Smith Barney Shearson California Municipals Fund Inc.
Class A or B (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to the Fund's transfer agent or your Smith Bar-
ney Shearson Financial Consultant must (a) state the Class and number or
dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or accompanied by an endorsed stock
power) and must be submitted to TSSG together with the redemption request. Any
signature appearing on a redemption request, share certificate or stock power
must be guaranteed by a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or a member firm of a
national securities exchange. TSSG may require additional supporting documents
for redemptions made by corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly received until
TSSG
receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly.
33
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
Any applicable CDSC will not be waived on amounts withdrawn by a shareholder
that exceed 2% per month of the value of the shareholder's shares subject to
the CDSC at the time the withdrawal plan commences. For further information
regarding the automatic cash withdrawal plan, shareholders should contact
their
Smith Barney Shearson Financial Consultants.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
A CDSC payable to Smith Barney Shearson is imposed on any redemption of
Class
B shares, however effected, that causes the current value of a shareholder's
account to fall below the dollar amount of all payments by the shareholder for
the purchase of Class B shares ("purchase payments") during the preceding five
years. No charge is imposed to the extent that the net asset value of the
Class
B shares redeemed does not exceed (a) the current net asset value of Class B
shares purchased through reinvestment of dividends or capital gains distribu-
tions, plus (b) the current net asset value of Class B shares purchased more
than five years prior to the redemption, plus (c) increases in the net asset
value of the shareholder's Class B shares above the purchase payments made
dur-
ing the preceding five years.
In circumstances in which the CDSC is imposed, the amount of the charge will
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed. Solely for the purposes of
determining
the number of years since a purchase payment, all purchase payments during a
month will be aggregated and deemed to have been made on the last day of the
preceding Smith Barney Shearson statement month.
The following table sets forth the rates of the charge for redemptions of
Class
B shares by investors:
<TABLE>
<CAPTION>
YEARS SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ----------------------------------
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------
</TABLE>
34
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
Class B shares will automatically convert to Class A shares eight years after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fee. The first of these conversions will commence on or
about September 30, 1984. See "Variable Pricing System--Class B Shares."
The purchase payment from which a redemption of Class B shares is made is
assumed to be the earliest purchase payment from which a full redemption has
not already been effected. In the case of redemptions of Class B shares of
other funds in the Smith Barney Shearson Group of Funds issued in exchange for
Class B shares of the Fund, the term "purchase payments" refers to the
purchase
payments for the shares given in exchange. In the event of an exchange of
Class
B shares of funds with differing CDSC schedules, the shares will be, in all
cases, subject to the higher CDSC schedule. See "Exchange Privilege."
Waivers of CDSC.The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to or less than
2%
per month of the value of the shareholders' shares at the time the withdrawal
plan commences (see above); (c) redemption of shares following the death or
disability of the shareholders; (d) involuntary redemptions; (e) redemption
proceeds from other funds in the Smith Barney Shearson Group of Funds that are
reinvested within 30 days of the redemption; and (f) redemptions of shares in
connection with a combination of any investment company with the Fund by merg-
er, acquisition of assets or otherwise.
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 currently is
scheduled to be closed on New Year's Day, Presidents' Day, Good Friday, Memo-
rial 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.
The net asset value per share of a Class is determined as of the close of
regular trading on the NYSE and is computed by dividing the value of the
Fund's
net assets attributable to that Class by the total number of shares of that
Class outstanding. Generally, the Fund's investments are valued at market
value
or, in the absence of a market value with respect to any securities, at fair
value as
35
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
VALUATION OF SHARES (CONTINUED)
determined by or under the direction of the Fund's Board of Directors. Short-
term investments that mature in 60 days or less are valued at amortized cost
whenever the Directors determine that amortized cost reflects fair value of
those investments. Amortized cost involves valuing an instrument at its cost
initially and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. Further information regarding the Fund's
valuation policies is contained in the Statement of Additional Information.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class in the
following funds in the Smith Barney Shearson Group of Funds, to the extent
shares are offered for sale in the shareholder's state of residence:
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
- ------------------------------------------------------------------------------
- -
<C> <S>
Municipal Bond Funds
A SMITH BARNEY SHEARSON LIMITED MATURITY MUNICIPALS FUND, an
intermediate-term municipal bond fund investing in investment-
grade obligations.
A, B SMITH BARNEY SHEARSON MANAGED MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund.
A, B SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND, an intermediate-
and long-term municipal bond fund investing in medium- and
lower-
rated securities.
A, B SMITH BARNEY SHEARSON ARIZONA MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
Arizona investors.
A SMITH BARNEY SHEARSON INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS
FUND, an intermediate-term municipal bond fund designed for
California investors.
</TABLE>
36
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
- ------------------------------------------------------------------------------
- -
<C> <S>
A, B SMITH BARNEY SHEARSON FLORIDA MUNICIPALS FUND, an intermediate-
and long-term municipal bond fund designed for Florida
investors.
A, B SMITH BARNEY SHEARSON MASSACHUSETTS MUNICIPALS FUND, an
intermediate- and long-term municipal bond fund designed for
Massachusetts investors.
A, B SMITH BARNEY SHEARSON NEW JERSEY MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for New
Jersey investors.
A SMITH BARNEY SHEARSON INTERMEDIATE MATURITY NEW YORK MUNICIPALS
FUND, an intermediate-term municipal bond fund designed for New
York investors investing in investment grade obligations.
A, B SMITH BARNEY SHEARSON NEW YORK MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for New
York investors.
Income Funds
A, B SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND,
seeks high current income while limiting the degree of
fluctuation in net asset value resulting from movement in
interest rates.
</TABLE>
37
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
- ------------------------------------------------------------------------------
- -
<C> <S>
A SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND, invests
exclusively in securities issued by the United States Treasury
and other U.S. government securities.
A, B SMITH BARNEY SHEARSON DIVERSIFIED STRATEGIC INCOME FUND, seeks
high current income primarily by allocating and reallocating its
assets among various types of fixed-income securities.
A, B SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC., invests in
obligations issued or guaranteed by the United States government
and its agencies and instrumentalities with emphasis on
mortgage-
backed government securities.
A, B SMITH BARNEY SHEARSON GOVERNMENT SECURITIES FUND, seeks a high
current return by investing in U.S. government securities.
A, B SMITH BARNEY SHEARSON INVESTMENT GRADE BOND FUND, seeks maximum
current income consistent with prudent investment management and
preservation of capital by investing in corporate bonds.
A, B SMITH BARNEY SHEARSON HIGH INCOME FUND, seeks high current
income
by investing in high-yield corporate bonds, debentures and
notes.
A, B SMITH BARNEY SHEARSON GLOBAL BOND FUND, seeks current income and
capital appreciation by investing in bonds, debentures and notes
of foreign and domestic issuers.
Growth and Income Funds
A*, B* SMITH BARNEY SHEARSON CONVERTIBLE FUND, seeks current income and
capital appreciation by investing in convertible securities.
A*, B* SMITH BARNEY SHEARSON GROWTH AND INCOME FUND, seeks income and
long-term capital growth by investing in income-producing equity
securities.
</TABLE>
38
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
- ------------------------------------------------------------------------------
- -
<C> <S>
A*, B* SMITH BARNEY SHEARSON UTILITIES FUND, seeks total return by
investing in equity and debt securities of utilities companies.
A*, B* SMITH BARNEY SHEARSON STRATEGIC INVESTORS FUND, seeks high total
return consisting of current income and capital appreciation by
investing in a combination of equity, fixed-income and money
market securities.
A*, B* SMITH BARNEY SHEARSON PREMIUM TOTAL RETURN FUND, seeks total
return by investing in dividend-paying common stocks.
Growth Funds
A*, B* SMITH BARNEY SHEARSON APPRECIATION FUND INC., seeks long-term
appreciation of capital.
A*, B* SMITH BARNEY SHEARSON FUNDAMENTAL VALUE FUND INC., seeks long-
term capital growth with current income as a secondary
objective.
A*, B* SMITH BARNEY SHEARSON TELECOMMUNICATIONS GROWTH FUND, seeks
capital appreciation, with income as a secondary consideration.
A*, B* SMITH BARNEY SHEARSON AGGRESSIVE GROWTH FUND INC., seeks above-
average capital growth.
A*, B* SMITH BARNEY SHEARSON SPECIAL EQUITIES FUND, seeks long-term
capital appreciation by investing in equity securities primarily
of emerging growth companies.
A*, B* SMITH BARNEY SHEARSON GLOBAL OPPORTUNITIES FUND, seeks long-term
capital growth by investing principally in the common stocks of
foreign and domestic issuers.
A*, B* SMITH BARNEY SHEARSON EUROPEAN FUND, seeks long-term capital
appreciation by investing primarily in securities of issuers
based in European countries.
</TABLE>
39
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
- ------------------------------------------------------------------------------
- -
<C> <S>
A*, B* SMITH BARNEY SHEARSON PRECIOUS METALS AND MINERALS FUND INC.,
seeks long-term capital appreciation by investing primarily in
precious metal- and mineral-related companies and gold bullion.
Money Market Funds
** SMITH BARNEY SHEARSON MONEY MARKET FUND, invests in a
diversified
portfolio of high quality money market instruments.
*** SMITH BARNEY SHEARSON DAILY DIVIDEND FUND INC., invests in a
diversified portfolio of high quality money market instruments.
*** SMITH BARNEY SHEARSON GOVERNMENT AND AGENCIES FUND INC., invests
in short-term U.S. government and agency securities.
*** SMITH BARNEY SHEARSON MUNICIPAL MONEY MARKET FUND INC., invests
in short-term, high quality municipal obligations.
*** SMITH BARNEY SHEARSON CALIFORNIA MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality California municipal
obligations.
*** SMITH BARNEY SHEARSON MUNICIPAL MONEY MARKET FUND, invests in
short-term, high quality New York municipal obligations.
- ------------------------------------------------------------------------------
- -
</TABLE>
* Shares of this fund are subject to a higher sales charge or CDSC than that
applicable to the Fund's shares.
** Shares of this money market fund may be exchanged for Class B shares of
the
Fund.
*** Shares of this money market fund may be exchanged for Class A shares of
the
Fund.
Tax Effect.The exchange of shares of one fund for shares of another fund is
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize
a
taxable gain or loss in connection with an exchange.
Class A Exchanges.Class A shareholders of the funds in the Smith Barney
Shearson Group of Funds sold without a sales charge or with a maximum sales
charge of less than 4.50% will be subject to the appropriate "sales charge
dif-
ferential" upon the exchange of their shares for Class A shares of the Fund or
other funds sold with a higher sales charge. The "sales charge differential"
is
40
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
limited to a percentage rate no greater than the excess of the sales charge
rate applicable to purchases of shares of the mutual fund being acquired in
the
exchange over the sales charge rate(s) actually paid on the mutual fund shares
relinquished in the exchange and on any predecessor of those shares. For pur-
poses of the exchange privilege, shares obtained through automatic
reinvestment
of dividends, as described below, are treated as having paid the same sales
charges applicable to the shares on which the dividends were paid; however, if
no sales charge was imposed upon the initial purchase of the shares, any
shares
obtained through automatic reinvestment will be subject to a sales charge dif-
ferential upon exchange.
Class B Exchanges. Shareholders of the Fund who wish to exchange all or a
portion of their Class B shares for Class B shares in any of the funds identi-
fied above may do so without imposition of any exchange fee. In the event a
Class B shareholder wishes to exchange all or a portion of his or her shares
for shares in any of the funds imposing a CDSC higher than that imposed by the
Fund, the exchanged Class B shares will be subject to the higher applicable
CDSC. Upon an exchange, the new Class B shares will be deemed to have been
pur-
chased on the same date as the Class B shares of the Fund that have been
exchanged.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can
be detrimental to the Fund's performance and its shareholders. Greenwich
Street
Advisors may determine that a pattern of frequent exchanges is excessive and
contrary to the best interests of the Fund's other shareholders. In this
event,
Greenwich Street Advisors will notify Smith Barney Shearson, and Smith Barney
Shearson may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, Smith Barney Shearson
will provide notice in writing or by telephone to the shareholder at least 15
days prior to suspending the exchange privilege and during the 15-day period
the shareholder will be required to (a) redeem his or her shares in the Fund
or
(b) remain invested in the Fund or exchange into any of the funds in the Smith
Barney Shearson Group of Funds ordinarily available, which position the share-
holder would expect to maintain for a significant period of time. All relevant
factors will be considered in determining what constitutes an abusive pattern
of exchanges. For further information regarding the exchange privilege or to
obtain the current prospectus for members of the Smith Barney Shearson Group
of
Funds, investors should contact their Smith Barney Shearson Financial Consul-
tant.
41
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Shareholders exercising the exchange privilege with any of the other funds
in
the Smith Barney Shearson Group of Funds should review the prospectus of that
fund carefully prior to making an exchange. Smith Barney Shearson reserves the
right to reject any exchange request. The exchange privilege may be modified
or
terminated at any time after written notice to shareholders.
DISTRIBUTOR
Smith Barney Shearson is located at 388 Greenwich Street, New York, New York
10013 and serves as distributor of the Fund's shares. Smith Barney Shearson is
paid an annual service fee with respect to Class A and Class B shares of the
Fund at the rate of .15% of the value of average daily net assets of the
respective Class. Smith Barney Shearson is paid an annual distribution fee
with
respect to Class B shares at the rate of .50% of the value of the average
daily
net assets attributable to those shares. The fees are authorized pursuant to a
services and distribution plan (the "Plan") adopted by the Fund pursuant to
Rule 12b-1 under the 1940 Act and are used by Smith Barney Shearson to pay its
Financial Consultants for servicing shareholder accounts and, in the case of
Class B shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: costs of printing and distributing the
Fund's Prospectus, Statement of Additional Information and sales literature to
prospective investors; an allocation of overhead and other Smith Barney
Shearson's branch office distribution-related expenses; payments to and
expenses of Smith Barney Shearson Financial Consultants and other persons who
provide support services in connection with the distribution of the shares;
and
accruals for interest on the amount of the foregoing expenses that exceed dis-
tribution fees and, in the case of Class B shares, the CDSC received by Smith
Barney Shearson. The payments to Smith Barney Shearson Financial Consultants
for selling shares of a Class include a commission paid at the time of sale
and
a continuing fee for servicing shareholder accounts for as long as a share-
holder remains a holder of that Class. The service fee is credited at the rate
of .15% of the value of the average daily net assets of the particular Class
of
shares that remain invested in the Fund. Smith Barney Shearson Financial Con-
sultants may receive different levels of compensation for selling one Class
over another.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney Shearson and
the
pay-
42
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
DISTRIBUTOR (CONTINUED)
ments may exceed distribution expenses actually incurred. The Fund's Board of
Directors will evaluate the appropriateness of the Plan and its payment terms
on a continuing basis and in so doing will consider all relevant factors,
including expenses borne by Smith Barney Shearson, amount received under the
Plan and proceeds of the CDSC.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund declares dividends from its net investment income (that is, income
other than its net realized long- and short-term capital gains) on each day
the
Fund is open for business and pays dividends on the last business day of the
Smith Barney Shearson statement month. Distributions of net realized long- and
short-term capital gains, if any, are declared and paid annually after the end
of the fiscal year in which they have been earned. Unless a shareholder
instructs that dividends and capital gains distributions on shares of any
Class
be paid in cash and credited to the shareholder's account, dividends and capi-
tal gains distributions will be reinvested automatically in additional shares
of the Class at net asset value, subject to no sales charge or CDSC. The
Fund's
earnings for Saturdays, Sundays and holidays are declared as dividends on the
next business day. Shares redeemed during the month are entitled to dividends
declared up to and including the date of redemption. In addition, in order to
avoid the application of a 4% nondeductible excise tax on certain
undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 in each year of any undistributed
ordi-
nary income or capital gains and expects to make any other distributions as
are
necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed current
and accumulated earnings and profits, the excess distributions generally will
be treated as a tax-free return of capital (up to the amount of the sharehold-
er's tax basis in his or her shares). The amount treated as a tax-free return
of capital will reduce a shareholder's adjusted basis in his or her shares.
Pursuant to the requirements of the 1940 Act and other applicable laws, a
notice will accompany any distribution paid from sources other than net
invest-
ment income. In the event the Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the
Fund's
expense ratio.
43
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
TAXES
The Fund has qualified and intends to continue to qualify each year as a
reg-
ulated investment company under the Code and will designate and pay exempt-
interest dividends derived from interest earned on qualifying tax-exempt obli-
gations. Such exempt-interest dividends may be excluded by shareholders of the
Fund from their gross income for Federal income tax purposes although (a) all
or a portion of such exempt-interest dividends will be a specific preference
item for purposes of the Federal individual and corporate alternative minimum
taxes to the extent they are derived from certain types of private activity
bonds issued after August 7, 1986 and (b) all exempt-interest dividends will
be
a component of the "current earnings" adjustment item for purposes of the Fed-
eral corporate alternative minimum tax. In addition, corporate shareholders
may
incur a greater Federal "environmental" tax liability through the receipt of
the Fund's dividends and distributions. Dividends derived from interest on
Cal-
ifornia Municipal Securities also will be exempt from California state
personal
income (but not corporate franchise or corporate income) taxes.
Dividends paid from taxable net investment income, if any, and distributions
of any net realized short-term capital gains (whether from tax-exempt or tax-
able securities) are taxable to shareholders as ordinary income, regardless of
how long they have held their Fund shares and whether such dividends or
distri-
butions are received in cash or reinvested in additional Fund shares.
Distribu-
tions of net realized long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long they have held their Funds
shares and whether such distributions are received in cash or reinvested in
additional shares. Furthermore, as a general rule, a shareholder's gain or
loss
on a sale or redemption of his or her shares will be a long-term capital gain
or loss if the shareholder has held the shares for more than one year and will
be a short-term capital gain or loss if the shareholder has held the shares
for
one year or less. The Fund's dividends and distributions will not qualify for
the dividends-received deduction for corporations. The per share dividends and
distributions on Class A shares will be higher than those on Class B shares as
a result of lower distribution and transfer agency fees applicable to Class A
shares.
Statements as to the tax status of each shareholder's dividends and
distribu-
tions are mailed annually. Each shareholder will also 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. These state-
ments
44
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
may set forth the dollar amount of income excluded or exempt from Federal
income taxes or California state personal income taxes and the dollar amount,
if any, subject to such taxes. Moreover, these statements will designate the
amount of exempt-interest dividends that is a specific preference item for
pur-
poses of the Federal individual and corporate alternative minimum taxes.
Share-
holders should consult their tax advisors with specific reference to their own
tax situations.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows California taxpayers how to translate Federal and
Cali-
fornia State tax savings from investments such as the Fund into an equivalent
return from a taxable investment. To the extent that the equivalent taxable
yields, illustrated in this table, are based on an effective tax rate which
combines the Federal and California marginal income tax rates, the table is
not
applicable to individuals who do not pay California State income tax. The
yields used below are for illustration only and are not intended to represent
current or future yields for the Fund, which may be higher or lower than those
shown.
<TABLE>
<CAPTION>
COMBINED
FEDERAL CALIFORNIA COMBINED EFFECTIVE
TAXABLE INCOME* MARGINAL MARGINAL MARGINAL MARGINAL TAX
EXEMPT YIELDS
SINGLE JOINT RATE RATE RATE RATE 4.00% 5.00% 6.00%
7.00% 8.00% 9.00%
- ------------------------------------------------------------------------------
- ---------------------------
EQUIVALENT TAXABLE YIELDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
$ 22,100 $ 36,900 15.00% 6.00% 21.00% 20.10% 5.01% 6.26% 7.51%
8.76% 10.01% 11.26%
53,500 89,150 28.00% 9.30% 37.30% 34.70% 6.13% 7.66% 9.19%
10.72% 12.25% 13.78%
106,190 140,000 31.00% 9.30% 40.30% 37.42% 6.39% 7.99% 9.59%
11.19% 12.78% 14.38%
212,380 250,000 36.00% 10.00% 46.00% 42.40% 6.94% 8.68% 10.42%
12.15% 13.89% 15.63%
250,000 424,760 39.60% 11.00% 50.60% 46.24% 7.44% 9.30% 11.16%
13.02% 14.88% 16.74%
- ------------------------------------------------------------------------------
- ---------------------------
</TABLE>
* Combined effective marginal tax rate represents the combined Federal and
California state income tax rates adjusted to account for the Federal
deduction of state taxes paid. The combined marginal income tax rate is
lower than the sum of the Federal and California state marginal rates
because the state taxes that shareholders of the Fund will pay are
deductible from Federal taxable income.
The Federal tax rates and California state tax rates shown are those pres-
ently in effect for 1994 and are subject to change. The calculations reflected
in the table assume that no income will be subject to the Federal or state
alternative minimum taxes.
45
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on
February
17, 1984, and is registered with the SEC as a non-diversified, open-end
manage-
ment investment company. Prior to December 15, 1988, the Fund's name was
Shearson Lehman California Municipals Inc. and on December 15, 1988, November
19, 1992 and July 30, 1993, the Fund changed its name to SLH California
Municipals Fund Inc., Shearson Lehman Brothers California Municipals Fund Inc.
and Smith Barney Shearson California Municipals Fund Inc., respectively.
Each Class represents an identical interest in the Fund's investment portfo-
lio. As a result, the Classes have the same rights, privileges and
preferences,
except with respect to: (a) the designation of each Class; (b) the effect of
the respective sales charges for each Class; (c) the distribution and/or serv-
ice fees borne by each Class; (d) the expenses allocable exclusively to each
Class; (e) voting rights on matters exclusively affecting a single Class; (f)
the exchange privilege of each Class; and (g) the conversion feature of the
Class B shares. The Fund's Board of Directors does not anticipate that there
will be any conflicts among the interests of the holders of the different
Clas-
ses. The Directors, on an ongoing basis, will consider whether any such con-
flict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be
no
meetings of shareholders for the purpose of electing Directors unless and
until
such time as less than a majority of the Directors holding office have been
elected by shareholders. The Directors will call a meeting for any purpose
upon
written request of shareholders holding at least 10% of the Fund's outstanding
shares. When matters are submitted for shareholder vote, shareholders of each
Class will have one vote for each full share owned and a proportionate, frac-
tional vote for any fractional share held of that Class. Generally, shares of
the Fund will be voted on a Fund-wide basis on all matters except matters
affecting only the interests of one Class.
Boston Safe Deposit and Trust Company, a wholly owned subsidiary of TBC, is
located at One Boston Place, Boston, Massachusetts 02108, and serves as custo-
dian of the Fund's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as
the Fund's transfer agent.
The Fund sends to each of its shareholders a semi-annual report and an
audited annual report, which include listings of the investment securities
held
46
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
ADDITIONAL INFORMATION (CONTINUED)
by the Fund at the end of the period covered. In an effort to reduce the
Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Fund also plans to con-
solidate the mailing of its Prospectus so that a shareholder having multiple
accounts will receive a single Prospectus annually. Any shareholder who does
not want this consolidation to apply to his or her account should contact his
or her Financial Consultant or TSSG. Shareholders may make inquiries regarding
the Fund to their Smith Barney Shearson Financial Consultants.
-----------------------
No person has been authorized to give any information or to make any repre-
sentations other than those contained in this Prospectus, the Statement of
Additional Information and/or the Fund's official sales literature in connec-
tion with the offering of the Fund's shares, and, if given or made, such other
information or representations must not be relied upon as having been autho-
rized by the Fund. This Prospectus does not constitute an offer in any state
in
which, or to any person to whom, such offer may not lawfully be made.
47
SMITH BARNEY SHEARSON
California Municipals Fund Inc.
DIRECTORS
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
James J. Crisona
Robert A. Frankel
Dr. Paul Hardin
Peter H. Gallary
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon
OFFICERS
Heath B. McLendon
Chairman of the Board and
Investment Officer
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Joseph P. Deane
Vice President and
Investment Officer
David Fare
Investment Officer
Vincent Nave
Treasurer
Francis J. McNamara, III
Secretary
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
48
- ------------------------------------------------------------------------------
- --
SMITH BARNEY SHEARSON
California
Municipals
Fund Inc.
Two World Trade Center
New York, New York 10048
Fund 14, 198
FD0209 D4
Smith Barney Shearson
CALIFORNIA MUNICIPALS FUND INC.
Two World Trade Center
New York, New York 10048
(212) 720-9218
STATEMENT OF ADDITIONAL INFORMATION APRIL 29,
1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney Shearson
California Municipals Fund Inc. (the "Fund") dated April 29, 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 your Smith
Barney Shearson Financial Consultant or by writing or calling the Fund at the
address or telephone number set forth above. This Statement of Additional
Information, although not in itself a prospectus, is incorporated by reference
into the Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus 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 (See in the Prospectus "California Municipal
Securities")...........................................................
12
Purchase of Shares......................................................
24
Redemption of Shares....................................................
25
Distributor.............................................................
26
Valuation of Shares.....................................................
27
Exchange Privilege......................................................
28
Performance Data (See in the Prospectus "The Fund's Performance").......
29
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")......
31
Custodian and Transfer Agent (See in the Prospectus "Additional Informa-
tion").................................................................
34
Financial Statements....................................................
34
Appendix................................................................
A-1
</TABLE>
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Shearson Inc.
("Smith Barney Shearson")................................ Distributor
Greenwich Street Advisors................................. Investment
Adviser
The Boston Company Advisors, Inc.
("Boston Advisors")...................................... 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
discussed in the Prospectus and in this Statement of Additional Information.
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The Directors and executive officers of the Fund, together with information as
to their principal business occupations during the past five years, are set
forth below. Each Director who is an "interested person" 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.
Robert E. Borgesen, Director. Retired; formerly Vice President of Morgan
Guaranty Trust Company of New York. His address is 160 Southeast Crestwood
Circle, Stuart, Florida 34997.
Martin Brody, Director. Vice Chairman of the Board of Restaurant Associates
Corp.; a Director of Jaclyn, Inc. His address is HMK Associates, Three ADP
Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director. Professor, Graduate School of Business
Administration, 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 a Justice of the Supreme
Court of the State of New York. His address is 118 East 60th Street, New York,
New York 10022.
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.
Peter H. Gallary, Director. Formerly President of Boston Advisors and
Executive Vice President of The Boston Company, Inc. and Boston Safe; prior to
May 1990, a partner at Coopers & Lybrand. His address is 101 Federal Street,
22nd Floor, Boston, Massachusetts 02110.
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 10172.
Joseph J. McCann, Director. Financial Consultant; formerly, Vice President
of Ryan Homes, Inc. His address is 200 Oak Park Place, Pittsburgh,
Pennsylvania 15243.
* Heath B. McLendon, Chairman of the Board and Investment Officer.
Executive Vice President of Smith Barney Shearson 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 member of the Asset Management Group of Shearson
Lehman Brothers; a Director of PanAgora Asset Management, Inc. and PanAgora
Asset Management Limited. His address is Two World Trade Center, New York, New
York 10048.
Stephen J. Treadway, President, Executive Vice President and Director of
Smith Barney Shearson; Director and President of Mutual Management Corp. and
Smith, Barney Advisers, Inc.; and Trustee of Corporate Realty Income Trust I.
His address is 1345 Avenue of the Americas, New York, New York 10105.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney Shearson; President of Smith Barney Shearson Strategy Advisers Inc.,
prior to July 1993. Senior Vice President of Shearson Lehman
2
Brothers; Vice President of Shearson Lehman Investment Strategy Advisors Inc.
His address is Two World Trade Center, New York, New York 10048.
Joseph P. Deane, Vice President and Investment Officer. Managing Director
of Greenwich Street Advisors; prior to July 1993, Managing Director of
Shearson Lehman Advisors. His address is Two World Trade Center, New York, New
York 10048.
David Fare, Investment Officer. Vice President of Greenwich Street
Advisors; prior to July 1993, Vice President of Shearson Lehman Advisors. His
address is Two World Trade Center, New York, New York 10048.
Vincent Nave, Treasurer. Senior Vice President of Boston Advisors and
Boston Safe. His address is One Boston Place, Boston, Massachusetts 02108.
Francis J. McNamara, III, Secretary. Senior Vice President and General
Counsel of Boston Advisors; prior to June 1989, Vice President and Associate
Counsel of Boston Advisors. His address is One Boston Place, Boston,
Massachusetts 02108.
Each Director also serves as a director, trustee or general partner of
other mutual funds for which Smith Barney Shearson serves as distributor. As
of March 1, 1994, the Directors and officers of the Fund as a group owned no
shares of the outstanding common stock of the Fund.
No director, officer or employee of Smith Barney Shearson, Boston Advisors
or any parent or subsidiary receives any compensation from the Fund for
serving as an officer or Director of the Fund. The Fund pays each Director who
is not an officer, director or employee of Smith Barney Shearson, Boston
Advisors or any of their 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
$47,451.
INVESTMENT ADVISER--GREENWICH STREET ADVISORS
ADMINISTRATOR--BOSTON ADVISORS
Greenwich Street Advisors serves as investment adviser to the Fund pursuant to
a written agreement dated July 30, 1993 (the "Advisory Agreement"), which was
first approved by the Board of Directors, including a majority of those
Directors who are not "interested persons" of the Fund or Greenwich Street
Advisors, on April 7, 1993. The services provided by Greenwich Street Advisors
under the Advisory Agreement are described in the Prospectus. Greenwich Street
Advisors pays the salaries of all officers and employees who are employed by
both it and the Fund. Greenwich Street Advisors bears all expenses in
connection with the performance of its services. Greenwich Street Advisors is
a division of Mutual Management Corp., which is in turn a wholly owned
subsidiary of Smith Barney Shearson Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary of The Travelers Inc. ("Travelers").
As compensation for Greenwich Street Advisors' services rendered to the
Fund, the Fund pays a fee computed daily and paid monthly at the following
annual rates: .35% of the value of the Fund's average daily net assets up to
$500 million and .32% of the value of its average daily net assets in excess
of $500 million. For the 1992, 1993 and 1994 fiscal years, such fees amounted
to $1,226,008, $1,376,158 and $1,761,043, respectively.
Boston Advisors serves as the Fund's administrator pursuant to a written
agreement dated May 22, 1993 (the "Administration Agreement"), which was most
recently approved by the Board of Directors, including a
3
majority of the Directors who are not "interested persons" of the Fund or
Boston Advisors, on July 21, 1993. Prior to the close of business on May 21,
1993, Boston Advisors served as sub-investment adviser and administrator to
the Fund. Boston Advisors is a wholly owned subsidiary of The Boston Company,
Inc., a financial services holding company, which is in turn a wholly owned
subsidiary of Mellon Bank Corporation.
Certain services provided to the Fund by Boston Advisors pursuant to the
Administration Agreement are described in the Prospectus under "Management of
the Fund." In addition to those services, Boston Advisors pays the salaries of
all officers and employees who are employed 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.
As compensation for Boston Advisors' services rendered to the Fund, the
Fund pays a fee computed daily and paid monthly at the following annual rates:
.20% of the value of the Fund's average daily net assets up to $500 million
and .18% of the value of its average daily net assets in excess of $500
million. For the 1992, 1993 and 1994 fiscal years, such fees amounted to
$700,576, $786,376 and $1,005,899, respectively.
The Fund bears expenses incurred in its operations, including: taxes,
interest, brokerage fees and commissions, if any; fees of Directors who are
not officers, directors, shareholders or employees of Smith Barney Shearson or
Boston Advisors; SEC fees and state blue sky qualification fees; charges of
custodian; transfer and dividend disbursing agent's fees; certain insurance
premiums; outside auditing and legal expenses; costs of any independent
pricing service; costs of maintaining corporate existence; costs attributable
to investor services (including allocated telephone and personnel expenses);
costs of preparation and printing of prospectuses for regulatory purposes and
for distribution to existing shareholders; costs of shareholders' reports and
shareholders' meetings and meetings of the Fund's Board of Directors and
officers.
Greenwich Street Advisors and Boston Advisors have each agreed that if in
any fiscal year the aggregate expenses of the Fund (including fees payable
pursuant to the Advisory Agreement and the Administration Agreement, but
excluding interest, taxes, brokerage and, with the prior written consent of
the necessary state securities commissions, extraordinary expenses) exceed the
expense limitations of any state having jurisdiction over the Fund, Greenwich
Street Advisors and Boston Advisors will, to the extent required by state law,
reduce their management fees by the amount of such excess expenses, such
amount to be allocated between them in the proportion 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 expense
limitation presently applicable to the Fund would require Greenwich Street
Advisors and Boston Advisors to reduce their fees in any year that such
expenses exceed 2.5% of the first $30 million of average daily net assets, 2%
of the next $70 million of average daily net assets and 1.5% of the remaining
average daily net assets. No fee reduction was required for the 1992, 1993 and
1994 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. O'Melveny &
Myers acts as special California counsel for the Fund and has reviewed the
portions of the Prospectus and this Statement of Additional Information
concerning California taxes and the description of the special considerations
relating to investments in California municipal securities. The Directors who
are not "interested persons" of the Fund have selected Stroock & Stroock &
Lavan as their counsel.
4
Coopers & Lybrand, independent accountants, One Post Office Square, Boston,
Massachusetts 02109, serve as auditors of the Fund and render an opinion on
the Fund's financial statements annually.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies it
employs to achieve that objective. The following discussion supplements the
description of the Fund's investment policies in the Prospectus. For purposes
of this Statement of Additional Information, obligations of non-California
municipal issuers, the interest on which is excluded from gross income for
Federal income tax purposes, together with obligations of the State of
California, local governments in the State of California and certain other
municipal issuers such as the Commonwealth of Puerto Rico ("California
Municipal Securities"), are collectively referred to as "Municipal Bonds."
As noted in the Prospectus, the Fund is classified as a non-diversified
investment company under the 1940 Act, which means that the Fund is not
limited by the 1940 Act in the proportion of its assets that may be invested
in the obligations of a single issuer. The identification of the issuer of
Municipal Bonds generally depends upon the terms and conditions of the
security. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision 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 would be 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 revenues of the nongovernmental user, then such
nongovernmental user is deemed to be the sole issuer. If in either case,
however, the creating government or some other entity guarantees a security,
such a guarantee would be considered a separate security and would be treated
as an issue of such government or other entity.
USE OF 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 investments 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 Greenwich Street Advisors to evaluate
potential investments. Among the factors that will be considered are the long-
term ability of the issuer to pay principal and interest and general 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 Greenwich Street Advisors' credit analysis of such securities
than would be the case for a portfolio consisting entirely of higher-rated
securities. The Appendix contains 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 require the
sale of such Municipal Bonds by the Fund, but Greenwich Street Advisors will
consider such event in its determination of whether the Fund should continue
to hold the Municipal Bonds. In addition, to the extent that the ratings
change as a result of changes in such organizations or their rating systems 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 accordance with its
investment objective and policies.
5
The Fund generally may invest up to 25% of its total assets in securities
rated below investment grade, i.e., lower than Baa, MIG 3 or Prime-1 by
Moody's or BBB, SP-2 or A-1 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 the rating organization, 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.
Zero coupon securities involve special considerations. Zero coupon
securities are debt obligations which do not entitle the holder to any
periodic payments of interest prior to maturity of a specified cash payment
date when the securities begin paying current interest (the "cash payment
date") and therefore are issued and traded at a discount from their face
amounts or par values. The discount varies depending on the time remaining
until maturity or cash payment date, prevailing interest rates, liquidity of
the security and the perceived credit quality of the issuer. The discount, in
the absence of financial difficulties of the issuer, decreases as the final
maturity or cash payment date of the security approaches. The market prices of
zero coupon securities generally are more volatile than the market prices of
other debt securities that pay interest periodically and are likely to respond
to changes in interest rates to a greater degree than do debt securities
having similar maturities and credit quality. The credit risk factors
pertaining to low-rated securities also apply to low-rated zero coupon bonds.
Such zero coupon bonds carry an additional risk in that, unlike bonds which
pay interest throughout the period to maturity, the Fund will realize no cash
until the cash payment date unless a portion of such securities is sold and,
if the issuer defaults, the Fund may obtain no return at all on its
investment.
Current Federal income tax laws may require the holder of a zero coupon
security to accrue income with respect to that security prior to the receipt
of cash payments. To maintain its qualification as a registered investment
company and avoid liability for Federal income taxes, the Fund may be required
to distribute income accrued with respect to zero coupon securities and may
have to dispose of portfolio securities under disadvantageous circumstances in
order to generate cash to satisfy these distribution requirements.
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 agencies or
instrumentalities ("U.S. government securities"), repurchase agreements, other
debt securities rated within the three highest grades by Moody's or 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 Investments 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 commencement of operations, the Fund has not found it necessary to
purchase taxable Temporary Investments.
6
Repurchase Agreements. The Fund may enter into 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 security 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 underlying debt obligation for
a relatively short period (usually not more than seven days) 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 arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's 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. Repurchase agreements could involve
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 associated with asserting
those rights and the risk of losing all or part of the income from the
agreement. In evaluating these potential risks, Greenwich Street Advisors or
Boston Advisors, acting under the supervision 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.
INVESTMENTS IN FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FINANCIAL FUTURES
CONTRACTS
The Fund may invest in financial futures contracts and options on financial
futures contracts that are traded on a domestic exchange or board of trade.
Such investments may be made by the Fund solely for the purpose of hedging
against changes in the value of its portfolio securities due to anticipated
changes in interest rates and market conditions, and not for purposes of
speculation. Further, such investments will be made only in unusual
circumstances, such as when Greenwich Street Advisors anticipates an extreme
change in interest rates or market conditions.
Municipal Bond Index Futures Contracts. A municipal bond index futures
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specific dollar amount times the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. No physical delivery of the underlying municipal bonds in the index
is made. Municipal bond index futures contracts based on an index of 40 tax-
exempt, long-term municipal bonds with an original issue size of at least $50
million and a rating of A- or higher by S&P or A or higher by Moody's began
trading in mid-1985.
The purpose of the acquisition or sale of a municipal bond index futures
contract by the Fund, as the holder of long-term municipal securities, is to
protect the Fund from fluctuations in interest rates on tax-exempt securities
without actually buying or selling long-term municipal securities.
Unlike the purchase or sale of a Municipal Bond, no consideration is paid
or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker an amount of
cash or cash equivalents equal to approximately 10% of the contract amount
(this amount is subject to change by the board of trade on which the contract
is traded and members of such board of trade may charge a higher amount). This
amount is known as initial margin and is in the nature of a performance bond
or good faith deposit on the contract which is returned to the Fund upon
termination of the futures
7
contract, assuming that all contractual obligations have been satisfied.
Subsequent payments, known as variation margin, to and from the broker, will
be made on a daily basis as the price of the index fluctuates, making the long
and short positions in the futures contract more or less valuable, a process
known as marking-to-market. At any time prior to the expiration of the
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
futures contract.
There are several risks in connection with the use of futures contracts as
a hedging device. Successful use of futures contracts by the Fund is subject
to Greenwich Street ability to predict correctly movements in the direction of
interest rates. Such predictions involve skills and techniques which may be
different from those involved in the management of a long-term municipal bond
portfolio. In addition, there can be no assurance that there will be a
correlation between movements in the price of the municipal bond index and
movements in the price of the Municipal Bonds which are the subject of the
hedge. The degree of imperfection of correlation depends upon various
circumstances, such as variations in speculative market demand for futures
contracts and municipal securities, technical influences on futures trading,
and differences between the municipal securities being hedged and the
municipal securities underlying the futures contracts, in such respects as
interest rate levels, maturities and creditworthiness of issuers. A decision
of whether, when and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected trends in interest rates.
Although the Fund intends to purchase or sell futures contracts only if
there is an active market for such contracts, there is no assurance that a
liquid market will exist for the contracts at any particular time. Most
domestic futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and,
therefore, does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses. In such
event, it will not be possible to close a futures position and, in the event
of adverse price movements, the Fund would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value
of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. As described above, however,
there is no guarantee that the price of Municipal Bonds will, in fact,
correlate with the price movements in the municipal bond index futures
contract and thus provide an offset to losses on a futures contract.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of the Municipal Bonds held in its
portfolio and rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of the Municipal Bonds it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may, but
will not necessarily, be at increased prices which reflect the decline in
interest rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
8
When the Fund purchases municipal bond index futures contracts, an amount
of cash and U.S. government securities or other high grade debt securities
equal to the market value of the futures contracts will be deposited in a
segregated account with the Fund's custodian (and/or such other persons as
appropriate) to collateralize the positions and thereby insure that the use of
such futures contracts is not leveraged. In addition, the ability of the Fund
to trade in municipal bond index futures contracts and options on interest
rate futures contracts may be materially limited by the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable to a
regulated investment company. See "Taxes" below.
Options on Financial Futures Contracts. The Fund may purchase put and call
options on futures contracts which are traded on a domestic exchange or board
of trade as a hedge against changes in interest rates, and may enter into
closing transactions with respect to such options to terminate existing
positions. The Fund will sell put and call options on interest rate futures
contracts only as part of closing sale transactions to terminate its options
positions. There is no guarantee that such closing transactions can be
effected.
Options on futures contracts, as contrasted with the direct investment in
such contracts, gives the purchaser the right, in return for the premium paid,
to assume a position in futures contracts at a specified exercise price at any
time prior to the expiration date of the options. Upon exercise of an option,
the delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in
the writer's futures contract margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an option on
interest rate futures contracts is limited to the premium paid for the option
(plus transaction costs). Because the value of the option is fixed at the
point of sale, there are no daily cash payments to reflect changes in the
value of the underlying contract; however, the value of the option does change
daily and that change would be reflected in the net asset value of the Fund.
There are several risks relating to options on futures contracts. The
ability to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the Fund's purchase of put
or call options will be based upon predictions as to anticipated interest rate
trends by Greenwich Street Advisors, which could prove to be inaccurate. Even
if Greenwich Street Advisors' expectations are correct there may be an
imperfect correlation between the change in the value of the options and of
the Fund's portfolio securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for the protection
of shareholders. Restrictions 1 through 7 below may not be changed without the
approval of 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 are present in person
or by proxy or (b) more than 50% of the Fund's outstanding shares. The
remaining restrictions may be changed by the Fund's Board of Directors at any
time.
The Fund may not:
1.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
9
or purchasing securities on a when-issued or delayed-delivery basis; (b)
purchasing or selling futures contracts and options on futures contracts
and other similar instruments; and (c) issuing separate classes of shares.
2.Invest more than 25% of its total assets in securities, the issuers of
which are in the same industry. For purposes of this limitation, 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.
3.Borrow money, except that 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, in an amount not exceeding 10% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the Fund's total assets, the
Fund will not make any additional investments.
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
objective and policies; (b) repurchase agreements; and (c) loans of its
portfolio securities.
5.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.
6.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.
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 initial
or maintenance margin in connection with futures contracts and related
options and options on securities is not considered to be the purchase of a
security on margin.
8.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.
9.Purchase or sell oil and gas interests.
10.Invest more than 5% of the value of its total assets in the securities
of issuers having a record, including predecessors, of less than three
years of continuous operation, except U.S. government securities. For
purposes of this restriction, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and 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.
10
13.Engage in the purchase or sale of put, call, straddle or spread options
or in the writing of such options, except that the Fund may purchase and
sell options on interest rate futures contracts.
Certain restrictions listed above permit the Fund to engage in investment
practices that the Fund does not currently pursue. The Fund has no present
intention of altering its current investment 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 notice
to shareholders. If a percentage restriction is complied with at the time of
an investment, a later increase or decrease in the percentage of assets
resulting from a change in the values of portfolio securities or in the amount
of the Fund's 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 restrictions described 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 involved.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as principal. Other purchases and sales usually are
placed with those dealers from which it appears 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 issuer to the underwriter, and
purchases of after-market securities from dealers normally are executed at a
price between the bid and asked prices. The Fund paid no brokerage commission
in 1992 and 1993 but for the fiscal year ended February 28, 1994, the Fund
paid $22,496 in brokerage commissions.
Allocation of transactions, including their frequency, to various dealers
is determined by Greenwich Street Advisors in its best judgment and in a
manner deemed fair and reasonable to shareholders. The primary considerations
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 Greenwich Street Advisors may receive orders
for portfolio transactions by the Fund. Information so received enables
Greenwich Street Advisors to supplement their own research and analysis with
the views and information of other securities firms. Such information may be
useful to Greenwich Street Advisors in serving both the Fund and other
clients, and, conversely, supplemental information obtained by the placement
of business of other clients may be useful to Greenwich Street Advisors in
carrying out its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the existence of any
underwriting or selling group relating thereto of which Smith Barney Shearson
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 such limitation.
While investment decisions for the Fund are made independently from those
of the other accounts managed by Greenwich Street Advisors, investments of the
type the Fund may make also may be made by those other accounts. When the Fund
and one or more other accounts managed by Greenwich Street Advisors 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 Greenwich Street Advisors to be equitable to each. In some
11
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
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)
generally is not expected to exceed 100%, but the portfolio turnover rate will
not be a limiting factor whenever the Fund deems it desirable to sell or
purchase securities. 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 may be purchased at
approximately the same time in order 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. For the 1993 and 1994 fiscal years,
the Fund's portfolio turnover rates were 72% and 76%, respectively.
MUNICIPAL BONDS
GENERAL INFORMATION
Municipal Bonds 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 various privately operated facilities are included
within the term Municipal Bonds if the interest paid thereon 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.
The yield on Municipal Bonds is dependent upon a variety of factors,
including general economic and monetary conditions, general money market
conditions, general conditions of the Municipal Bond market, the financial
condition of the issuer, the size of a particular offering, the maturity of
the obligation offered and the rating of the issue.
Municipal Bonds also are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, that may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. There is also
the possibility 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 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
12
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 strategy.
Municipal Bonds are subject to changes in value based upon the public's
perception of the creditworthiness of the issuers and changes, real or
anticipated, in the level of interest rates. In general, Municipal Bonds tend
to appreciate when interest rates decline and depreciate when interest rates
rise. Purchasing Municipal Bonds on a when-issued basis, therefore, can
involve the risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself. To account for this risk, a separate 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 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 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 securities to meet such
obligations may involve the realization of capital gains, which are not exempt
from Federal income taxes or California state personal income tax.
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 considered
to be advantageous.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
Some of the significant financial considerations relating to the Fund's
investments in California Municipal Obligations are summarized below. This
summary information is derived principally from official statements and
prospectuses relating to securities offerings of the State of California and
various local agencies in California, available as of the date of this
Statement of Additional Information and does not purport to be a complete
description of any of the considerations mentioned herein. The accuracy and
completeness of the information contained in such official statements has not
been independently verified.
Economic Factors. The Governor's 1993-1994 Budget, introduced on January 8,
1993, proposed general fund expenditures of $37.3 billion, with projected
revenues of $39.9 billion. It also proposed special fund expenditures of $12.4
billion and special fund revenues of $12.1 billion. To balance the budget in
the face of declining revenues, the Governor proposed a series of revenue
shifts from local government, reliance on increased federal aid, and
reductions in state spending.
The Department of Finance of the State of California's May Revision of
General Fund Revenues and Expenditures (the "May Revision"), released on May
20, 1993, indicated that the revenue projections of the January budget
proposal were tracking well, with the full year 1992-1993 about $80 million
higher than the
13
January projection. Personal income tax revenue was higher than projected,
sales tax was close to target, and bank and corporation taxes were lagging
behind projections. The May Revision projected the State would have an
accumulated deficit of about $2.75 billion by June 30, 1993. The Governor
proposed to eliminate this deficit over an 18-month period. He also agreed to
retain the 0.5% sales tax scheduled to expire June 30 for a six-month period,
dedicated to local public safety purposes, with a November election to
determine a permanent extension. Unlike previous years, the Governor's Budget
and May Revision did not calculate a "gap" to be closed, but rather set forth
revenue and expenditure forecasts and proposals designed to produce a balanced
budget.
The 1993-1994 budget act (the "1993-94 Budget Act") was signed by the
Governor on June 30, 1993, along with implementing legislation. The Governor
vetoed about $71 million in spending.
The 1993-94 Budget Act is predicated on general fund revenues and transfers
estimated at $40.6 billion, $400 million below 1992-93 (and the second
consecutive year of actual decline). The principal reasons for declining
revenue are the continued weak economy and the expiration (or repeal) of three
fiscal steps taken in 1991--a half cent temporary sales tax, a deferral of
operating loss carryforwards, and repeal by initiative of a sales tax on candy
and snack foods.
The 1993-94 Budget Act also assumes special fund revenues of $11.9 billion,
an increase of 2.9% over 1992-93.
The 1993-94 Budget Act includes general fund expenditures of $38.5 billion
(a 6.3% reduction from projected 1992-93 expenditures of $41.1 billion), in
order to keep a balanced budget within the available revenues. The 1993-94
Budget Act also includes special fund expenditures of $12.1 billion, a 4.2%
increase. The 1993-94 Budget Act reflects the following major adjustments:
1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts, thereby reducing
general fund support by an equal amount. About $2.5 billion would be
permanent, reflecting termination of the State's "bailout" of local
governments following the property tax cuts of Proposition 13 in 1978 (See
"Constitutional, Legislative and Other Factors" below).
The property tax revenue losses for cities and counties are offset in
part by additional sales tax revenues and mandate relief. The temporary
0.5% sales tax was extended through December 31, 1993, for allocation to
counties for public safety programs. The voters approved Proposition 172 in
November 1993 and the 0.5% sales tax was extended permanently for public
safety purposes.
Legislation also has been enacted to eliminate state mandates in order
to provide local governments flexibility in making their programs
responsive to local needs. Legislation provides mandate relief for local
justice systems which affect county audit requirements, court reporter
fees, and court consolidation; health and welfare relief involving advisory
boards, family planning, state audits and realignment maintenance efforts;
and relief in areas such as county welfare department self-evaluations,
noise guidelines and recycling requirements.
Lawsuits have been filed by several local governmental entities
challenging the shift of property taxes. The court in one case, County of
Los Angeles v. Sasaki, has already ruled in favor of the State. An appeal
by the County has been submitted to the Court of Appeal with a decision
expected before the
14
end of March. The State's petition to coordinate the other lawsuits into a
single proceeding has been granted and those matters are proceeding to
resolution under the coordination order.
2. The 1993-94 Budget Act keeps K-12 Proposition 98 funding on a cash
basis at the same per-pupil level as 1992-93 by providing schools a $609
million loan payable from future years' Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692 million of aid
to the State from the Federal government to offset health and welfare costs
associated with foreign immigrants living in the State, which would reduce
a like amount of general fund expenditures. About $411 million of this
amount is one-time funding. Congress ultimately appropriated only $450
million.
4. Reductions of $600 million in health and welfare programs.
5. Reductions of $400 million in support for higher education. These
reductions will be partly offset by fee increases at all three units of
higher education.
6. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94). A constitutional amendment will be
placed on the June 1994 ballot to restore the renters' tax credit after
1994-95.
7. Various miscellaneous cuts (totalling approximately $150 million) in
State government services in many agencies, up to 15%.
8. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund ($339 million) and a change in accounting
for debt service from accrual to cash basis, saving $107 million.
The 1993-94 Budget Act contains no general fund tax/revenue increases other
than a two year suspension of the renters' tax credit.
The 1994-95 Governor's Budget released January 7, 1994 indicates that the
continued sluggish performance of the State's economy will have an adverse
effect on results for the 1993-94 Fiscal Year. Revenues are now projected to
be $39.7 billion, about $900 million less than the 1993-94 Budget Act, even
though revenues in the first half of the fiscal year have been very close to
original projections.
Expenditures for the 1993-94 Fiscal Year are now projected in the 1994-95
Governor's Budget to be $39.3 billion, about $800 million above the original
1993-94 Budget Act. The main reasons for this change are increased health and
welfare caseloads, lower local property taxes (which require State support for
K-14 education to make up the shortfall), and lower than expected federal
government payments for immigration-related costs. The 1994-95 Governor's
Budget does not reflect possible additional General Fund costs in the 1993-94
Fiscal Year for earthquake relief.
The February 1994 Bulletin of the Department of Finance indicates that
revenues in January 1994 (and for year-to-date) were very slightly lower than
the projections in the 1994-95 Governor's Budget, but it is thought that these
variances are primarily due to cash flow factors, including delays in receipt
of some revenues because of the earthquake in Los Angeles.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including
15
northern Los Angeles County, Ventura County, and parts of Orange and San
Bernardino Counties, which were declared as State and Federal disaster areas
by January 18. Preliminary estimates of total property damage (private and
public) are in the range of $15 billion or more. However, precise estimates of
the damage are being developed and may change.
Despite such damage, on the whole, the vast majority of structures in the
areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage,
validating the cumulative effect of strict building codes and thorough
preparation for such an emergency by the State and local agencies.
State-owned facilities, including transportation corridors and facilities
such as Interstate Highways 5 and 10 and State Highways 14, 118 and 210, and
certain other State facilities, such as the campus at California State
University--Northridge (which was heavily damaged and is only partly open),
the Van Nuys State Office Building and the University of California at Los
Angeles, sustained some damage. Aside from the road and bridge closures, it is
not expected that this damage will interfere significantly with ongoing State
government operations.
The State in conjunction with the Federal government is committed to
providing assistance to local governments, individuals and businesses
suffering damage as a result of the earthquake, as well as to provide for the
repair and replacement of State-owned facilities. The Federal government will
provide substantial earthquake assistance.
The President immediately allocated some available disaster funds, and
Congress has approved additional funds for a total of at least $9.5 billion of
federal funds for earthquake relief, including assistance to homeowners and
small businesses, and costs for repair of damaged public facilities. The
Governor has announced that the State will have to pay about $1.9 billion for
earthquake relief costs, including a 10% match to some of the Federal funds,
and costs for some programs not covered by the Federal aid. The Governor has
proposed to cover $1.05 billion of these costs from a general obligation bond
issue to be placed on the June, 1994 ballot. Under the Governor's plan, some
of the additional costs would be paid by the General Fund, and some borrowed
from the federal government in a manner similar to that used by the State of
Florida after Hurricane Andrew.
The 1994-95 Fiscal Year will represent the fourth consecutive year the
Governor and Legislature will be faced with a very difficult budget
environment to produce a balanced budget. Many program cuts and budgetary
adjustments have already been made in the last three years. The Governor's
Budget once again does not calculate a "gap" which must be "closed;" rather it
sets forth revenue and expenditure forecasts and revenue and expenditure
proposals which result in a balanced budget, including elimination of the
accumulated 1992-93 budget deficit of $2.8 billion.
The Governor's Budget projects General Fund revenues and transfers in 1994-
95 of $41.3 billion, about $1.4 billion above 1993-94. Included in these
projections are receipt of $2.0 billion in new Federal aid to reimburse the
State for the cost of educating and incarcerating undocumented foreign
immigrants, the transfer of 0.5% of the State sales tax to counties, and tax
relief of about $95 million proposed by the Governor for law and moderate
income taxpayers. The Governor's Budget also includes receipt of $600 million
assuming the State will prevail in the Barclays Bank case now before the U.S.
Supreme Court.
16
The Governor's Budget projects Special Fund revenues of $13.7 billion, an
increase of 9.6% over 1993-94 (in part reflecting the tax shift to counties).
The Governor's Budget projects General Fund expenditures of $38.8 billion
(a 1.3% reduction from projected 1993-94 expenditures of $39.3 billion), in
order to keep a balanced budget which pays off the accumulated deficit, within
the available revenues. The Governor's Budget also proposes Special Fund
expenditures of $13.7 billion, a 5.4% increase.
The Governor proposes to achieve the General Fund reductions and balance
the 1994-95 Budget with the following major adjustments:
1. Receipt in 1994-95 of about $1.1 billion in additional Federal funds
for health and welfare costs which would reduce a like amount of General
Fund expenditures. This is based on a possible change in the federal
formula for dividing such aid among the states ($600 million), a request
for additional aid for undocumented immigrants ($300 million) and various
other health and welfare proposals ($200 million).
2. Reductions of approximately $800 million in health and welfare
programs. In addition, the Governor proposes to transfer approximately $3.3
billion of health and welfare programs to counties, as described below.
3. The Governor's Budget provides continued support for the base level
of funding for the University of California and the California State
University, but does not include additional funding for enrollment growth.
The Governor's Budget does not propose student fee increases for either the
UC or CSU systems, but will entertain fee increase proposals for them. To
mitigate any potential student fee increases, the Governor's Budget
proposes an increase of $113 million in student financial aid and $20
million for the Cal-Grant program. The Governor's Budget includes $90
million in new funds to expand financial aid for community colleges, to be
partially offset with an increase in student fees from $13 per unit to $20
per unit.
4. The Governor's Budget proposes an increase of about $2.0 billion in
Proposition 98 General Fund support for K-14 education, exceeding the
Proposition 98 guarantee, reflecting an increase for enrollment growth and
a small decrease for inflation. See "State Finances Proposition 98" above.
Per student funding is proposed to remain the same as the prior year. The
proposal also reflects retransfer back to counties from school districts of
$1.1 billion of property taxes, with the General Fund to make up the shift.
5. Various miscellaneous cuts (totalling approximately $75 million). The
Governor did not propose across-the-board cuts, and would suspend the 4
percent automatic budget reduction "trigger," as was done in 1993-94, so
cuts can be focused.
The Governor's Budget proposes the largest restructuring of the State-
county relationship since Proposition 13. The proposal's objectives are to:
(a) promote economic development, (b) promote local control and
accountability, (c) establish fiscal incentives for program performance, and
(d) reduce bureaucracy. In total, the proposal is a $5.4 billion transaction
constructed with existing revenue sources. However, the proposal is fiscally
neutral and primarily affects counties with a minor benefit for cities.
Special districts and redevelopment agencies are not included in the proposal.
17
The proposal calls for expanding the realignment program from $2.1 billion
to $5.4 billion by increasing the counties' share of the State sales tax from
12 cent to 1 cent ($1.4 billion), transferring some property tax revenue from
schools to counties ($1.1 billion), and increasing other county revenues ($0.3
billion). In addition, the State would assume responsibility for a greater
share of trial court costs ($0.4 billion). With these additional county
resources, the counties will assume a greater share of costs for AFDC ($1.1
billion), and Medi-Cal ($1.3 billion) as well as assume full responsibility
for Foster Care, In-Home Supportive Services, Alcohol and Drug programs and
functions previously funded from the County Services Block Grant ($0.8
billion).
The Governor's Budget proposes no tax/revenue increases. Therefore, if the
health and welfare proposals are not adopted or if the Federal aid will not be
forthcoming as proposed, additional program cuts or budget adjustments will
have to be made in the 1994-95 Fiscal Year to keep the budget in balance. The
Governor's Budget projects the June 30, 1995 ending balance of the budget
reserve, the Special Fund for Economic Uncertainties to be about $260 million,
or less than 0.5% of General Fund revenues.
President Clinton's 1995 Fiscal Year Budget does not contain any additional
funds to the State for immigrant-related costs or for revising the formula for
paying health and welfare costs. The Governor and other officials intend to
vigorously pursue these additional federal funds through the Congressional
budget process.
The Governor's Budget assumes the State's regular cash flow borrowing
program in 1994-95, and assumes the budget will be adopted on time. Cash
resources at the start of the 1994-95 fiscal year are projected to be
insufficient to meet all obligations without external borrowing, such as
revenue anticipation notes, reimbursement or refunding warrants or registered
warrants as occurred in 1992.
The Governor's Budget continues to predict that population growth in the
1990s will keep upward pressure on major state programs, such as K-14
education, health, welfare, and corrections, outstripping projected revenue
growth in an economy only very slowly emerging from a deep recession. The
Governor's health, welfare and local government realignment continue his
efforts to keep expenditures in line with resources in the long term. The
Governor's Budget also proposes significant restructuring of State government,
with elimination and consolidation of several agencies and numerous smaller
boards, and a change to "performance budgeting" which would be more efficient
and cost-effective.
Constitutional, Legislative and Other Factors. Certain California
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in the adverse
effects described below. The following information constitutes only a brief
summary, does not purport to be a complete description, and is based on
information drawn from official statements and prospectuses relating to
securities offerings of the State of California and various local agencies in
California available as of the date of this Statement of Additional
Information.
Certain of the California Municipal Obligations in which the Fund may
invest may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's general fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes
certain obligations theretofore paid out of local funds. Whether and to what
extent a portion of the State's general fund will be distributed in the future
to counties, cities and their various entities, is unclear.
18
On November 1, 1993, the United States Supreme Court agreed to review the
California court decisions in Barclays Bank International, Ltd v. Franchise
Tax Board and Colgate-Palmolive Company, Inc. v. Franchise Tax Board which
upheld California's worldwide combined reporting ("WWCR") method of taxing
corporations engaged in a unitary business operation against challenges under
the foreign commerce and due process clauses. In 1983, in Container
Corporation v. Franchise Tax Board, the Supreme Court held that the WWCR
method did not violate the foreign commerce clause in the case of a domestic-
based unitary business group with foreign-domiciled subsidiaries, but
specifically left open the question of whether a different result would obtain
for a foreign-based multinational unitary business. Barclays concerns a
foreign-based multinational and Colgate-Palmolive concerns a domestic-based
multinational in light of Federal foreign policy developments since 1983. In a
brief filed at the Supreme Court's request, the Clinton Administration had
argued that the Court should not hear the Barclays case, even though there are
"serious questions" about the California Supreme Court's analysis and
holdings, because the recent changes in the law noted below means the issue in
Barclays "lacks substantial recurring importance." The Clinton Administration
had previously decided not to become involved in the Barclays petition. The
United States government under the Bush Administration, along with various
foreign Governments, had appeared as amicus on behalf of Barclays before the
California Courts.
The Clinton Administration appeared as amicus on the merits in the United
States Supreme Court supporting the California Franchise Tax Board, arguing
that the Court should judge WWCR by looking at Federal policies in effect at
the time the taxes were collected and stating that the Federal government had
not indicated to the States during the 1970's and 1980's that it objected to
WWCR.
Oral argument was held on March 28, 1994. If the Court does not uphold the
State's prior method of taxation, the State could be liable for tax refunds
and will be unable to collect taxes previous assessed, with an aggregate
impact of $3.5 billion to $4 billion.
In 1988, California enacted legislation providing for a water's-edge
combined reporting method if an election fee was paid and other conditions
met. On October 6, 1993, California Governor Pete Wilson signed Senate Bill
671 (Alquist) which modifies the unitary tax law by deleting the requirements
that a taxpayer electing to determine its income on a water's-edge basis pay a
fee and file a domestic disclosure spreadsheet and instead requiring an annual
information return. Significantly, the Franchise Tax Board can no longer
disregard a taxpayer's election. The Franchise Tax Board is reported to have
estimated state revenue losses from the Legislation as growing from $27
million in 1993-94 to $616 million in 1999-2000, but others, including
Assembly Speaker Willie Brown, disagree with that estimate and assert that
more revenue will be generated for California, rather than less, because of an
anticipated increase in economic activity and additional revenue generated by
the incentives in the Legislation. The United Kingdom has been encouraged by
the legislative developments in California and threatened retaliatory taxation
by the United Kingdom is on hold.
Certain of the California Municipal Obligations may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, California voters approved an amendment to
the California Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA is to limit ad
valorem taxes on real property and to restrict the ability of taxing entities
to increase real property tax revenues. On November 7, 1978, California voters
approved Proposition 8, and on June 3, 1986, California voters approved
Proposition 46, both of which amended Article XIIIA.
19
Section 1 of Article XIIA limits the maximum ad valorem tax on real
property to 1% of full cash value (as defined in Section 2), to be collected
by the counties and apportioned according to law; provided that the 1%
limitation does not apply to ad valorem taxes or special assessments to pay
the interest and redemption charges on (a) any indebtedness approved by the
voters prior to July 1, 1978, or (b) any bonded indebtedness for the
acquisition or improvement of real property approved on or after July 1, 1978,
by two-thirds of the votes cast by the voters voting on the proposition.
Section 2 of Article XIIIA defines "full cash value" to mean "the County
Assessor's valuation of real property as shown on the 1975/76 tax bill under
"full cash value' or, thereafter, the appraised value of real property when
purchased, newly constructed, or a change in ownership has occurred after the
1975 assessment." The full cash value may be adjusted annually to reflect
inflation at a rate not to exceed 2% per year, or reduction in the consumer
price index or comparable local data, or reduced in the event of declining
property value caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on county
assessors, interpreting the meaning of "change in ownership" and "new
construction" for purposes of determining full cash value of property under
Article XIIIA.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that
notwithstanding any other law, local agencies may not levy any ad valorem
property tax except to pay debt service on indebtedness approved by the voters
prior to July 1, 1978, and that each county will levy the maximum tax
permitted by Article XIIIA of $4.00 per $100 assessed valuation (based on the
former practice of using 25%, instead of 100%, of full cash value as the
assessed value for tax purposes). The legislation further provided that, for
the 1978/79 fiscal year only, the tax levied by each county was to be
apportioned among all taxing agencies within the county in proportion to their
average share of taxes levied in certain previous years. The apportionment of
property taxes for fiscal years after 1978/79 has been revised pursuant to
Statutes of 1979, Chapter 282, which provides relief funds from State moneys
beginning in fiscal year 1979/80 and is designed to provide a permanent system
for sharing State taxes and budget funds with local agencies. Under Chapter
282, cities and counties receive more of the remaining property tax revenues
collected under Proposition 13 instead of direct State aid. School districts
receive a correspondingly reduced amount of property taxes, but receive
compensation directly from the State and are given additional relief. Chapter
282 does not affect the derivation of the base levy ($4.00 per $100 of
assessed valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or the "Gann
Initiative" was approved by the California voters, which added Article XIIIB
to the California Constitution. Under Article XIIIB, State and local
governmental entities have an annual "appropriations limit" and are not
allowed to spend certain monies called "appropriations subject to limitation"
in an amount higher than the "appropriations limit." Article XIIIB does not
affect the appropriation of moneys which are excluded from the definition of
"appropriations subject to limitation," including debt service on indebtedness
existing or authorized as of January 1, 1979, or bonded indebtedness
subsequently approved by the voters. In general terms, the "appropriations
limit" is required to be based on certain 1978/79 expenditures, and is to be
adjusted annually to reflect changes in consumer prices, population and
certain services provided by these entities. Article XIIIB also provides that
if these entities' revenues in any year exceed the amounts permitted to be
spent, the excess is to be returned by revising tax rates or fee schedules
over the subsequent two years.
At the November 8, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (a) the California Legislature establish a prudent state
20
reserve fund in an amount as it shall deem reasonable and necessary and (b)
revenues in excess of amounts permitted to be spent and which would otherwise
be returned pursuant to Article XIIIB by revision of tax rates or fee
schedules, be transferred and allocated (up to a maximum of 4%) to the State
School Fund and be expended solely for purposes of instructional improvement
and accountability. No such transfer or allocation of funds will be required
if certain designated state officials determine that annual student
expenditures and class size meet certain criteria as set forth in Proposition
98. Any funds allocated to the State School Fund shall cause the appropriation
limits established in Article XIIIB to be annually increased for any such
allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the State of
California provide a minimum level of funding for public schools and community
colleges. Commencing with the 1988-89 fiscal year, state monies to support
school districts and community college districts shall equal or exceed the
lesser of (a) an amount equalling the percentage of state general revenue
bonds for school and community college districts in fiscal year 1986-87, or
(b) an amount equal to the prior year's state general fund proceeds of taxes
appropriated under Article XIIIB plus allocated proceeds of local taxes, after
adjustment under Article XIIIB. The initiative permits the enactment of
legislation, by a two-thirds vote, to suspend the minimum funding requirement
for one year.
On June 30, 1989, the California Legislature enacted Senate Constitutional
Amendment 1, a proposed modification of the California Constitution to alter
the spending limit and the education funding provisions of Proposition 98.
Senate Constitutional Amendment 1, on the June 5, 1990 ballot as Proposition
111, was approved by the voters and took effect on July 1, 1990. Among a
number of important provisions, Proposition 111 recalculates spending limits
for the State and for local governments, allows greater annual increases in
the limits, allows the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduces the amount of the funding
guarantee in recession years for school districts and community college
districts (but with a floor of 40.9% of State general fund tax revenues),
removes the provision of Proposition 98 which included excess moneys
transferred to school districts and community college districts in the base
calculation for the next year, limits the amount of State tax revenue over the
limit which would be transferred to school districts and community college
districts, and exempts increased gasoline taxes and truck weight fees from the
State appropriations limit. Additionally, Proposition 111 exempts from the
State appropriations limit funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further interpretation by
both the Legislature and the courts to determine its applicability to specific
situations involving the State and local taxing authorities. Depending upon
the interpretation, Article XIIIB may limit significantly a governmental
entity's ability to budget sufficient funds to meet debt service on bonds and
other obligations.
On November 4, 1986, California voters approved an initiative statute known
as Proposition 62. This initiative (a) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution
or ordinance adopted by a two-thirds vote of the governmental entity's
legislative body and by a majority vote of the electorate of the governmental
entity, (b) requires that any special tax (defined as taxes levied for other
than general governmental purposes) imposed by a local governmental entity be
approved by a two-thirds vote of the voters within that jurisdiction, (c)
restricts the use of revenues from a special tax to the purposes or for the
service for which the special tax was imposed, (d) prohibits the imposition of
ad valorem taxes on real property by local governmental entities except as
permitted by Article XIIIA, (e) prohibits the imposition of transaction taxes
and sales taxes on the sale of real property by local
21
governments, (f) requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority vote of the electorate within
two years of the adoption of the initiative or be terminated by November 15,
1988, (g) requires that, in the event a local government fails to comply with
the provisions of this measure, a reduction in the amount of property tax
revenue allocated to such local government occurs in an amount equal to the
revenues received by such entity attributable to the tax levied in violation
of the initiative, and (h) permits these provisions to be amended exclusively
by the voters of the State of California.
In September 1988, the California Court of Appeal in City of Westminster v.
County of Orange 204 Cal. App. 3d 623, 215 Cal. Rptr. 511 (Cal. Ct. App.
1988), held that Proposition 62 is unconstitutional to the extent that it
requires a general tax by a general law city, enacted on or after August 1,
1985 and prior to the effective date of Proposition 62, to be subject to
approval by a majority of voters. The Court held that the California
Constitution prohibits the imposition of a requirement that local tax measures
be submitted to the electorate by either referendum or initiative. It is not
possible to predict the impact of this decision on charter cities, on special
taxes or on new taxes imposed after the effective date of Proposition 62.
On November 8, 1988, California voters approved Proposition 87. Proposition
87 amended Article XVI, Section 16, of the California Constitution by
authorizing the California Legislature to prohibit redevelopment agencies from
receiving any of the property tax revenue raised by increased property tax
rates levied to repay bonded indebtedness of local governments which is
approved by voters on or after January 1, 1989. It is not possible to predict
whether the California Legislature will enact such a prohibition nor is it
possible to predict the impact of Proposition 87 on redevelopment agencies and
their ability to make payments on outstanding debt obligations.
Certain California Municipal Obligations in which the Fund may invest may
be obligations that are payable solely from the revenues of health care
institutions. Certain provisions under California law may adversely affect
such revenues and, consequently, payment on those California Municipal
Obligations.
The Federally sponsored Medicaid program for health care services to
eligible welfare beneficiaries in California is known as the Medi-Cal program.
Historically, the Medi-Cal program has provided for a cost-based system of
reimbursement for inpatient care furnished to Medi-Cal beneficiaries by any
hospital wanting to participate in the Medi-Cal program, provided such
hospital met applicable requirements for participation. California law now
provides that the State of California shall selectively contract with
hospitals to provide acute inpatient services to Medi-Cal patients. Medi-Cal
contracts currently apply only to acute inpatient services. Generally, such
selective contracting is made on a flat per diem payment basis for all
services to Medi-Cal beneficiaries, and generally such payment has not
increased in relation to inflation, costs
or other factors. Other reductions or limitations may be imposed on payment
for services rendered to Medi-Cal beneficiaries in the future.
Under this approach, in most geographical areas of California, only those
hospitals which enter into a Medi-Cal contract with the State of California
will be paid for non-emergency acute inpatient services rendered to Medi-Cal
beneficiaries. The State may also terminate these contracts without notice
under certain circumstances and is obligated to make contractual payments only
to the extent the California legislature appropriates adequate funding
therefor.
In February 1987, the Governor of the State of California announced that
payments to Medi-Cal providers for certain services (not including hospital
acute inpatient services) would be decreased by 10% through June 1987.
However, a federal district court issued a preliminary injunction preventing
application of
22
any cuts until a trial on the merits can be held. If the injunction is deemed
to have been granted improperly, the State of California would be entitled to
recapture the payment differential for the intended reduction period. It is
not possible to predict at this time whether any decreases will ultimately be
implemented.
California enacted legislation in 1982 that authorizes private health plans
and insurers to contract directly with hospitals for services to beneficiaries
on negotiated terms. Some insurers have introduced plans known as "preferred
provider organizations" ("PPOs"), which offer financial incentives for
subscribers who use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance organizations
("HMOs"), private payors limit coverage to those services provided by selected
hospitals. Discounts offered to HMOs and PPOs may result in payment to the
contracting hospital of less than actual cost and the volume of patients
directed to a hospital under an HMO or PPO contract may vary significantly
from projections. Often, HMO or PPO contracts are enforceable for a stated
term, regardless of provider losses or of bankruptcy of the respective HMO or
PPO. It is expected that failure to execute and maintain such PPO and HMO
contracts would reduce a hospital's patient base or gross revenues.
Conversely, participation may maintain or increase the patient base, but may
result in reduced payment and lower net income to the contracting hospitals.
Such California Municipal Obligations may also be insured by the State of
California pursuant to an insurance program implemented by the Office of
Statewide Health Planning and Development for health facility construction
loans. If a default occurs on insured California Municipal Obligations, the
State Treasurer will issue debentures payable out of a reserve fund
established under the insurance program or will pay principal and interest, on
an unaccelerated basis from unappropriated State funds. At the request of the
Office of Statewide Health Planning and Development, Arthur D. Little, Inc.
prepared a study in December 1983 to evaluate the adequacy of the reserve fund
established under the insurance program and, based on certain formulations and
assumptions found the reserve fund substantially underfunded. In September of
1986, Arthur D. Little, Inc. prepared an update of the study and concluded
that an additional 10% reserve be established for "multi-level" facilities.
For the balance of the reserve fund, the update recommended maintaining the
current reserve calculation method. In March 1990, Arthur D. Little, Inc.
prepared a further review of the study and recommended that separate reserves
continue to be established for "multi-level" facilities at a reserve level
consistent with those that would be required by an insurance company.
Certain California Municipal Obligations in the Fund may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. California has five principal statutory provisions which limit the
remedies of a creditor secured by a mortgage or deed of trust. Two limit the
creditor's right to obtain a deficiency judgment, one limitation being based
on the method of foreclosure and the other on the type of debt secured. Under
the former, a deficiency judgment is barred when the foreclosure is
accomplished by means of a nonjudicial trustee's sale. Under the latter, a
deficiency judgment is barred when the foreclosed mortgage or deed of trust
secures certain purchase money obligations. Another California statute,
commonly known as the "one form of action" rule, requires creditors secured by
real property to exhaust their real property security by foreclosure before
bringing a personal action against the debtor. The fourth statutory provision
limits any deficiency judgment obtained by a creditor secured by real property
following a judicial sale of such property to the excess of the outstanding
debt over the fair value of the property at the time of the sale, thus
preventing the creditor from obtaining a large deficiency judgment against the
debtor as the result of low bids at a judicial sale. The fifth statutory
provision gives the debtor the right to redeem the real property from any
judicial foreclosure sale as to which a deficiency judgment may be ordered
against the debtor.
23
Upon the default of a mortgage or deed of trust with respect to California
real property, the creditor's nonjudicial foreclosure rights under the power
of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless
at least three full monthly payments have become due and remain unpaid. The
power of sale is exercised by posting and publishing a notice of sale for at
least 20 days after expiration of the three-month reinstatement period.
Therefore, the effective minimum period for foreclosing on a mortgage could be
in excess of seven months after the initial default. Such time delays in
collections could disrupt the flow of revenues available to an issuer for the
payment of debt service on the outstanding obligations if such defaults occur
with respect to a substantial number of mortgages or deeds of trust securing
an issuer's obligations.
In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such
private sale to constitute "state action," and could hold that the private-
right-of-sale proceedings violate the due process requirements of the Federal
or State Constitutions, consequently preventing an issuer from using the
nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the Fund may be obligations
which finance the acquisition of single family home mortgages for low and
moderate income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to California's
statutory limitations described above applicable to obligations secured by
real property. Under California antideficiency legislation, there is no
personal recourse against a mortgagor of a single family residence purchased
with the loan secured by the mortgage, regardless of whether the creditor
chooses judicial or nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family owner-
occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years during the term of the mortgage loan, and cannot
in any event exceed six months' advance interest on the amount prepaid in
excess of 20% of the original principal amount of the mortgage loan. This
limitation could affect the flow of revenues available to an issuer for debt
service on the outstanding debt obligations which financed such home
mortgages.
Additional Considerations. With respect to Municipal Securities issued by
the State of California and its political sub-divisions, the Fund cannot
predict what legislation, if any, may be proposed in the California State
Legislature as regards the California State personal income tax status of
interest on such obligations, or which proposals, if any, might be enacted.
Such proposals, if enacted, might materially adversely affect the availability
of California Municipal Securities for investment by the Fund and the value of
the Fund's portfolio. In such an event, the Trustees would reevaluate the
Fund's investment objective and policies and consider changes in its structure
or possible dissolution.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedule of sales charges on Class A shares described in the Prospectus
applies to purchases made by any "purchaser," which is defined to include the
following: (a) an individual; (b) an individual's immediate family purchasing
shares for his or her own account; (c) a trustee or other fiduciary
24
purchasing shares for a single trust estate or single fiduciary account; (d) a
pension, profit sharing or other employee benefit plan qualified under Section
401(a) of the Code and qualified employee benefit plans of employers who are
"affiliated persons" of each other within the meaning of the 1940 Act; (e)
tax-exempt organizations enumerated in Section 501(c)(3) or (13) of the Code;
(f) any other organized group of persons, provided 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; or (g) a
trustee or other professional fiduciary (including a bank, or an investment
adviser registered with the SEC under the Investment Advisers Act of 1940)
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 on Class A shares should contact their Smith Barney Shearson
Financial Consultants.
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 in the Smith Barney
Shearson Group of Funds that are sold with a sales charge, including the
purchase being made, of any purchaser is $25,000 or more. The funds in the
Smith Barney Shearson Group of Funds that are sold with a sales charge are
shown under "Exchange Privilege" in the Prospectus. 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 notice to shareholders. For
further information regarding the right of accumulation, shareholders should
contact their Smith Barney Shearson Financial Consultants.
DETERMINATION OF PUBLIC OFFERING PRICE
The Fund offers its shares to the public on a continuous basis. The public
offering price per Class A share of the Fund is equal to the net asset value
per share at the time of purchase plus a sales charge based on the aggregate
amount of the investment. The public offering price per Class B share (and
Class A share purchases, including applicable rights of accumulation, equaling
or exceeding $1 million), 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 shares and Class A shares when purchased in amounts
equalling or exceeding $1 million. The method of computing the public offering
price is shown in the Fund's financial statements incorporated by reference
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 the markets the Fund normally utilizes is restricted, or an
emergency, as determined by the SEC, exists making disposal of the Fund's
investments or determination of net asset value not reasonably practicable or
(c) for such other periods as the SEC by order may permit for protection of
the Fund's shareholders.
25
DISTRIBUTIONS IN KIND
If the Fund's Board of Directors determines that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make a
redemption payment wholly in cash, the Fund may pay, in accordance with rules
adopted by the SEC, 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. Portfolio securities issued in a distribution in
kind will be readily marketable, although shareholders receiving distributions
in kind may incur brokerage commissions when subsequently disposing of 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 periodically. Withdrawals of at least $50
monthly 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 2% per month of the value of a shareholder's shares at the time the
Withdrawal Plan commences. To the extent withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in the Fund, the
value of the shareholder's investment will be reduced and continued withdrawal
payments may reduce the shareholder's investment and ultimately exhaust it.
Withdrawal payments should not be considered as income 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 shareholder 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 distributions on
shares in the Withdrawal Plan are reinvested automatically at net asset value
in additional shares of the Fund. All applications for participation in the
Withdrawal Plan must be received by TSSG as Withdrawal Plan agent no later
than the eighth day of the month to be eligible for participation beginning
with that month's withdrawal. The Withdrawal Plan will not be carried over on
exchanges between funds or classes of the Fund ("Classes"). A new Withdrawal
Plan application is required to establish the Withdrawal Plan in the new fund
or Class. For additional information, shareholders should contact their Smith
Barney Shearson Financial Consultants.
DISTRIBUTOR
Smith Barney Shearson serves as the Fund's distributor on a best efforts basis
pursuant to a written agreement (the "Distribution Agreement"). For the 1992,
1993 and 1994 fiscal years, Smith Barney Shearson received $1,638,252,
$1,713,689 and $937,828, respectively, in sales charges from 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 the fiscal
year ended February 28, 1994 Smith Barney Shearson received $9,030 and
$75,150, representing CDSC on redemption of the Fund's Class B shares.
Smith Barney Shearson forwards investors' funds for the purchase of shares
five business days after placement of purchase orders (i.e., the "settlement
date"). When payment is made by the investor before settlement date, unless
otherwise directed by the investor, the funds will be held as a free credit
balance in
26
the investor's brokerage account, and Smith Barney Shearson 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 the Smith Barney Shearson Money Market Fund) in the Smith Barney
Shearson Group of Funds. If the investor instructs Smith Barney Shearson to
invest the funds in a money market fund in the Smith Barney Shearson Group of
Funds, 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 Shearson which serve the funds in an investment advisory capacity
will benefit from the fact that they are receiving investment management fees
from both such investment companies, 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 Shearson resulting from five-day settlement
procedures and will take such benefits into consideration when reviewing the
Advisory and Distribution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Fund are distributed on a best efforts basis by Smith Barney
Shearson as exclusive sales agent of the Fund pursuant to the Distribution
Agreement. To compensate Smith Barney Shearson for the services it provides
and for the expense it bears under the Distribution Agreement, the Fund has
adopted a services and distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund pays Smith Barney Shearson a
service fee, accrued daily and paid monthly, calculated at the annual rate of
.15% of the value of the Fund's average daily net assets attributable to the
Class A and Class B shares. In addition, Class B shares pay a distribution fee
intended to compensate Smith Barney Shearson for its initial expense of paying
Financial Consultants a commission upon sales of the respective shares. The
Class B distribution fees are calculated at the annual rate of .50% 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
Fund's Class A and Class B shares paid $187,628 and $8,827, respectively, in
service fees. For the same period, the Fund's Class B shares paid $29,426 in
distribution fees. For the fiscal year ended February 28, 1994, the Fund's
Class A and Class B shares paid $641,265 and $115,317, respectively in service
fees. For the same period the Fund's Class B shares paid $384,392 in
distribution fees.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Fund's 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 distribution
fees without shareholder approval, and all material amendments of the Plan
also must be approved by the Directors and Independent Directors in the manner
described above. The Plan may be terminated at any time with respect to a
Class, without penalty, by vote of a majority of the Independent Directors or
by a vote of a majority of the outstanding voting securities of the Class (as
defined in the 1940 Act). Pursuant to the Plan, Smith Barney Shearson will
provide the Fund's Board of Directors periodic reports for the amounts
expended under the Plan and the purpose for which such expenditures were made.
VALUATION OF SHARES
The Prospectus discusses the time at which the net asset value of shares of
each Class of the Fund is determined for purposes of sales and redemptions.
Because of the differences in distribution fees and Class-
27
specific expenses, the per share net asset value of each Class will differ.
The following is a description of the procedures used by the Fund in valuing
its assets.
The valuation of the Fund's assets is made by Boston Advisors after
consultation with an independent pricing service (the "Service") approved by
the Fund's Board of Directors. When, in the judgment of the Service, quoted
bid prices for investments are readily available and 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 Directors, which may
replace any such Service at any time if it determines it to be in the best
interest of the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund in the Smith Barney Shearson
Group of Funds may exchange all or part of their shares for shares of the same
Class of other funds in the Smith Barney Shearson Group of 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 another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates and conversion periods, will be
deemed to have been held since the date the shares being exchanged were
purchased.
Dealers other than Smith Barney Shearson must notify TSSG of the investor's
prior ownership of Class A shares of Smith Barney Shearson High Income Fund
and the account number in order to accomplish an exchange of shares of the
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. 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 your Smith Barney Shearson Financial
Consultant.
28
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 immediately invested, at a
price as described above, in shares of the fund being acquired. Smith Barney
Shearson reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time after 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. 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 Class.
YIELD
A Class' 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows:
YIELD = 2 [(a-b + 1)/6/ - 1]
---
cd
<TABLE>
<C> <S>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimubrsement).
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.
</TABLE>
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 of shares 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 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 continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the current yield of the
Fund. In periods of rising interest rates, the opposite can be expected to
occur.
29
AVERAGE ANNUAL TOTAL RETURN
Average annual total return figures are computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)/n/ = ERV
<TABLE>
<C> <S>
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 distri-
butions.
</TABLE>
These total return figures assume that the maximum 4.50% sales charge
assessed by the Fund has been deducted from the investment at the time of
purchase.
The average annual total returns for Class B shares for the periods
indicated were as follows:
1.05% per annum for the one-year period beginning on March 1, 1993 through
February 28, 1994.
8.37% per annum during the period the Fund commenced selling Class B shares,
November 6, 1992 through February 28, 1994.
Average annual total return figures assume that the maximum applicable CDSC
assessed by the Fund has been deducted from the hypothetical investment. If
the maximum applicable CDSC had not been deducted from the investment at the
time of redemption the average annual total return for the Class B shares
would have been 5.40% and 11.32%, respectively.
AGGREGATE TOTAL RETURN
Aggregate total return figures represent the cumulative change in the value of
an investment in the Class for the specified period and are computed by the
following formula:
ERV-P
-----
P
<TABLE>
<C> <S>
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), assuming reinvestment of all dividends and distri-
butions.
</TABLE>
The aggregate total return for Class B shares for the periods indicated were
as follows:
5.40% for the period from March 1, 1993 through February 28, 1994.
15.17% for the period from November 6, 1992 through February 28, 1994.
The aggregate total return figures do not assume that the maximum 4.5% 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 aggregate total return for the same period would have been 1.05% and
11.17%, respectively.
30
A Class' performance will vary from time to time depending upon market
conditions, the composition of the Fund's 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 the 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
As described above and in the Prospectus, the Fund is designed to provide
investors with current income which is excluded from gross income for Federal
income tax purposes and exempt from California state personal income taxes.
The Fund is not intended to constitute 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 Fund would not be
suitable for tax-exempt institutions, 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 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 consult
their own tax advisors as to the tax consequences of an investment in the
Fund.
The Fund has qualified and intends to continue to qualify each year as a
"regulated investment company" under the Code. Provided that the Fund (a)
qualifies as a regulated investment company and (b) distributes at least 90%
of its taxable net investment income and 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 and California state income
or franchise taxes to the extent its taxable net investment income and its net
realized short-and long-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 and California state 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 for
Federal and California state income tax purposes, any loss on the sale or
exchange of such share, to the extent of such exempt-interest dividend, may be
disallowed. In addition, the Code may require a shareholder, if he or she
receives exempt-interest dividends, to treat as taxable income a portion of
certain otherwise non-taxable social security and railroad retirement benefit
payments. Furthermore, that portion of any exempt-interest dividends paid by
the Fund which represents income derived from private activity bonds held by
the Fund may not retain its Federal tax-exempt status in the hands of a
shareholder who is a "substantial user" of a facility financed by such bonds
or a "related person" thereof. Similar rules are applicable for California
state personal income tax purposes. Moreover, as noted in the Fund's
Prospectus, (a) some or all of the Fund's dividends and distributions may be a
specific tax 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 the Fund's dividends and
31
distributions may affect a corporate shareholder's Federal "environmental" tax
liability. In addition, the receipt of Fund dividends and distributions may
affect a foreign corporate shareholder's Federal "branch profits" tax
liability and the Federal and California state "excess net passive income" tax
liability of a shareholder of a Subchapter S corporation. Shareholders should
consult their own tax advisors as to whether they are (a) substantial users
with respect to a facility or related to such users within the meaning of the
Code and (b) subject to a Federal alternative minimum tax, the Federal
environmental tax, the Federal branch profits tax or the Federal and
California state excess net passive income tax.
As described above and in the Fund's Prospectus, the Fund may invest in
exchange-traded municipal bond index futures contracts and options on interest
rates futures contracts. The Fund anticipates that these investment activities
will not prevent the Fund from qualifying as a regulated investment company.
As a general rule, these investment activities will increase or decrease the
amount of long-and short-term capital gains or losses realized by the Fund
and, accordingly, will affect the amount of capital gains distributed to the
Fund's shareholders.
For Federal and California state income tax purposes, gain or loss on the
futures contracts and options described above (collectively referred to herein
as "section 1256 contracts") 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 such contracts 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 the losses of the Fund
for the 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 by the Fund will be distributed
annually as described in the Prospectus. Such distributions ("capital gain
dividends") will be taxable to shareholders as long-term capital gains,
regardless of how long they have held Fund shares, and will be designated as
capital gain dividends in a written notice mailed to shareholders after the
close of the Fund's 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 other six-month rule described above relating to
exempt-interest dividends) on the sale or exchange of such share will be
treated as a long-term capital loss to the extent of the capital gain
dividend.
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 mutual
fund for which the otherwise applicable sales charge is reduced by reason of a
reinvestment right (i.e., exchange privilege), the original sales charge will
not be taken into account when computing gain/loss on 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. The portion of the original sales
charge that does not increase the shareholder's tax basis in the original
shares will be treated as incurred with respect to the second acquisition and,
as a general rule, will increase the shareholder's tax basis in the newly
acquired
32
shares. Furthermore, the same rule also applies to a disposition of the newly
acquired or redeemed shares made within 90 days of the second acquisition.
This provision prevents a shareholder from immediately deducting the sales
charge by shifting his or her investment in a family of mutual funds.
Each shareholder will receive after the close of the calendar year an
annual statement as to the Federal income tax and California state personal
income tax status of his or her dividends and distributions from the Fund for
the prior calendar year. Dividends attributable to California Municipal
Securities and any other obligations which, when held by an individual, the
interest therefrom would be exempt from taxation by California, will be exempt
from California state personal income taxation ("California exempt-interest
dividends"). Any dividends attributable to interest on municipal obligations
that are not California Municipal Securities generally will be taxable as
ordinary dividends for California state personal income tax purposes even if
such dividends are excluded from gross income for Federal income tax purposes.
These statements also will designate the amount of exempt-interest dividends
that is a specific preference item for purposes of the Federal individual and
corporate 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 other
state and local taxes that may apply to these dividends and distributions. The
dollar amount of dividends excluded or exempt from Federal income taxation or
California state personal income taxation and the dollar amount subject to
Federal income taxation or California state personal income taxation, if any,
will vary for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. In the event the Fund earns taxable net
investment income, it intends to designate as taxable dividends the same
percentage of each day's dividend as its actual taxable net investment 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 taxable dividend or capital gain distribution should be aware that,
regardless of whether the price of the Fund shares to be purchased reflects
the amount of the forthcoming dividend or distribution payment, any such
payment will be a taxable dividend or distribution payment.
If a shareholder fails to furnish the Fund with a correct taxpayer
identification number, fails to fully report dividend or interest income or
fails to certify to the Fund that he or she has provided a correct taxpayer
identification number and that he or she is not subject to "backup
withholding," then the shareholder may be subject to a 31% backup withholding
tax with respect to (a) any taxable dividends and distributions and (b) the
proceeds of any redemption of Fund shares. An individual's taxpayer
identification number is his or her social security number. The backup
withholding tax is not an additional tax and may be credited against a
shareholder's regular Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substitute
for careful tax planning. Further, it should be noted that, for California
state tax purposes, the portion of any Fund dividends constituting California
exempt-interest dividends is exempt from income for California state personal
income tax purposes only. Dividends (including California exempt-interest
dividends) paid to shareholders subject to California state franchise tax or
California state corporate income tax may therefore be taxed as ordinary
dividends to such shareholders, notwithstanding that all or a portion of such
dividends is exempt from California state personal income tax. Potential
shareholders in the Fund, including, in particular, corporate shareholders
which may be subject to
33
either California franchise tax or California corporate income tax, should
consult their tax advisors with respect to (a) the application of such
corporate and franchise taxes to the receipt of Fund dividends and as to their
own California state tax situation in general, (b) the application of other
state and local taxes to the receipt of Fund dividends and distributions and
(c) their own specific tax situations.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston Place,
Boston, Massachusetts 02108, and pursuant to a custody agreement, serves as
the Fund's custodian. 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
market value of securities held in custody and also receives certain
securities transaction charges. The assets of the Fund are held under bank
custodianship in compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and
pursuant to a transfer agency agreement, serves as the Fund's transfer agent.
Under the 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 certain out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended February 28, 1994
accompanies this Statement of Additional Information and is incorporated
herein by reference in its entirety.
34
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 definitions 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
particularly, the competitive position of the municipal enterprise under
review and the basic security covenants. Although a rating reflects S&P's
judgment 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. Quality of
management appears superior.
Revenue Bonds--Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong,
due to the competitive position of the municipal enterprise or to the nature
of the revenues. Basic security provisions (including rate covenant, earnings
test for issuance of additional bonds and debt service reserve requirements)
are rigorous. There is evidence of superior management.
AA
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 capacity 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 because:
General Obligation Bonds--There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
A-1
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.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
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
revenues 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
categories, 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 rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change,
A-2
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which 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 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 security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which 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 therefore 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 default
or present elements of danger may exist with respect to principal or interest.
Ca
Bonds that are rated Ca represent obligations which 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.
A-3
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 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.
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 demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). This
distinction is in recognition of the differences between short-term and long-
term credit risk. Loans bearing the designation MIG 1 or VMIG 1 are of the
best quality, enjoying strong protection from established cash flows of funds
for their servicing, from established and broad-based access to the market for
refinancing or both. Loans bearing the designation MIG 2 or VMIG 2 are of high
quality, with ample margins of protection although not as large as the
preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow may be
tight and market access for refinancing is likely to be less well established.
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 on-going 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 allowance 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) economic
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 customer 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.
A-4
Smith Barney Shearson
CALIFORNIA
MUNICIPALS
FUND INC.
SMITH BARNEY SHEARSON
CALIFORNIA MUNICIPALS FUND INC.
Two World Trade Center
New York, New York 10048 Fund 14, 198
STATEMENT OF
ADDITIONAL INFORMATION
APRIL 29, 1994
[LOGO OF SMITH BARNEY SHEARSON APPEARS HERE]
SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended February 28, 1994
and the Report of Independent Accountants dated April 8, 1994 are incorporated
by reference to the Definitive 30b2-1 filed on April 28, 1994 as Accession #
0000053798-94-000205.
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
All references are to the Registrant's Registration Statement on Form N-1A as
filed with the Securities and Exchange Commission on February 21, 1984. File
Nos. 2-89548 and 811-3970 (the "Registration Statement").
(1)(a) Registrant's Articles of Incorporation dated February 16, 1984 is
filed herein.
(b) Articles of Amendment dated August 26, 1987, to Articles of
Incorporation is filed herein.
(c) Articles of Amendment dated December 14, 1988, to Articles of
Incorporation is filed herein.
(d) Articles Supplementary dated November 2, 1992, to Articles of
Incorporation is filed herein.
(e) Article of Amendment dated November 4, 1992, to Articles of
Incorporation is filed herein.
(f) Article of Amendment dated July 30, 1993, to Articles of
Incorporation is filed herein.
(2)(a) Registrant's By-Laws dated March 21, 1984 are incorporated by
reference to Pre-Effective Amendment No. 1 to the Registration Statement
("Pre-Effective Amendment No. 1").
(b) Amendments to Registrant's By-Laws dated March 21, 1987 is
incorporated by reference to Post-Effective Amendment No. 5 to the
Registration Statement ("Post-Effective Amendment No. 5").
(3) Not Applicable.
(4) Registrant's form of stock certificate for Class A and Class B shares is
incorporated by reference to Post-Effective Amendment No. 16 to the
Registration Statement filed on October 23, 1992 ("Post-Effective
Amendment No. 16").
(5) Investment Advisory Agreement between the Registrant and Greenwich
Street Advisors dated July 30, 1993 is incorporated by reference to Post-
Effective Amendment No. 18 to the Registration Statement filed on February 28,
1994 ("Post-Effective Amendment No. 18").
(6) Distribution Agreement between the Registrant and Smith Barney Shearson
Inc. dated July 30, 1993 is incorporated by reference to Post-Effective
Amendment No. 18.
(7) Not Applicable.
(8) Custodian Agreement with Boston Safe Deposit and Trust Company dated
March 26, 1984 is incorporated by reference to Pre-Effective Amendment
No. 1.
(9) (a) Transfer Agency Agreement between the Registrant and The
Shareholders Services Group, Inc. dated August 2, 1993 is incorporated by
reference to Post-Effective Amendment No. 18.
(b) Administration Agreement between the Registrant and The Boston
Company Advisors, Inc. dated May 21, 1993 is incorporated by reference to
Post-Effective Amendment No. 18.
(10) Opinion of "'Melveny & Myers, special state counsel is filed herein.
(11)(a) Consent of Independent Accountants is filed herein.
(b) Consent of Morningstar Mutual Fund Values is incorporated by
reference to Post-Effective Amendment No. 16.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Services and Distribution Plan pursuant to Rule 12b-1 is
incorporated by reference to Post-Effective Amendment No. 18.
(16) Performance Data dated is incorporated by reference to Post-Effective
Amendment No. 10 to the Registration Statement filed on June 28, 1989 ("Post-
Effective Amendment No. 10").
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Title of Class Holders by Class as of March 25, 1994
Common Stock Class A - 6,777
par value $.001 per Class B - 3,110
share
Item 27. Indemnification
The response to this item is incorporated by reference to Post-Effective
Amendment No. 16.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Greenwich Street Advisors
Greenwich Street Advisors, through its predecessors, has been in the
investment counseling business since 1934 and is a division of Mutual
Management Corp. ("MMC"). MMC was incorporated in 1978 and is a wholly owned
subsidiary of Smith Barney Shearson Holdings Inc. ("Holdings"), which is in
turn a wholly owned subsidiary of The Travelers Inc. (formerly known as
Primerica Corporation) ("Travelers").
The list required by this Item 28 of officers and directors of MMC and
Greenwich Street Advisors, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two fiscal years, is incorporated by
reference to Schedules A and D of FORM ADV filed by MMC on behalf of Greenwich
Street Advisors pursuant to the Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney, Harris Upham
& Co. Incorporated acquired the domestic retail brokerage and asset management
businesses of Shearson Lehman Brothers, which included the business of the
Registrant's prior investment adviser. Shearson Lehman Brothers was a wholly
owned subsidiary of Shearson Lehman Brothers Holdings Inc. ("Shearson
Holdings"). All of the issued and outstanding common stock of Shearson
Holdings (representing 92% of the voting stock) was held by American Express
Company. Information as to any past business vocation or employment of a
substantial nature engaged in by officers and directors of Shearson Lehman
Advisors can be located in Schedules A and D of FORM ADV filed by Shearson
Lehman Brothers on behalf of Shearson Lehman Advisors prior to July 30, 1993.
(SEC FILE NO. 801-3701)
1/27/94
Item 29. Principal Underwriters
Smith Barney Shearson Inc. ("Smith Barney Shearson") currently acts as
distributor for Smith Barney Shearson Managed Municipals Fund Inc., Smith
Barney Shearson New York Municipals Fund Inc., Smith Barney Shearson
California Municipals Fund Inc., Smith Barney Shearson Massachusetts
Municipals Fund, Smith Barney Shearson Global Opportunities Fund, Smith Barney
Shearson Aggressive Growth Fund Inc., Smith Barney Shearson Appreciation Fund
Inc., Smith Barney Shearson Small Capitalization Fund, Smith Barney Shearson
Worldwide Prime Assets Fund, Smith Barney Shearson Short-Term World Income
Fund, Smith Barney Shearson Principal Return Fund, Smith Barney Shearson
Municipal Money Market Fund Inc., Smith Barney Shearson Daily Dividend Fund
Inc., Smith Barney Shearson Government and Agencies Fund Inc., Smith Barney
Shearson Managed Governments Fund Inc., Smith Barney Shearson New York
Municipal Money Market Fund, Smith Barney Shearson California Municipal Money
Market Fund, Smith Barney Shearson Income Funds, Smith Barney Shearson Equity
Funds, Smith Barney Shearson Investment Funds Inc., Smith Barney Shearson
Precious Metals and Minerals Fund Inc., Smith Barney Shearson
Telecommunications Trust, Smith Barney Shearson Arizona Municipals Fund Inc.,
Smith Barney Shearson New Jersey Municipals Fund Inc., The USA High Yield Fund
N.V., Garzarelli Sector Analysis Portfolio N.V., The Advisors Fund L.P., Smith
Barney Shearson Fundamental Value Fund Inc., Smith Barney Shearson Series
Fund, The Trust for TRAK Investments, Smith Barney Shearson Income Trust,
Smith Barney Shearson FMA R Trust, Smith Barney Shearson Adjustable Rate
Government Income Fund, Smith Barney Shearson Florida Municipals Fund, Smith
Barney Funds, Inc., Smith Barney Equity Funds, Inc., Smith Barney Muni Funds,
Smith Barney World Funds, Inc., Smith Barney Money Funds, Inc., Smith Barney
Tax Free Money Fund, Inc., Smith Barney Variable Account Funds, Smith Barney
U.S. Dollar Reserve Fund (Cayman), Worldwide Special Fund, N.V., Worldwide
Securities Limited, (Bermuda), and various series of unit investment trusts.
Smith Barney Shearson is a wholly owned subsidiary of Smith Barney
Shearson Holdings Inc., which in turn is a wholly owned subsidiary of The
Travelers Inc. The information required by this Item 29 with respect to each
director, officer and partner of Smith Barney Shearson is incorporated by
reference to Schedule A of FORM BD filed by Smith Barney Shearson pursuant to
the Securities Exchange Act of 1934 (SEC File No. 812-8510).
1/27/94
Item 30. Location of Accounts and Records
(1) Smith Barney Shearson California Municipals Fund Inc.
Two World Trade Center
New York, New York 10048
(2) Greenwich Street Advisors
Two World Trade Center
New York, New York 10048
(3) The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
(4) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(5) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None
Rule 485(b) Certification
The Registrant hereby certifies that it meets all requirements for
effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY SHEARSON
CALIFORNIA MUNICIPALS FUND INC., has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Boston, Commonwealth of
Massachusetts on the 28th day of April, 1994.
SMITH BARNEY SHEARSON
CALIFORNIA MUNICIPALS FUND INC.
By: /s/ Heath B. McLendon*
Heath B. McLendon, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement and the above Power of Attorney
has been signed below by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the Board
4/28/94
Heath B. McLendon (Chief Executive Officer)
/s/ Vincent Nave* Treasurer (Chief Financial
4/28/94
Vincent Nave and Accounting Officer)
/s/ Herbert Barg* Director
4/28/94
Herbert Barg
/s/ Alfred J. Bianchetti* Director
4/28/94
Alfred J. Bianchetti
________________ Director
Robert E. Borgesen
/s/ Martin Brody* Director
4/28/94
Martin Brody
/s/ Dwight B. Crane* Director
4/28/94
Dwight B. Crane
/s/ James J. Crisona* Director
4/28/94
James J. Crisona
Signature Title Date
/s/ Robert A. Frankel* Director
4/28/94
Robert A. Frankel
/s/ Peter H. Gallary* Director
4/28/94
Peter H. Gallary
/s/ Dr. Paul Hardin* Director
4/28/94
Dr. Paul Hardin
/s/ Stephen E. Kaufman* Director
4/28/94
Stephen E. Kaufman
/s/ Joseph J. McCann* Director
4/28/94
Joseph J. McCann
*Signed by Lee D. Augsburger, their
duly authorized attorney-in-fact,
pursuant to power of attorney dated
June 30, 1993
/s/ Lee D. Augsburger
Lee D. Augsburger
g:\shared\domestic\clients\shearson\fund\camu\n1a
EXHIBIT 1A-F
ARTICLES OF INCORPORATION
OF
SHEARSON CALIFORNIA MUNICIPALS INC.
ARTICLE 1
THE UNDERSIGNED, Aaron M. Lampert, whose post office address is c/o
Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York,
New York 10022, being at least eighteen years of age, does hereby act as an
incorporator, under and by virtue of the Maryland General Corporation Law
authorizing the formation of corporations.
ARTICLE II
NAME
The name of the Corporation is SHEARSON CALIFORNIA MUNICIPALS INC.
ARTICLE III
PURPOSES AND POWERS
The Corporation is formed for the following purposes:
(1) To conduct an carry on the business of an investment company;
(2) To hold, invest and reinvest its assets in securities and
investments or to hold part or all of its assets in cash.
(3) To issue an sell shares of its capital stock in such amounts and
on such terms and conditions and for such purposes and for such amount or kind
of consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, hold, dispose
of, resell, transfer, reissue or cancel (all without the vote or consent of
the stockholders of the Corporation) shares of its capital stock, in any
manner and to the extent now or hereafter permitted by law and by these
Articles of Incorporation.
(5) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations by
the Maryland General Corporation Law now or hereafter in force, and the
enumeration of the foregoing shall not be deemed to exclude any powers, rights
or privileges so granted or conferred.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in
the State of Maryland is c/o The Corporation Trust Company Incorporated, 32
South Street, Baltimore, Maryland 21202. The name of the resident agent of
the Corporation in the State of Maryland is The Corporation Trust Company
Incorporated, a Maryland Corporation. The post office address of the resident
is 32 South Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock that the Corporation
shall have authority to issue is five hundred million (500,000,000) shares, of
the par value of one cent ($.01) per share and of the aggregate par value of
five million ($500,000,000) all of which five hundred million (500,000,000)
share are designated Common Stock.
(2) Any fractional share shall carry proportionately the rights of a
whole share including, without limitation, the right to vote and the right to
receive dividends. A fractional share shall not, however, have the right to
receive a certificate evidencing it.
(3) All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of these Articles of Incorporation
and the By-Laws of the Corporation.
(4) No holder of stock of the Corporation by virtue of being such a
holder shall have any right to purchase or subscribe for any shares of the
Corporation's capital stock or any other security that the Corporation may
issue or sell (whether out of the number of shares authorized by these
Articles of Incorporation or out of any shares of the Corporation's capital
stock that the Corporation may acquire) other than a right that the Board of
Directors in its discretion may determine to grant.
(5) The Board of Directors shall have authority by resolution to
classify and reclassify any authorized but unissued shares of capital stock
from time to time by setting or changing in any one or more repents the
preferences conversions or other rights, voting powers, restrictions,
limitations as to dividends qualifications or terms or conditions of
redemption of the capital stock. Subject to the provisions of Sections 6, 7
and 8 of this Article V and applicable law, the power of the Board of
Directors to classify or reclassify any of the shares of capital stock shall
include, without limitation, authority to classify or reclassify the stock
into a class or not more than ten (10) classes of capital stock and to divide
and classify share of any class into one or more series of the class, by
determining, fixing or altering one or more of the following:
(i) The distinctive designation of a class or series; provided that,
unless otherwise prohibited by the terms of the class or series, the number of
shares of any class or series may be decreased by the Board of Directors in
connection with any classification or reclassification of unisssued shares and
the number of shares of the class or series may be increased by the Board of
Directors in connection with the classification or reclassification, and any
shares of any class or series that gave been redeemed, purchased or acquired
in any other manner by the Corporation shall remain part of the authorized
capital stock and be subject to classification and reclassification as
provided herein.
(ii) Whether or not and, if so, the rates, amounts and times at which,
and the conditions under which, dividends shall be payable on shares of the
class or series.
(iii) Whether or not share of such class or series shall have voting
rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(iv) The rights of the holders of shares of the class or series upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation.
(v) Any other rights, restrictions, including restrictions on
transferability, and qualifications of shares of the class or series, not
inconsistent with law and these Articles of Incorporation.
(6) All consideration received by the Corporation for the issue or
sale of stock of any class, together with all income, earnings, profits and
porches thereof, including any proceeds derived form the sale, exchange or
liquidation thereof, and any funds or payments derived form any reinvestment
of the proceeds in whatever form the same may be, shall irrevocably belong to
the class of shares of stock with respect to which the assets, payments or
funds were received by the Corporation for all purposes, subject only to the
rights of creditors, and shall be so handled upon the books of account of the
Corporation. Such assets, income, earnings, profits and proceeds thereof,
including any proceeds derived form the sale, exchange or liquidation thereof,
any assets derived from any reinvestment of the proceeds in whatever form, are
herein referred to as "assets belonging to" such class.
(7) In the event of the liquidation or dissolution of the
Corporation, shareholders of each class shall be entitled to receive, as a
class, out of the assets of the Corporation available for distribution to
shareholders, but other than general assets not belonging to any particular
class of stock, the assets belonging to the class; and the assets so
distributable to the stockholders of any class shall be distributed among the
stockholders in proportion to the number of shares of the class held by them
and recorded on the books of the Corporation. In the event that there are any
general assets not belonging to any particular class of stock and available
for distribution, the distribution shall be made to the holders of stock of
all classes in proportion to the asset value of the respective classes
determined as hereinafter provided.
(8) The assets belong to any class of stock shall be charged with the
liabilities of the class, and shall also be charged with the lass's share of
the general liabilities of the Corporation, in proportion to the net asset
value of the respective classes before taking into account general
liabilities, determined as hereinafter provided. The determination of the
Board of Directors shall be conclusive (i) as to the amount of such
liabilities, including the amount of accrued expenses and reserves; (ii) as to
any allocation of the same to a given class; and (iii) whether the same, or
general assets of the Corporation, are allocated to one or more classes. The
liabilities are so allocated to a class are herein referred to as "liabilities
belonging to " the class.
(9) Notwithstanding any provision of law requiring any action to be
taken or authorized by the affirmation vote of the holders of a designated
proportion of the votes of all classes of any class of stock of the
Corporation, such action shall be effective and valid if taken or authorized
by the affirmative vote of a majority of the total number of votes entitled to
be cast thereon, except as otherwise provided in these Articles of
Incorporation.
ARTICLE VI
REDEMPTION
Each holder of shares of the Corporation's capital stock shall be
entitled to require the Corporation to redeem all or any part of the shares of
capital stock of the Corporation standing in the name of the holder on the
books of the Corporation, and all shares of capital stock issued by the
Corporation shall be subject to redemption by the Corporation, at the
redemption price of the shares as in effect from time to time as may be
determined b the Board of Directors of the Corporation in accordance with the
provisions of this Article VI, subject to the right of the Board of Directors
of the corporation to suspend the right of redemption or postpone the date of
payment of the redemption price in accordance with provisions of applicable
law. Without limiting the generality of the foregoing, the Corporation shall,
to the extent permitted by applicable law, have the right at any time to
redeem the shares owned by any holder of capital stock of the Corporation (i)
if the redemption is, in the opinion of the Board of Directors of the
Corporation, desirable in order to prevent the Corporation from being deemed a
"personal holding company" within the meaning of the Internal Revenue Code of
1954, as amended, or (ii) if the value of the shares in the account maintained
by the Corporation or its transfer agent for any class of stock is less than
$500.00 (Five Hundred Dollars); provided, however, that a shareholder shall be
notified that the value of his account is less than $500.00 (Five Hundred
Dollars); and shall be allowed 30 (thirty) days to make additional purchases
of shares before the redemption is processed by the Corporation. The
redemption price of shares of capital stock of the Corporation shall be net
asset value is determined by the Board of Directors of the Corporation form
time to time in accordance with provisions of applicable law, less a
redemption fee or there charge, if any, as may be fixed by resolution of the
Board Directors of the Corporation. Payment of the redemption price shall be
made in cash by the Corporation at the time and in the manner as may be
determined from time to time by the Board of Directors of the corporation
unless, in the opinion of the Board of Directors, which shall be conclusive,
conditions exist that make payment wholly in cash unwise or undesirable; in
such event the Corporation may make payment wholly or partly by securities or
other property included in the assets belonging or allocable to the class of
the shares redemption of which is being sought, the value of which shall be
determined as provided herein. The Board of Directors may establish
procedures for redemption of shares.
ARTICLE VII
BOARD OF DIRECTORS
(1) The number of directors constituting the Board of Directors shall
be three, which number may be changed pursuant to the By-Laws of the
Corporation. The name of the directors who shall act until the first annual
meeting of shareholders or until their successors are duly chosen and
qualified are:
LAWRENCE T. McDERMOTT
HEATH B. McLENDON
JEFFREY B. LANE
(2) In furtherance, and not in limitation, of the powers conferred by
the laws of the State of Maryland, the Board of Directors is expressly
authorized:
(i) To make, alter or repeal the By-Laws of the Corporation,
except where such power is reserved by the By-Laws to the stockholders, and
except as otherwise required by the Investment Company Act of 1940, as
amended.
(ii) From time to time to determine whether and to what extent
and at what times and places and under what conditions and regulations the
books and accounts of the Corporation, or any of them other than the stock
ledger, shall be open to the inspection of the stockholders. No stockholder
shall have any right to inspect any account or book or document of the
Corporation, except as conferred by law or authorized by resolution of the
Board of Directors or of the stockholders.
(iii) Without the assent or vote of the stockholders, to
authorize the issuance from time to time of shares of the stock of any class
of the Corporation, whether now or hereafter authorized, and securities
convertible into shares of stock of the Corporation of any class or classes,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable.
(iv) Without the assent or vote of the stockholders, to authorize
and issue obligations of the Corporation, secured and unsecured, as the Board
of Directors may determine, and to authorize and cause to be executed
mortgages and liens upon the real or personal property of the Corporation.
(v) Notwithstanding anything in these Articles of Incorporation
to the contrary, to establish in its absolute discretion the basis or method
for determining the value of the assets belonging to any class, the value of
the liabilities belonging to any class, and the net asset value of each share
of any class of the Corporation's stock for purposes of sales, redemption's,
repurchases of shares or otherwise.
(vi) To determine in accordance with generally accepted
accounting principles and practices what constitutes capital, and to determine
what accounting periods shall be used by the Corporation for any purpose; to
set apart out of any funds of the Corporation reserves for such purposes as it
shall determine and to abolish the same; to declare and pay any dividends and
distributions in cash, securities or other property from surplus or any funds
legally available therefor, at such intervals as it shall determine; to
declare dividends or distributions by means of a formula or other method of
determination, at meetings held less frequently than the frequency of the
effectiveness of such declarations; to establish payment dates for dividends
or any other distributions on any basis, including dates occurring less
frequently than the effectiveness of declarations thereof; and to provide for
the payment of declared dividends on a date earlier or later than the
specified payment date in the case of stockholders of the Corporation
redeeming their entire ownership of shares of any class of the Corporation.
(vii) In addition to the powers and authorities granted herein
and by statute expressly conferred upon it, the Board of Directors is
authorized to exercise all powers and do all acts that may be exercised or
done by the Corporation pursuant to the provisions of the laws of the State of
Maryland, these Articles of Incorporation and the By-Laws of the Corporation.
(3) Any determination made in good faith, and in accordance with
accepted accounting practices, if applicable, by or pursuant to the direction
of the Board of Directors, with respect to the amount of assets, obligations
or liabilities of the Corporation, as to the amount of net income of the
Corporation from dividends and interest for any period or amounts at any time
legally available for the payment of dividends, as to the amount of any
reserves or charges set up and the propriety thereof, as to the time of or
purpose for creating reserves or as to the use, alteration or cancellation of
any reserves or charges (whether or not any obligation or liability for which
the reserves or charges have been created has been paid or discharged), as to
the value of any security owned by the Corporation, the determination of the
net asset value of shares of any class of the Corporation's capital stock, or
as to any other matters relating to the issuance, sale, redemption or other
acquisition or disposition of securities or shares of capital stock of the
Corporation, and any reasonable determination made in good faith by the Board
of Directors whether any transaction constitutes a purchase of securities on
"margin," a sale of securities "short," or any underwriting or selling group
in connection with the public distribution of, any securities, shall be final
and conclusive, and shall be binding upon the Corporation and all holder s of
its capital stock, past, present and future, and shares of the capital stock
of the Corporation are issued and sold on the condition and understanding,
evidenced by the purchase of shares of capital stock or acceptance of share
certificates, that any and all such determinations shall be binding as
aforesaid. No provision of these Articles of Incorporation of the Corporation
shall be effective to *i) require a waiver of compliance with any provision of
the Securities Act of 1933, as amended, or the Investment Company Act of 1940,
as amended, or of any valid rule, regulation or order of the Securities and
Exchange Commission under those Acts or (ii) protect or purport to protect any
directors or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendment to its Articles of Incorporation, now or hereafter authorized by
law, including any amendment that alters the contract rights, as expressly set
forth in its Articles of Incorporation, of any outstanding stock.
IN WITNESS WHEREOF, I have adopted and signed these Articles of
Incorporation and do hereby acknowledge that the adoption and signing are my
act.
Dated the 16th day of February, 1984.
/s/ Aaron M. Lampert
Incorporator
EXHIBIT 1B
SHEARSON CALIFORNIA MUNICIPALS INC.
ARTICLES OF AMENDMENT
Shearson California Municipals Inc. a Maryland corporation having its
principal office in the state of Maryland in Baltimore City, (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland, that:
FIRST: The Charter of the Corporation is hereby amended by striking out
Article II and inserting in lieu thereof the following:
ARTICLE II
Name
The name of the Corporation is Shearson Lehman California Municipals
Inc.
SECOND: The foregoing amendment to the Charter of the Corporation has
been advised by a majority of the entire Board of Directors of the Corporation
and approved by vote of the holders of a majority of the outstanding shares of
stock of the Corporation.
IN WITNESS WHEREOF, Shearson California Municipals Inc. has caused these
presents to be signed in its name and on its behalf by its Secretary, Peter
Meenan, attested by its Assistant Treasurer, Robert A. Dwight, Jr., on August
26, 1987.
The Secretary acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief the matters and facts set forth in these Articles with
respect to the authorization and approval of the amendment of the
Corporation's Charter are true in all material respects and that this
statement is made under the penalties of perjury.
SHEARSON CALIFORNIA MUNICIPALS INC.
By:/s/ Peter Meenan
Peter Meenan, Secretary
Attest:
/s/ Robert A. Dwight, Jr.
Robert A. Dwight, Jr.
Assistant Treasurer
EXHIBIT 1C
SHEARSON LEHMAN CALIFORNIA MUNICIPALS INC.
ARTICLES OF AMENDMENT
Shearson Lehman California Municipals Inc., a Maryland corporation,
having its principal office in the state of Maryland in Baltimore City,
(hereinafter called the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland, that:
FIRST: The Charter of the Corporation is hereby amended by striking
out Article II and inserting in lieu thereof the following:
ARTICLE II
The name of the Corporation is SLH California Municipals Fund Inc.
SECOND: The foregoing amendment to the Charter of the Corporation has
been advised by a majority of the entire Board of Directors of the Corporation
and approved by vote of the holders of a majority of the outstanding shares of
stock of the Corporation.
THIRD: The Charter of the Corporation is further amended with the
addition of ARTICLE IX as follows:
Articles IX:
To the fullest extent permitted by Maryland General Corporation Law, as
amended from time to time, no director or officer of the Corporation shall be
personally liable to the Corporation or its stockholders for money damages,
except to the extent such exemption from liability or limitation thereof is
not permitted by the Investment Company Act of 1940, as amended from time to
time. No amendment to these Articles of Incorporation or repeal of any of its
provisions shall limit or eliminate the benefits provided to directors of
officers under this provision with respect to any act or omission which
occurred prior to such amendment or repeal.
FOURTH: The foregoing amendment to the Charter of the Corporation has
been advised by a majority of the entire Board of Directors of the Corporation
and approved by vote of the Directors of the holders of a majority of the
outstanding shares of stock of the Corporation.
IN WITNESS WHEREOF, Shearson Lehman California Municipals Inc. has
caused these present to be signed in its name and on its behalf by its
President, Thomas A. Belshe, attested by its Secretary, Stephen E. Cavan on
December 14, 1988.
The Secretary acknowledges these Articles of Amendment to be the
corporate act of the Corporation and states that to the best of his knowledge,
information and belief the matters and facts set forth in these Articles with
respect to the authorization and approval of the amendment of the
Corporation's Charter are true in all material respects and that this
statement is made under the penalties or perjury.
SHEARSON LEHMAN CALIFORNIA
MUNICIPALS INC.
By: /s/ Thomas A. Belshe
Thomas A. Belshe, President
Attest:
/s/ Stephen E. Cavan
Stephen E. Cavan, Secretary
EXHIBIT 1D
ARTICLES SUPPLEMENTARY
SLH CALIFORNIA MUNICIPALS FUND INC.
SLH California Municipals Fund Inc., a Maryland corporation having its
principal office in the State of Maryland in Baltimore City (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Board of Directors hereby reclassifies 3000,000,000
shares of authorized but unissued Common Stock as 150,000,000 shares of Class
B Common Stock and 150,000,000 shares of Class D Common Stock.
SECOND: The shares of Common Stock reclassified hereby shall have
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption as set forth in Article V of the Corporation's charter and shall be
subject to all provisions of the charter relating to stock of the Corporation
generally, and those set forth as follows:
(1) The assets belonging to each of the Class B Common Stock and Class D
Common Stock shall be invested in the same investment portfolio of the
Corporation as the assets belonging to the unclassified Common Stock.
(2) The dividends and distributions of investment income and capital gains
with respect to each of the Class B Common Stock and Class D Common Stock
shall be in such amounts as may be declared from time to time by the Board of
Directors, and such dividends and distributions with respect to each such
class of Common Stock may vary from dividends and distributions with respect
to each other class of Common Stock to reflect differing allocation of the
expenses of the Corporation among the holders of each such class and any
resultant differences among the net asset value per share of each such class,
to such extent and for such purposes as the Board of Directors may deem
appropriate.
(3) The holders of each of Class B Common Stock and Class D Common Stock
shall have (i) exclusive voting rights with respect to any matter, including
any distribution plan adopted by the Corporation pursuant to 12b-1 under the
Investment Company Act of 1940 (a "Plan") which affects only holders of such
class, and (ii) no voting rights with respect to any matter, including any
Plan, which does not affect holders of such class.
(4) (a) Each share of Class B Common Stock, other than a share purchased
through the automatic reinvestment of a dividend or a distribution with
respect to the Class B Common Stock, shall be converted automatically, and
without any action or choice on the part of the holder thereof, into shares of
the unclassified Common Stock on the later of (A) September 30, 1944 (or such
later date determined by the Board of Directors of the Corporation to be the
date as of which the Corporation's transfer agent has in place the systems
necessary to calculate the timing and amount of the conversions described
below) or (B) the date that is the first Corporation business day in the month
following the month in which the eighth anniversary date of the date of
issuance of the share falls (the "Conversion Date"). With respect to shares
of Class B Common Stock issued in an exchange or series of exchanges for
shares of capital stock of another investment company or class or series
thereof registered under the Investment Company Act of 1940 pursuant to an
exchange privilege granted by the Corporation, other than for shares of such
capital stock purchased through the automatic reinvestment of a dividend or a
distribution with respect to such capital stock, the date of issuance of the
shares of Class B Common Stock for purposes of the immediately preceding
sentence shall be the date of issuance of the original shares of capital stock
of such other investment Company, or the first such investment company in the
event of a series of exchanges.
(b) Each share of Class B Common Stock (A) purchased through the
automatic reinvestment of a dividend or a distribution with respect to the
Class B Common Stock, or (B) issued pursuant to an exchange privilege granted
by the Corporation in an exchange or series of exchanges for shares originally
purchased through the automatic reinvestment of a dividend or distribution
with respect to shares of capital stock of another investment company or class
or series thereof registered under the Investment Company Act of 1940, shall
be segregated in a separate sub-account on the stock records of the
Corporation for each of the holders of record thereof. On any Conversion
Date, a number of the shares held in the sub-account of the holder of record
of the share or shares being converted, calculated in accordance with the next
following sentence, shall be converted automatically, and without any action
or choice on the part of the holder, into shares of the unclassified Common
Stock. The number of shares in the holder's sub-account
so converted shall bear the same relation to the total number of shares
maintained in the sub-account on the Conversion Date (immediately prior to
conversion) as the number of shares of the holder converted on the Conversion
Date pursuant to paragraph (4) (a) hereof bears to the total number of shares
on the Conversion Date (immediately prior to conversion) of the Class B Common
Stock of the holder after subtracting the shares then maintained in the
holder's sub-account.
(c) The number of shares of the unclassified Common Stock into which a
share of the Class B Common Stock is converted pursuant to paragraphs (4)(a)
and (4)(b) hereof shall equal the number (including for this purpose fractions
of a share) obtained by dividing the net asset value per share of the Class B
Common Stock for purposes of sales and redemptions thereof on the Conversion
Date by the net asset value per share of the unclassified Common Stock for
purposes of sales and redemptions thereof on the Conversion Dated.
(d) On the Conversion Date, the shares of the Class B Common Stock
converted into shares of the unclassified Common Stock will cease to accrue
dividends and will no longer be deemed outstanding and the rights of the
holders thereof (except the right to receive the number of shares of
unclassified Common Stock into which the shares of Class B Common Stock have
been converted and declared but unpaid dividends to the Conversion Date) will
cease. Certificates representing shares of the unclassified Common Stock
resulting from the conversion need not be issued until certificates
representing shares of the Class B Common Stock converted, if issued, have
been received by the Corporation or its agent duly endorsed for transfer.
THIRD: The Board of Directors of the Corporation has reclassified
the shares of Common Stock pursuant to authority provided in the Corporation's
charter.
The undersigned Heath B. McLendon acknowledges these Articles
Supplementary to be the corporate act of the Corporation and states that to
the best of his knowledge, information and belief the matters and facts set
forth in these Articles with respect to authorization and approval are true in
all material respects and that this statement is made under penalties of
perjury.
IN WITNESS WHEREOF, SLH California Municipals Fund Inc. has caused these
Articles Supplementary to be signed and filed in its name and on its behalf by
its Chairman of the Board and witnessed by its Assistant Secretary on November
2, 1992.
SLH California Municipals Fund Inc.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
WITNESS:
/s/ Lee D. Augsburger
Lee D. Augsburger
Assistant Secretary
EXHIBIT 1E
ARTICLES OF AMENDMENT
SLH CALIFORNIA MUNICIPALS FUND INC.
SLH California Municipals Fund Inc., a Maryland corporation having its
principal office in the State of Maryland in Baltimore City (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended by deleting
Article II and inserting in lieu thereof the following:
ARTICLE II
NAME
The name of the corporation (hereinafter called the "Corporation") is Shearson
Lehman Brothers California Municipals Fund Inc.
SECOND: The foregoing amendment to the charter was advised by the
board of directors and approved by the stockholders.
The undersigned Chairman acknowledges these Articles of Amendment to be
the corporate act of the Corporation and states to the best of his knowledge,
information and belief that the matters and facts set forth in these Articles
with respect to authorization and approval are true in all material respects
and that this statement is made under the penalties of perjury.
IN WITNESS WHEREOF, SLH California Municipals Fund Inc. has caused these
Articles of Amendment to be signed in its name and on its behalf by its
Chairman and witnessed by its Assistant Secretary on November 4, 1992.
SLH CALIFORNIA MUNICIPALS FUND INC.
By: /s/ Heath B. McLendon
Heath B. McLendon, Chairman
WITNESS:
/s/ Lee D. Augsburger
Lee D. Augsburger
Assistant Secretary
EXHIBIT 1F
SHEARSON LEHMAN BROTHERS CALIFORNIA MUNICIPALS FUND INC.
ARTICLES OF AMENDMENT
Shearson Lehman Brothers California Municipals Fund Inc., a Maryland
corporation having its principal office in the State of Maryland in Baltimore
City (hereinafter called the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Articles of Incorporation of the Corporation are hereby
amended by deleting Article II and inserting in lieu thereof the following:
ARTICLE II
NAME
The name of the corporation (hereinafter called the "Corporation") is Smith
Barney Shearson California Municipals Fund Inc.
SECOND: The foregoing amendment to the charter was advised by the
board of directors and approved by the stockholders.
The undersigned Chairman acknowledges these Articles of Amendment to be
the corporate act of the Corporation and states to the best of his knowledge,
information and belief that the matters and facts set forth in these Articles
with respect to authorization and approval are true in all material respects
and that this statement is made under the penalties perjury.
IN WITNESS WHEREOF, Shearson Lehman Brothers California Municipals Fund
Inc. has caused these Articles of Amendment to be signed in its name and on
its behalf by its Chairman and witnessed by its Assistant Secretary on July
30, 1993.
Shearson Lehman Brothers California Municipals Fund
Inc.
By: /s/ Heath B. McLendon
Heath B. McLendon, Chairman
WITNESS:
/s/ Lee D. Augsburger
Lee D. Augsburger,
Assistant Secretary
g/shared/domestic/clients/shearson/funds/camu/artinc
EXHIBIT 10
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to
our Firm under the caption "Counsel and Auditors" in the Statement of
Additional Information included in Post-Effective Amendment No. 19 to the
Registration Statement (No. 2-89548) on Form N-1A under the Securities Act of
1933, as amended, of Smith Barney Shearson California Municipals Fund Inc.
/s/ O'MELVENY & MEYERS
O'MELVENY & MYERS
Los Angeles, California
April 25, 1994
LA1-257288.V104/25/94
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Smith Barney Shearson California Municipals Fund Inc.:
We hereby consent to the following with respect to Post-Effective
Amendment
No. 19 to the Registration Statement on Form N-1A (File No. 2-89548) under the
Securities
Act of 1933, as amended, of Smith Barney Shearson California Municipals Fund
Inc.:
1. The incorporation by reference of our report dated April 8,
1994
accompanying the Annual Report for the fiscal year ended
February 28,
1994 of Smith Barney Shearson California Municipals Fund Inc.,
in the
Statement of Additional Information.
2. The reference to our firm under the heading "Financial
Highlights" in the
Prospectus.
3. The reference to our firm under the heading "Counsel and
Auditors" in
the Statement of Additional Information.
COOPERS & LYBRAND
Boston, Massachusetts
April 26, 1994
