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. 20
X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 21
X
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street , New York, New York 10013<R/>
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(212) 723-9218
Christina T. Sydor
Secretary
Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
(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 November 7, 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 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. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund
Management of the Fund;
Distributor;
Additional Information; Annual
Report
6. Capital Stock and Other
Securities
Investment Objective
and Managment Policies ;
Dividends, Distributions and
Taxes; Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares;
Valuation of Shares; Redemption of
Shares; Exchange Privilege;
Minimum Account Size ,/R>
Distributor; Additional
Information
8 Redemption or Repurchase
Purchase of Shares;
Redemption of Shares; Exchange
Privilege
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; Additional
Information
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;
Distributor
18. Capital Stock and Other
Securities
Invesment Objective and
Management Policies ; Purchase
of Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing of Securities Being
Offered
Purchase of Shares; Redemption of
Shares; 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
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO OF
TRAVELERS
GROUP APPEARS
HERE]
Smith Barney
California
Municipals
Funds Inc.
388 Greenwich Street
New York, New York 10013
[RECYCLING LOGO Recycled Fund 14 198
APPEARS HERE] Recyclable FD0209 J4
P R O S P E C T U S
SMITH
BARNEY
CALIFORNIA
MUNICIPALS
FUND
INC.
NOVEMBER 7,
1994
Prospectus begins on page
one
[LOGO OF SMITH BARNEY Smith Barney Mutual Funds
MUTUAL FUNDS APPEARS HERE] Investing for your future.
Everyday.
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS
November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney California Municipals Fund Inc. (the "Fund") is a non-
diversi-
fied 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, that
pro-
spective investors will find helpful in making an investment decision.
Invest-
ors are encouraged to read this Prospectus carefully and retain it for
future
reference.
Additional information about the Fund is contained in a Statement of
Addi-
tional Information dated November 7, 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 a Smith Barney Financial Consultant. The Statement of Additional
Informa-
tion has been filed with the Securities and Exchange Commission (the "SEC")
and
is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS
A CRIMINAL OFFENSE.
1
SMITH BARNEY
California Municipals Fund Inc.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS 11
- ---------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- ---------------------------------------------------
CALIFORNIA MUNICIPAL SECURITIES 21
- ---------------------------------------------------
VALUATION OF SHARES 22
- ---------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 22
- ---------------------------------------------------
PURCHASE OF SHARES 25
- ---------------------------------------------------
EXCHANGE PRIVILEGE 33
- ---------------------------------------------------
REDEMPTION OF SHARES 37
- ---------------------------------------------------
MINIMUM ACCOUNT SIZE 38
- ---------------------------------------------------
PERFORMANCE 39
- ---------------------------------------------------
MANAGEMENT OF THE FUND 40
- ---------------------------------------------------
DISTRIBUTOR 42
- ---------------------------------------------------
ADDITIONAL INFORMATION 43
- ---------------------------------------------------
</TABLE>
2
SMITH BARNEY
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."
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."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of
expenses
to which they are subject. A fourth Class of shares, Class Y shares, is
offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an
initial
sales charge of up to 4.00% and are subject to an annual service fee of
0.15%
of the average daily net assets of the Class. The initial sales charge may
be
reduced or waived for certain purchases. Purchases of Class A shares, which
when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no sales charge, but will be subject to a contingent deferred
sales
charge ("CDSC") of 1.00% on redemptions made within 12 months of purchase.
See
"Prospectus Summary--Reduced or No Initial Sales Charge."
3
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares. Class B shares are offered at net asset value subject to
a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual
service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily
net
assets of the Class. The Class B shares' distribution fee may cause that
Class
to have higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically
to Class A shares, based on relative net asset value, eight years after the
date of the original purchase. Upon conversion, these shares will no longer
be
subject to an annual distribution fee. In addition, a certain portion of
Class
B shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time.
See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no
initial
sales charge. They are subject to an annual service fee of 0.15% and an
annual
distribution fee of 0.55% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12
months of
purchase. This CDSC may be waived for certain redemptions. The Class C
shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when
combined
with current holdings of Class C shares of the Fund equal or exceed
$500,000 in
the aggregate, should be made in Class A shares at net asset value with no
sales charge, and will be subject to a CDSC of 1.00% on redemptions made
within
12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net
asset
value with no initial sales charge or CDSC. They are not subject to any
service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider
the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his
or
her investment. Shareholders who are planning to establish a program of
regu-
4
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
lar investment may wish to consider Class A shares; as the investment
accumu-
lates shareholders may qualify for reduced sales charges and the shares are
subject to lower ongoing expenses over the term of the investment. As an
alter-
native, Class B and Class C shares are sold without any initial sales
charge so
the entire purchase price is immediately invested in the Fund. Any
investment
return on these additional invested amounts may partially or wholly offset
the
higher annual expenses of these Classes. Because the Fund's future return
can-
not be predicted, however, there can be no assurance that this would be the
case.
Finally, investors should consider the effect of the CDSC period and any
con-
version rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than
Class
B shares, they do not have a conversion feature, and therefore, are subject
to
an ongoing distribution fee. Thus, Class B shares may be more attractive
than
Class C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares
which are not subject to an initial sales charge, CDSC or service or
distribu-
tion fees. The maximum purchase amount for Class A shares is $4,999,999,
Class
B shares is $249,999 and Class C shares is $499,999. There is no maximum
pur-
chase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire
purchase
price will be immediately invested in the Fund. In addition, Class A share
pur-
chases, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made
at
net asset value with no initial sales charge, but will be subject to a CDSC
of
1.00% on redemptions made within 12 months of purchase. The $500,000
aggregate
investment may be met by adding the purchase to the net asset value of all
Class A shares held in funds sponsored by Smith Barney, Inc. ("Smith
Barney")
listed under "Exchange Privilege." Class A share purchases may also be
eligible
for a reduced initial sales charge. See "Purchase of Shares." Because the
ongo-
ing expenses of Class A shares may be lower than those for Class B and
Class C
shares, purchasers eligible to purchase Class A shares at net asset value
or at
a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose
of
the
5
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
CDSC on the Class B and Class C shares is the same as that of the initial
sales
charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete
descrip-
tion of the sales charges and service and distribution fees for each Class
of
shares and "Valuation of Shares," "Dividends, Distributions and Taxes" and
"Ex-
change Privilege" for other differences between the Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith
Barney
on a fully disclosed basis (an "Introducing Broker") or an investment
dealer in
the selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open
an account by making an initial investment of at least $1,000 for each
account.
Investors in Class Y shares may open an account for an initial investment
of
$5,000,000. Subsequent investments of at least $50 may be made for all
Classes.
The minimum investment for Class A, Class B and Class C shares and the
subse-
quent investment for all Classes through the Systematic Investment Plan
described below is $100. There is no minimum investment requirement in
Class A
for unitholders who invest distributions from a unit investment trust
("UIT")
sponsored by Smith Barney. 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 of at least $100. See
"Pur-
chase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment adviser. SBMFM provides investment advisory
and
management services to investment companies affiliated with Smith Barney.
SBMFM
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings").
Hold-
ings is a wholly owned subsidiary of The Travelers Inc. ("Travelers"), a
diver-
sified financial services holding company engaged through its subsidiaries
principally in four business segments: Investment Services, Consumer
Finance
Services, Life Insurance Services and Property & Casualty Insurance
Services.
6
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
SBMFM also serves as the Fund's administrator and The Boston Company
Advi-
sors, Inc. ("Boston Advisors") serves as the Fund's sub-administrator.
Boston
Advisors is a wholly owned subsidiary of The Boston Company, Inc. ("TBC"),
which in turn is an indirect 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 of the Smith Barney Mutual Funds at the
respective
net asset values next determined, plus any applicable sales charge
differen-
tial. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally
is
quoted daily in the financial section of most newspapers and is also
available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are
declared
daily and paid on the last business day of the Smith Barney 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
were
earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically in additional shares of the same
Class
at current net asset value unless otherwise specified by an investor.
Shares
acquired by dividend and distribution reinvestments will not be subject to
any
sales charge or CDSC. Class B shares acquired through dividend and
distribution
reinvestments will become eligible for conversion to Class A shares on a
pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund
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
7
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
item for Federal alternative minimum tax purposes. The Fund may invest
without
limit in securities subject to the Federal alternative minimum tax. See
"In-
vestment 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
quality. 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.
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."
8
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
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, unless otherwise noted, the Fund's
operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
CLASS Y
- ---------------------------------------------------------------------------
- ---
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00% None None
None
Maximum CDSC
(as a percentage of original cost or redemp-
tion proceeds, whichever is lower) None* 4.50% 1.00%
None
- ---------------------------------------------------------------------------
- ---
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.55% 0.55% 0.55%
0.55%
12b-1 fees** 0.15 0.65 0.70
None
Other expenses*** 0.10 0.13 0.10
0.10
- ---------------------------------------------------------------------------
- ---
TOTAL FUND OPERATING EXPENSES 0.80% 1.33% 1.35%
0.65%
- ---------------------------------------------------------------------------
- ---
</TABLE>
* Purchases of Class A shares, which when combined with current holdings
of
Class A shares offered with a sales charge, equal or exceed $500,000 in
the
aggregate, will be made at net asset value with no sales charge, but
will
be subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will
no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing
distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** For Class C and Class Y shares, "Other expenses" have been estimated
based
on expenses incurred by Class A shares because Class C and Class Y
shares
were not available for purchase prior to November 7, 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
actually pay lower or no charges depending on the amount purchased and, in
the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 fee of 0.15% of the value of average daily
net
assets of Class A shares. Smith Barney also receives, with respect to Class
B
shares, an annual 12b-1 fee of 0.65% of the value of average daily net
9
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
assets of that Class, consisting of a 0.50% distribution fee and a 0.15%
serv-
ice fee. For Class C shares, Smith Barney receives an annual 12b-1 fee of
0.70%
of the value of average daily net assets of the Class, consisting of a
0.55%
distribution fee and a 0.15% service fee. "Other expenses" in the above
table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in
understand-
ing the various costs that an investor in the Fund will bear directly or
indi-
rectly. The example assumes payment by the Fund of operating expenses at
the
levels set forth in the table above. See "Purchase of Shares," "Redemption
of
Shares" and "Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10
YEARS*
- ---------------------------------------------------------------------------
- ---
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A $48 $65 $83 $135
Class B 59 72 83 145
Class C 24 43 74 162
Class Y 7 21 36 81
An investor would pay the following expenses
on the same investment, assuming the same
annual return and
no redemption:
Class A 48 65 83 135
Class B 14 42 73 145
Class C 14 43 74 162
Class Y 7 21 36 81
- ---------------------------------------------------------------------------
- ---
</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.
The example also provides a means for the investor to compare expense
levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00%
annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN
THOSE SHOWN.
10
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS
Except where otherwise noted, 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. This information should be
read
in conjunction with the financial statements and related notes that also
appear
in the Fund's Annual Report, which is incorporated by reference into the
State-
ment of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR
YEAR YEAR
ENDED ENDED ENDED ENDED
ENDED ENDED
8/31/94 2/28/94*** 2/28/93* 2/28/92
2/28/91 2/28/90
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
<C>
Operating performance:
Net asset value,
beginning of period $16.15 $16.70 $15.78 $15.66
$15.61 $15.33
- ---------------------------------------------------------------------------
- ---------------
Income from investment
operations:
Net investment income+++ 0.44 0.86 0.97 1.04
1.07 1.09
Net realized and
unrealized gain/(loss)
on investments (0.58) 0.08 1.25 0.40
0.17 0.26
- ---------------------------------------------------------------------------
- ---------------
Total from investment
operations (0.14) 0.94 2.22 1.44
1.24 1.35
- ---------------------------------------------------------------------------
- ---------------
Less distributions:
Distributions from net
investment income (0.45) (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 (0.45) (1.49) (1.30) (1.32)
(1.19) (1.07)
- ---------------------------------------------------------------------------
- ---------------
Net asset value, end of
period $15.56 $16.15 $16.70 $15.78
$15.66 $15.61
- ---------------------------------------------------------------------------
- ---------------
Total return++ (0.85)% 5.92% 14.76% 9.50%
8.29% 9.02%
- ---------------------------------------------------------------------------
- ---------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of
period (in 000's) $405,437 $425,181 $423,504 $364,809
$334,599 $328,938
Ratio of operating
expenses to average net
assets 0.79%** 0.80% 0.70% 0.65%
0.65% 0.72%
Ratio of net investment
income to average net
assets 5.55%** 5.20% 6.04% 6.54%
6.85% 6.95%
Portfolio turnover rate 31%
- ---------------------------------------------------------------------------
- ---------------
</TABLE>
* The Fund commenced operations on April 9, 1984. On November 6, 1992, the
Fund commenced selling Class B shares. Shares issued prior to November
6,
1992 were designated as Class A shares.
** Annualized
*** 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.
++ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable sales charges.
11
SMITH BARNEY
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
- ---------------------------------------------------------------------------
- ----
</TABLE>
* The Fund commenced operations on April 9, 1985. On November 6, 1992 the
Fund commenced selling Class B shares. Any shares in existence prior to
November 6, 1992 were designated Class A shares.
** Annualized.
+ 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, 1986, 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.
12
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SIX
MONTHS YEAR
PERIOD
ENDED ENDED ENDED
8/31/94 2/28/94***
2/28/93*
(UNAUDITED)
<S> <C> <C> <C>
Operating performance:
Net asset value, beginning of period $16.15 $16.70
$15.84
- ---------------------------------------------------------------------------
- ----
Income from investment operations:
Net investment income 0.40 0.77
0.29
Net realized and unrealized gain/(loss) on
investments (0.59) 0.09
1.15
- ---------------------------------------------------------------------------
- ----
Total from investment operations (0.19) 0.86
1.44
- ---------------------------------------------------------------------------
- ----
Less distributions:
Distributions from net investment income (0.40) (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 (0.40) (1.41)
(0.58)
- ---------------------------------------------------------------------------
- ----
Net asset value, end of period $15.56 $16.15
$16.70
- ---------------------------------------------------------------------------
- ----
Total return++ (1.12)% 5.40%
9.27%
- ---------------------------------------------------------------------------
- ----
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of period (in 000s) $119,939 $107,740
$37,924
Ratio of operating expenses to average net
assets 1.31%** 1.33%
1.30%**
Ratio of net investment income to average
net assets 5.03%** 4.67%
5.44%**
Portfolio turnover rate 31% 76%
72%
- ---------------------------------------------------------------------------
- ----
</TABLE>
* The Fund commenced selling Class B shares on November 6, 1992.
** Annualized.
*** 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.
++ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable sales charges.
Prior to November 7, 1994, the Fund did not offer Class C or Class Y shares
and, accordingly, no comparable financial information is available at this
time
for those Classes.
13
SMITH BARNEY
California Municipals Fund Inc.
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 applicability of a Federal alternative minimum tax),
but
which is subject to California state personal income tax. When SBMFM
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 "Temporary 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
SBMFM to be comparable in quality to instruments so rated, or if other out-
standing 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 comparable 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 SBMFM. The Fund intends to focus on intermediate- and long-term
obligations, that is, obligations with remaining maturities at the time of
pur-
chase of between three and twenty years.
14
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 or to respond to changes in the economy or in the financial
markets.
The market for certain low-rated and comparable unrated securities has not
fully weathered a major economic recession. Any such recession, however,
would
likely disrupt severely the market for such securities and adversely affect
the
value of the securities and 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 periods of declining
interest
rates, the Fund may have to replace the security with a lower yielding
securi-
ty, 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 Additional Information.
15
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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, SBMFM will consider such factors as it deems appropriate, which may
include: (a) whether the lease can be canceled; (b) the ability of the
lease
obligee to direct the sale of the underlying assets; (c) the general
creditwor-
thiness of the lease obligor; (d) the likelihood that the municipality will
discontinue appropriating funding for the leased property in the event such
property is no longer considered essential by the municipality; (e) the
legal
recourse of the lease obligee in the event of such a failure to appropriate
funding; (f) whether the security is backed by a credit enhancement such as
insurance; and (g) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services 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 that the Fund's dividends are derived from interest
on
those bonds. Dividends derived from interest income on California Municipal
Securities are a component of the "current earnings" adjustment item for
pur-
poses of the Federal corporate alternative minimum tax.
16
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 which are repayable
out
of revenue streams generated from economically-related projects or
facilities
or debt obligations whose issuers are located in the same state. Sizeable
investments in such obligations could involve an increased risk to the Fund
should any of the related projects or facilities experience financial
difficul-
ties. 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
forego-
ing, the Fund shall not invest more than 10% of its assets in securities
(ex-
cluding those subject to Rule 144A under the Securities Act of 1993, as
amend-
ed, that are determined to be liquid by SBMFM) that are restricted. The
Fund
also is authorized to borrow an amount of up to 10% of its total assets
(in-
cluding 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
Information.
17
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 45 days after the date of the commitment to purchase. The payment
obli-
gation and the interest rate that will be received on when-issued
securities
are fixed at the time the buyer enters into the commitment. California
Munici-
pal Securities, like other investments made by the Fund, may decline or
appre-
ciate in value before their actual delivery to the Fund. Due to
fluctuations 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 segregated
account
with the Fund's custodian consisting of cash, obligations issued or
guaranteed
by the United States government or its agencies or instrumentalities ("U.S.
government securities") or other high grade debt obligations in an amount
equal
to the purchase price of the Fund's when-issued commitments. Placing
securities
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
Cali-
fornia 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
advis-
able.
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 SBMFM
believes that market conditions warrant, including when acceptable
California
Municipal Securities are unavailable, the Fund may take a temporary
defensive
posture and invest without limitation in Temporary Investments. Securities
eli-
gible for short-term investment by the Fund are tax-exempt 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
debt
securities rated within the three highest grades of Moody's or S&P, and
certain
taxable short-term instruments having quality characteristics comparable to
those for tax-exempt investments. To the extent the Fund holds
18
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Temporary Investments, it may not achieve its investment objective. Since
the
commencement of its operations, the Fund has not found it necessary to make
taxable Temporary Investments and it is not expected that such action will
be
necessary.
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
SBMFM
to correlate with the prices of the California Municipal 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
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 con-
19
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tract at a specified exercise price at any time prior to the expiration
date of
the option. Upon exercise of an option, the delivery of the futures
position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures
contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on financial futures contracts is
limited
to the premium paid for the option (plus transaction costs). The value of
the
option may change daily and that change would be reflected in the net asset
value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and
options
on financial futures contracts be engaged in for bona fide hedging
purposes, or
if the Fund enters into futures contracts for speculative purposes, that
the
aggregate initial margin deposits and premiums paid by the Fund will not
exceed
5% of the market value of its assets. In addition, the Fund will, with
respect
to its purchases of financial futures contracts, establish a segregated
account
consisting of cash or cash equivalents in an amount equal to the total
market
value of the futures contracts, less the amount of initial margin on
deposit
for the contracts. The Fund's ability to trade in financial futures
contracts
and options on financial futures contracts may be limited to some extent by
the
requirements of the Code, applicable to a regulated investment company that
are
described below under "Dividends, Distributions and Taxes."
Lending of Portfolio Securities.The Fund has the ability to lend
securities
from its portfolio to brokers, dealers and other financial organizations.
Such
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 SBMFM to be
of
good standing and will not be made unless, in the judgment of SBMFM, the
con-
sideration to be earned from such loans would justify the risk.
20
SMITH BARNEY
California Municipals Fund Inc.
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 bonds issued by or on behalf of public
authorities to
obtain funds for privately operated facilities are included in the term
Cali-
fornia Municipal Securities, provided the interest paid thereon qualifies
as
excluded from gross income for Federal income tax purposes and as exempt
from
California state personal income tax. Private activity bonds are in most
cases
revenue bonds and generally do not carry the pledge of the credit of the
issu-
ing 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.
21
SMITH BARNEY
California Municipals Fund Inc.
CALIFORNIA MUNICIPAL SECURITIES (CONTINUED)
For instance, certain provisions of the California Constitution and
statutes
that limit the taxing and spending authority of California governmental
enti-
ties may impair the ability of the issuers of some California Municipal
Securi-
ties to maintain debt service on their obligations. Other measures
affecting
the taxing or spending authority of California or its political
subdivisions
may be approved or enacted in the future. Some of the significant financial
considerations relating to the Fund's investments in California Municipal
Secu-
rities are summarized in the Statement of Additional Information.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular
trading on the NYSE, on each day that the NYSE is open, by dividing the
value
of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Fund's Board of Directors.
Certain
securities may be valued on the basis of prices provided by pricing
services
approved by the 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 is fair value.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
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
that the Fund is open for business and pays dividends on the last business
day
of the Smith Barney 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.
If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same
Class at net asset value, subject to no sales charge or CDSC. In order to
avoid
22
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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 of each year of any undistributed
ordi-
nary income or capital gains and expects to pay 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 net
investment income and net realized capital gains, the excess distributions
gen-
erally will be treated as a tax-free return of capital (up to the amount of
the
shareholder'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
investment 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.
The per share dividends on Class B shares and Class C shares may be lower
than the per share dividends on Class A and Y shares principally as a
result of
the distribution fee applicable with respect to Class B and Class C shares.
The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y principally as a result of the service fee
applica-
ble to Class A shares. Distributions of capital gains, if any, will be in
the
same amount for Class A, B, C and Y.
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
from
their gross income for Federal income tax purposes although (a) all or a
por-
tion 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 Federal
corporate
alternative minimum tax. In addition, corporate shareholders may incur a
greater Federal
23
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
"environmental" tax liability through the receipt of the Fund's dividends
and
distributions. Dividends derived from interest on California Municipal
Securi-
ties also will be exempt from California state personal income (but not
corpo-
rate 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 will be 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.
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 set forth the dollar amount of income excluded from Federal income
taxes
or California state personal income taxes and the dollar amount, if any,
sub-
ject to Federal Income 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.
24
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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>
FEDERAL CALIFORNIA COMBINED
TAXABLE INCOME* MARGINAL MARGINAL MARGINAL
TAX EXEMPT YIELDS
SINGLE JOINT 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>
$ 22,750 $ 38,000 15.00% 6.00% 20.10% 5.01% 6.26%
7.51% 8.76% 10.01% 11.26%
22,751-24,519 38,001-91,850 28.00% 8.00% 32.30% 6.13% 7.66%
9.19% 10.72% 12.25% 13.78%
24,520-107,464 91,851-140,000 31.00% 9.30% 37.40% 6.39% 7.99%
9.59% 11.19% 12.78% 14.38%
107,464-214,929 140,001-214,958 36.00% 10.00% 42.40% 6.94% 8.68%
10.42% 12.15% 13.89% 15.63%
214,930-250,000 214,929-250,000 39.60% 11.00% 43.00% 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.
PURCHASE OF SHARES
GENERAL
The Fund offers four classes of shares. Class A shares are sold to
investors
with an initial sales charge and Class B and Class C shares are sold
without an
initial sales charge but are subject to a CDSC payable upon certain redemp-
tions. Class Y shares are sold without an initial sales charge or CDSC and
are
25
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
available only to investors investing a minimum of $5,000,000. See
"Prospectus
Summary--Alternative Purchase Arrangements" for a discussion of factors to
con-
sider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained
with Smith Barney, with an Introducing Broker or with an investment dealer
in
the selling group. When purchasing shares of the Fund, investors must
specify
whether the purchase is for Class A, Class B, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may open an account by
mak-
ing an initial investment of at least $1,000 for each account in the Fund.
Investors in Class Y shares may open an account by making an initial
investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Clas-
ses. For the Fund's Systematic Investment Plan, the minimum initial
investment
requirement for Class A, Class B and Class C shares and the subsequent
invest-
ment requirement for all Classes is $100. There are no minimum investment
requirements for Class A shares for employees of Travelers and its
subsidiar-
ies, including Smith Barney, unitholders who invests distributions from a
UIT
sponsored by Smith Barney, and Directors of the Fund and their spouses and
children. The Fund reserves the right to waive or change minimums, to
decline
any order to purchase its shares and to suspend the offering of shares from
time to time. Shares purchased will be held in the shareholder's account by
the
Fund's transfer agent, The Shareholder Services Group, Inc., a subsidiary
of
First Data Corporation ("TSSG"). Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by Smith Barney prior to the close of regular
trad-
ing on the NYSE, on any day the Fund calculates its net asset value, are
priced
according to the net asset value determined on that day. Orders received by
dealers or Introducing Brokers prior to the close of regular trading on the
NYSE on any day the Fund calculates its net asset value, are priced
according
to the net asset value determined on that day, provided the order is
received
by Smith Barney prior to Smith Barney's close of business (the "trade
date").
Currently, payment for Fund shares is due on the fifth business day after
the
trade date (the "settlement date"). The Fund anticipates that, in
accordance
with regulatory changes, beginning on or about June 1, 1995, the settlement
date will be the third business day after the trade date.
26
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or TSSG is authorized through
preau-
thorized transfers of $100 or more to charge the regular bank account or
other
financial institution indicated by the shareholder on a monthly or
quarterly
basis to provide systematic additions to the shareholder's Fund account. A
shareholder who has insufficient funds to complete the transfer will be
charged
a fee of up to $25 by Smith Barney or TSSG. The Systematic Investment Plan
also
authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney
brokerage account or redeem the shareholder's shares of a Smith Barney
money
market fund to make additions to the account. Additional information is
avail-
able from the Fund or a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
DEALERS
SALES CHARGE AS % OF
REALLOWANCE AS %
AS % OF AMOUNT OF
OFFERING
AMOUNT OF INVESTMENT* TRANSACTION INVESTED
PRICE
--------------------------------------------------------------------------
- --------
<S> <C> <C> <C>
Under $25,000 4.00% 4.17%
3.60%
$25,000--$49,999 3.50% 3.63%
3.15%
$50,000--$99,999 3.00% 3.09%
2.70%
$100,000--$249,999 2.50% 2.56%
2.25%
$250,000--$499,999 1.50% 1.52%
1.35%
$500,000 and over* * * *
--------------------------------------------------------------------------
- --------
</TABLE>
* Purchases of Class A shares, which when combined with current
holdings of Class A shares offered with a sales charge equal
or exceed $500,000 in the aggregate, will be made at net asset
value without any initial sales charge, but will be subject to
a CDSC of 1.00% on redemptions made within 12 months of
purchase. The CDSC on Class A shares is payable to Smith
Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which
the CDSC applicable to Class B and Class C shares is waived.
See "Deferred Sales Charge Alternatives" and "Waivers of
CDSC."
Members of the selling group may receive up to 90% of the sales charge
and
may be deemed to be underwriters of the Fund as defined in the Securities
Act
of 1933, as amended.
27
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
The reduced sales charges shown above apply to the aggregate of purchases
of
Class A shares of the Fund made at one time by "any person," which includes
an
individual, his or her spouse and children, or a trustee or other fiduciary
of
a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset
value
of all Class A shares held in funds sponsored by Smith Barney that are
offered
with a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without a
sales
charge in the following circumstances: (a) sales of Class A shares to
Directors
of the Fund and employees of Travelers and its subsidiaries, or to the
spouses
and children of such persons (including the surviving spouse of a deceased
Director or employee, and retired Directors or employees); (b) offers of
Class
A shares to any other investment company in connection with the combination
of
such company with the Fund by merger, acquisition of assets or otherwise;
(c)
purchases of Class A shares by any client of a newly employed Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of
the
Financial Consultant's employment with Smith Barney), on the condition the
pur-
chase of Class A shares is made with the proceeds of the redemption of
shares
of a mutual fund which (i) was sponsored by the Financial Consultant's
prior
employer, (ii) was sold to the client by the Financial Consultant and (iii)
was
subject to a sales charge; (d) shareholders who have redeemed Class A
shares in
the Fund (or Class A shares of another Fund of the Smith Barney Mutual
Funds
that are offered with a sales charge equal to or greater than the maximum
sales
charge of the Fund) and who wish to reinvest their redemption proceeds in
the
Fund, provided the reinvestment is made within 60 calendar days of the
redemp-
tion; and (e) accounts managed by registered investment advisory
subsidiaries
of Travelers; and (f) investments of distributions from a UIT sponsored by
Smith Barney. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that
the
purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by
aggregat-
ing the dollar amount of the new purchase and the total net asset value of
all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
28
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
offered with a sales charge listed under "Exchange Privilege" then held by
such
person and applying the sales charge applicable to such aggregate. In order
to
obtain such discount, the purchaser must provide sufficient information at
the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification
or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
pur-
chase at net asset value will also be available to employees (and partners)
of
the same employer purchasing as a group, provided each participant makes
the
minimum initial investment required. The sales charge applicable to
purchases
by each member of such a group will be determined by the table set forth
above
under "Initial Sales Charge Alternatives--Class A Shares," and will be
based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds
offered
with a sales charge to, and share holdings of, all members of the group. To
be
eligible for such reduced sales charges or to purchase at net asset value,
all
purchases must be pursuant to an employer or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be
open to specified partners or employees of the employer and its
subsidiaries,
if any. Such plan may, but is not required to, provide for payroll
deductions.
Smith Barney may also offer a reduced sales charge or net asset value
purchase
for aggregating related fiduciary accounts under such conditions that
Smith Barney will realize economies of sales efforts and sales related
expenses. An individual who is a member of a qualified group may also
purchase
Class A shares at the reduced sales charge applicable to the group as a
whole.
The sales charge is based upon the aggregate dollar value of Class A shares
offered with a sales charge that have been previously purchased and are
still
owned by the group, plus the amount of the current purchase. A "qualified
group" is one which (a) has been in existence for more than six months, (b)
has
a purpose other than acquiring Fund shares at a discount and (c) satisfies
uni-
form criteria which enable Smith Barney to realize economies of scale in
its
costs of distributing shares. A qualified group must have more than 10
members,
must be available to arrange for group meetings between representatives of
the
Fund and the members, and must agree to include sales and other materials
related to the Fund in its publications and mailings to members at no cost
to
Smith Barney. In order to obtain such reduced sales charge or to purchase
at
net asset value, the purchaser must provide sufficient information at the
time
of purchase to per
29
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
mit verification that the purchase qualifies for the reduced sales charge.
Approval of group purchase reduced sales charge plans is subject to the
discre-
tion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity
for
an investor to obtain a reduced sales charge by aggregating investments
over a
13 month period, provided that the investor refers to such Letter when
placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all
Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds
offered
with a sales charge over a 13 month period based on the total amount of
intended purchases plus the value of all Class A shares previously
purchased
and still owned. An alternative is to compute the 13 month period starting
up
to 90 days before the date of execution of a Letter of Intent. Each
investment
made during the period receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the sales charges
applica-
ble to the purchases made and the charges previously paid, or an
appropriate
number of escrowed shares will be redeemed. New Letters of Intent will be
accepted beginning January 1, 1995. Please contact a Smith Barney Financial
Consultant or TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial
sales charge so that the full amount of an investor's purchase payment may
be
immediately invested in the Fund. A CDSC, however, may be imposed on
certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C
shares; and (c) Class A shares which when combined with Class A shares
offered
with a sales charge currently held by an investor equal or exceed $500,000
in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to
the
extent that the value of such shares represents: (a) capital appreciation
of
Fund assets; (b) reinvestment of dividends or capital gain distributions;
(c)
with respect to Class B shares, shares redeemed more than five years after
their pur
30
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
chase; or (d) with respect to Class C shares and Class A shares that are
CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC
if redeemed within 12 months of purchase. In circumstances in which the
CDSC is
imposed on Class B shares, the amount of the charge will depend on the
number
of years since the shareholder made the purchase payment from which the
amount
is being redeemed. Solely for purposes of determining the number of years
since
a purchase payment, all purchase payments made during a month will be
aggre-
gated and deemed to have been made on the last day of the preceding Smith
Bar-
ney statement month. The following table sets forth the rates of the charge
for
redemptions of Class B shares by shareholders.
<TABLE>
<CAPTION>
YEAR 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>
Class B shares will convert automatically to Class A shares eight years
after
the date on which they were purchased and thereafter will no longer be
subject
to any distribution fees. There will also be converted at that time such
pro-
portion of Class B Dividend Shares owned by the shareholder as the total
number
of his or her Class B shares converting at the time bears to the total
number
of outstanding Class B shares (other than Class B Dividend Shares) owned by
the
shareholder. Shareholders who held Class B shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") on July
15,
1994 and who subsequently exchange those shares for Class B shares of the
Fund
will be offered the opportunity to exchange all such Class B shares for
Class A
shares of the Fund four years after the date on which those shares were
deemed
to have been purchased. Holders of such Class B shares will be notified of
the
pending exchange in writing approximately 30 days before the fourth
anniversary
of the purchase date and, unless the exchange has been rejected in writing,
the
exchange will occur on or about the fourth anniversary date. See
"Prospectus
Summary--Alternative Purchase Arrangements--Class B Shares Conversion
Feature."
31
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
The length of time that CDSC Shares acquired through an exchange have
been
held will be calculated from the date that the shares exchanged were
initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares
being
redeemed will be considered to represent, as applicable, capital
appreciation
or dividend and capital gain distribution reinvestments in such other
funds.
For Federal income tax purposes, the amount of the CDSC will reduce the
gain or
increase the loss, as the case may be, on the amount realized on
redemption.
The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month
after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated
to
$12 per share, the value of the investor's shares would be $1,260 (105
shares
at $12 per share). The CDSC would not be applied to the amount which
represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC on will be waived on: (a) exchanges (see "Exchange Privilege");
(b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month
of
the value of the shareholder's shares at the time the withdrawal plan
commences
(see below) (provided, however, that automatic cash withdrawals in amounts
equal to or less than 2.00% per month of the value of the shareholder's
shares
will be permitted for withdrawal plans that were established prior to
November
7, 1994); (c) redemptions of shares within 12 months following the death or
disability of the shareholder; (d) involuntary redemptions; and (e)
redemptions
of shares in connection with a combination of the Fund with any investment
com-
pany by merger, acquisition of assets or otherwise. In addition, a
shareholder
who has redeemed shares from other funds of the Smith Barney Mutual Funds
may,
under certain circumstances, reinvest all or part of the redemption
proceeds
within 60 days and receive pro rata credit for any CDSC imposed on the
prior
redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the
case of shareholders who are also Smith Barney clients or by TSSG in the
32
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
case of all other shareholders) of the shareholder's status or holdings, as
the
case may be.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at
the
net asset value next determined for shares of the same Class in the
following
funds of the Smith Barney Mutual Funds, to the extent shares are offered
for
sale in the shareholder's state of residence. Exchanges of Class A, Class B
and
Class C shares are subject to minimum investment requirements and all
shares
are subject to the other requirements of the fund into which exchanges are
made
and a sales charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
33
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney World Funds--International Balanced Portfolio
Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
*Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney Florida Municipals Fund
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
*Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
*Smith Barney Muni Funds--California Limited Term Portfolio
Smith Barney Muni Funds--California Portfolio
*Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
34
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
++Smith Barney Muni Funds--California Money Market Portfolio
++Smith Barney Muni Funds--New York Money Market Portfolio.
++Smith Barney Municipal Money Market Fund, Inc.
- ---------------------------------------------------------------------------
- -----
*Available for exchange with Class A, Class C and Class Y shares of the
Fund.
**Available for exchange with Class A, Class B and Class Y shares of the
Fund.
***Available for exchange with Class A shares of the Fund.
+Available for exchange with Class B and Class C shares of the Fund.
++Available for exchange with Class A and Class Y shares of the Fund.
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold
without a
sales charge or with a maximum sales charge of less than the maximum
charged by
other Smith Barney Mutual Funds will be subject to the appropriate "sales
charge differential" upon the exchange of such shares for Class A shares of
a
fund sold with a higher sales charge. The "sales charge differential" is
lim-
ited 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 and capital gains distributions are treated as having paid the
same sales charges applicable to the shares on which the dividends or
distribu-
tions were paid; however, if no sales charge was imposed upon the initial
pur-
chase of shares, any shares obtained through automatic reinvestment will be
subject to a sales charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund
on
July 15, 1994) wishes to exchange all or a portion of his or her shares in
any
of the funds imposing a higher CDSC than that imposed by the Fund, the
exchanged Class B shares will be subject to the higher applicable CDSC.
Upon
35
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
an exchange, the new Class B shares will be deemed to have been purchased
on
the same date as the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be
deemed to
have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can
be detrimental to the Fund's performance and its shareholders. SBMFM may
deter-
mine that a pattern of frequent exchanges is excessive and contrary to the
best
interests of the Fund's other shareholders. In this event, SBMFM will
notify
Smith Barney and Smith Barney may, at its discretion, decide to limit addi-
tional purchases and/or exchanges by a shareholder. Upon such a
determination,
Smith Barney will provide notice in writing or by telephone to the
shareholder
at least 15 days prior to suspending the exchange privilege and during the
15
day period the shareholder will be required to (a) redeem his or her shares
in
the Fund or (b) remain invested in the Fund or exchange into any of the
funds
of the Smith Barney Mutual Funds ordinarily available, which position the
shareholder would be expected to maintain for a significant period of time.
All
relevant factors will be considered in determining what constitutes an
abusive
pattern of exchanges.
Exchanges will be processed at the net asset value next determined, plus
any
applicable sales charge differential. Redemption procedures discussed below
are
also applicable for exchanging shares, and exchanges will be made upon
receipt
of all supporting documents in proper form. If the account registration of
the
shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital
gain or loss for tax purposes will be realized upon the exchange, depending
upon the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Fund reserves the right to modify or discontinue exchange
privi-
leges upon 60 days' prior notice to shareholders.
36
SMITH BARNEY
California Municipals Fund Inc.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share
next determined after receipt of a written request in proper form at no
charge
other than any applicable CDSC. Redemption requests received after the
close of
regular trading on the NYSE are priced at the net asset value next
determined.
If a shareholder holds shares in more than one Class, any request for
redemp-
tion must specify the Class being redeemed. In the event of a failure to
spec-
ify which Class, or if the investor owns fewer shares of the Class than
speci-
fied, the redemption request will be delayed until the Fund's transfer
agent
receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The
redemption
proceeds will be remitted on or before the seventh day following receipt of
proper tender, except on any days on which the NYSE is closed or as
permitted
under the 1940 Act in extraordinary circumstances. The Fund anticipates
that,
in accordance with regulatory changes, beginning on or about June 1, 1995,
pay-
ment will be made on the third business day after receipt of proper tender.
Generally, if the redemption proceeds are remitted to a Smith Barney
brokerage
account, these funds will not be invested for the shareholder's benefit
without
specific instruction and Smith Barney will benefit from the use of
temporarily
uninvested funds. Redemption proceeds for shares purchased by check, other
than
a certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or
by
submitting a written request for redemption to:
Smith Barney California Municipals Fund Inc.
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or
dollar
amount of shares to be redeemed, (b) identify the shareholder's account
number
and (c) be signed by each registered owner exactly as the shares are regis-
tered.
37
SMITH BARNEY
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
If the shares to be redeemed were issued in certificate form, the
certificates
must be endorsed for transfer (or be accompanied by an endorsed stock
power)
and must be submitted to TSSG together with the redemption request. Any
signa-
ture appearing on a redemption request, share certificate or stock power
must
be guaranteed by an eligible guarantor institution such as a domestic bank,
savings and loan institution, domestic credit union, member bank of the
Federal
Reserve System or member firm of a national securities exchange. 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 cash payments of at least $100 monthly or quarterly. The withdrawal
plan will be carried over on exchanges between funds or Classes of the
Fund.
Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder
that exceed 1.00% per month of the value of the shareholder's shares
subject to
the CDSC at the time the withdrawal plan commences. (With respect to
withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be
waived
on amounts withdrawn that do not exceed 2.00% per month of the
shareholder's
shares subject to the CDSC.) For further information regarding the
automatic
cash withdrawal plan, shareholders should contact a Smith Barney Financial
Con-
sultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in
the
Fund account is less than $500. (If a shareholder has more than one account
in
this Fund, each account must satisfy the minimum account size.) The Fund,
how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive
written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
38
SMITH BARNEY
California Municipals Fund Inc.
PERFORMANCE
YIELD
From time to time, the Fund may advertise its 30-day "yield" and
"equivalent
taxable yield" for each Class of shares. The yield refers to the income
gener-
ated by an investment in those shares over the 30-day period identified 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 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. 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
"Divi-
dends, Distributions and Taxes."
TOTAL RETURN
From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other
types
of sales literature. These figures are computed separately for Class A,
Class
B, class C and Class Y shares of the Fund. These figures are based on
histori-
cal earnings and are not intended to indicate future performance. Total
return
is computed for a specific period of time assuming deduction of the maximum
sales charge, if any, from the initial amount invested and reinvestment of
all
income dividends and capital gain distributions on the reinvestment dates
at
prices calculated as stated in this Prospectus, then dividing the value of
the
investment at the end of the period so calculated by the initial amount
invested and subtracting 100%. The standard average annual total return, as
prescribed by the SEC, is derived from this total return, which provides
the
ending redeemable value. Such standard total return information may also be
accompanied with nonstandard total return information for differing periods
computed in the same manner but without annualizing the total return or
taking
sales charges into account. The Fund calculates current dividend return for
each Class by annualizing the most recent monthly distribution and dividing
by
the net asset value of the maximum public offering price (including sales
charge) on the last
39
SMITH BARNEY
California Municipals Fund Inc.
PERFORMANCE (CONTINUED)
day of the period for which current dividend return is presented. The
current
dividend return for each Class may vary from time to time depending on
market
conditions, the composition of its investment portfolio and operating
expenses.
These factors and possible differences in the methods used in calculating
cur-
rent dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other
investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may
include
date from Lipper Analytical Services, Inc. or similar independent services
that
monitor the performance of mutual funds or other industry publications. The
Fund will include performance data for Class A, Class B, Class C and Class
Y
shares in any advertisement or information including performance data of
the
Fund.
MANAGEMENT OF THE FUND
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, administrator, sub-
admin-
istrator, custodian and transfer agent. The day-to-day operations of the
Fund
are delegated to the Fund's investment adviser, administrator and sub-
adminis-
trator. The Statement of Additional Information contains background
information
regarding each Director and executive officer of the Fund.
INVESTMENT ADVISER
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as
the Fund's investment adviser pursuant to a transfer of the advisory
agreement,
effective November 7, 1994, from its affiliate Mutual Management Corp.
(Mutual
Management Corp. and SBMFM are both wholly owned subsidiaries of Holdings.)
Investment advisory services continue to be provided to the Fund by the
same
portfolio managers who provided services under the agreement with Mutual
Man-
agement Corp. SBMFM (through predecessor entities) has been in the
investment
counseling business since 1934 and is a registered investment adviser.
SBMFM
renders investment advice to investment companies
40
SMITH BARNEY
California Municipals Fund Inc.
MANAGEMENT OF THE FUND (CONTINUED)
that had aggregate assets under management as of September 30, 1994, in
excess
of $52.4 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 stated investment objective and policies, makes investment decisions
for
the Fund, places orders to purchase and sell securities and employs profes-
sional portfolio managers and securities analysts who provide research
services
to the Fund. For investment advisory services rendered, the Fund pays SBMFM
a
fee at the following annual rates of average daily net assets: 0.35% up to
$500
million; 0.32% of the value of its average daily net assets in excess of
$500
million. For the fiscal year ended February 28, 1994, the SBMFM was paid
investment advisory fees equal to 0.32% of the value of the average daily
net
assets of the Fund.
PORTFOLIO MANAGEMENT
Joseph P. Deane, Vice President, Investment Officer of the Fund since
November 1, 1988 and an Investment Officer of SBMFM, is responsible for
manag-
ing the day-to-day operations of the Fund including, making all investment
decisions.
Management's discussion and analysis, and additional performance
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 a Smith Barney Financial
Consul-
tant or by writing or calling the Fund at the address or phone number
listed on
page one of the Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of
the
Fund's administration. For administration services rendered, the Fund pays
SBMFM a fee at the following annual rates of average daily net assets:
0.20% to
$500 million 0.18% of the value of its average daily net assets in excess
of
$500 million.
41
SMITH BARNEY
California Municipals Fund Inc.
MANAGEMENT OF THE FUND (CONTINUED)
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts
02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to
investment
companies that had aggregate assets under management as of September 30,
1994,
in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
gen-
erally assists SBMFM in all aspects of the Fund's administration and
operation.
Under a sub-administration agreement dated July 20, 1994, Boston Advisors
is
paid a portion of the administration fee paid by the Fund to SBMFM at a
rate
agreed upon from time to time between Boston Advisors and SBMFM. Prior to
July
20, 1994, Boston Advisors served as the Fund's administrator.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York
10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts"
arrangement
requiring Smith Barney to take and pay for only such securities as may be
sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service
fee
with respect to Class A, Class B and Class C shares of the Fund at the
annual
rate of 0.15% of the average daily net assets of the respective Class.
Smith
Barney is also paid a distribution fee with respect to Class B and Class C
shares at the rate of 0.50% and 0.55%, respectively, of the average daily
net
assets attributable to those Classes. Class B shares which automatically
con-
vert to Class A shares eight years after the date of original purchase,
will no
longer be subject to a distribution fee. The fees are used by Smith Barney
to
pay its Financial Consultants for servicing shareholder accounts and, in
the
case of Class B and Class C shares, to cover expenses primarily intended to
result in the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential
investors;
payments to and expenses of Smith Barney Financial Consultants and other
per-
sons who provide support services in connection with the distribution of
shares; interest and/or carrying charges; and indirect and overhead costs
of
Smith Barney associated
42
SMITH BARNEY
California Municipals Fund Inc.
DISTRIBUTOR (CONTINUED)
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of
a
Class include a commission or fee paid by the investor or Smith Barney at
the
time of sale and, with respect to Class A, Class B and Class C shares, a
con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may
receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the
payments
may exceed distribution expenses actually incurred. The Fund's Board of
Direc-
tors 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, amounts received under the Plan and
proceeds of
the CDSC.
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.
Each Class of the Fund represents an identical interest in the Fund's
invest-
ment portfolio. As a result, the Classes have the same rights, privileges
and
preferences, except with respect to: (a) the designation of each Class; (b)
the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class; (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 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
43
SMITH BARNEY
California Municipals Fund Inc.
ADDITIONAL INFORMATION (CONTINUED)
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, and the Fund will assist shareholders in calling such a meeting as
required by the 1940 Act. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share owned and
a
proportionate, fractional vote for any fractional share held of that Class.
Generally, shares of the Fund will be voted on a Fund-wide basis on all
matters
except matters affecting only the interests of one Class.
Boston Safe Deposit and Trust Company is an indirect wholly owned
subsidiary
of Mellon and is located at One Boston Place, Boston, Massachusetts 02108,
and
serves as custodian 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
by the Fund at the end of the reporting period. In an effort to reduce the
Fund's printing and mailing costs, the Fund plans to consolidate the
mailing of
its semi-annual and annual reports by household. This consolidation means
that
a household having multiple accounts with the identical address of record
will
receive a single copy of each report. Shareholders who do not want this
consol-
idation to apply to their account should contact their Financial
Consultants or
the Fund's transfer agent.
-----------------------
No person has been authorized to give any information or to make any
repre-
sentations in connection with this offering other than those contained in
this
Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
Distribu-
tor. This Prospectus does not constitute an offer by the Fund or the
Distribu-
tor to sell or a solicitation of an offer to buy any of the securities
offered
hereby in any jurisdiction to any person to whom it is unlawful to make
such an
offer or solicitation in such jurisdiction.
44
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
CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013 Fund 14, 198
Smith Barney
CALIFORNIA MUNICIPALS FUND INC.
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
[LOGO OF SMITH BARNEY APPEARS HERE]
Smith Barney
CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 7, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney California
Municipals Fund Inc. (the "Fund") dated November 7, 1994, as amended or
supplemented from time to time, and should be read in conjunction with the
Fund's Prospectus. The Fund's Prospectus may be obtained from your Smith
Barney 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").......
28
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")......
32
Additional Information (See in the Prospectus "Additional Information").
34
Financial Statements....................................................
35
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 Inc.
("Smith Barney")...................... Distributor
Smith Barney Mutual Funds Management
Inc.
("SBMFM")............................. Investment Adviser and
Administrator
The Boston Company Advisors, Inc.
("Boston Advisors")................... Sub-Administrator
Boston Safe Deposit and Trust Company
("Boston Safe")....................... Custodian
The Shareholder Services Group, Inc.
("TSSG"),
a subsidiary of First Data
Corporation........................... Transfer Agent
</TABLE>
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional
Information.
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The names of the Directors and executive officers of the Fund, together
with
information as to their principal business occupations during the past five
years, are 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.
Martin Brody, Director. Vice Chairman of the Board of Restaurant
Associates
Industries 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.
Burt N. Dorsett, Director. Managing Partner of Dorsett McCabe
Management,
Inc., an investment counselling firm; Director of Research Corporation
Technologies Inc., a non-profit patent-clearing and licensing firm. His
address is 201 East 62nd Street, New York, New York 10021.
James J. Crisona, Director Emeritus. 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.
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.
Elliot S. Jaffe, Director. Chairman of the Board and President of The
Dress
Barn, Inc. His address is 30 Dunnigan Drive, Suffern NY 10901.
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 and Chairman of Smith Barney
Strategy
Advisers Inc.; prior to July 1993, Senior Executive Vice President of
Shearson
Lehman Brothers Inc. ("Shearson Lehman Brothers"); Vice Chairman of
Shearson
Asset Management; a Director of PanAgora Asset Management, Inc. and
PanAgora
Asset Management Limited. His address is 388 Greenwich Street, New York,
New
York 10013.
Stephen J. Treadway, President, Executive Vice President and Director of
Smith Barney; Director and President of Mutual Management Corp. and SBMFM;
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; President of Smith Barney Strategy Advisers Inc., prior to July
1993.
Senior Vice President of Shearson Lehman Brothers; Vice
2
President of Shearson Lehman Investment Strategy Advisors Inc. His address
is
388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director. President, Cornelius C. Rose
Associates,
Inc., financial consultants, and Chairman and Director of Performance
Learning
Systems, an educational consultant. His address is Fair Oaks, Enfield, New
Hampshire 03748.
Joseph P. Deane, Vice President and Investment Officer. Investment
Officer
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman
Advisors.
His address is 388 Greenwich Street, New York, New York 10013.
David Fare, Investment Officer. Investment Officer of SBMFM; prior to
July
1993, Vice President of Shearson Lehman Advisors. His address is 388
Greenwich
Street, New York, New York 10013.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial
Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address
is
1345 Avenue of the Americas, New York, NY 10105.
Christina T. Sydor, Secretary. Managing Director of Smith Barney;
General
Counsel and Secretary of SBMFM. Her address is 1345 Avenue of the Americas,
New York, NY 10105.
Each Director also serves as a director, trustee or general partner of
other mutual funds for which Smith Barney serves as distributor. As of
October
31, 1994, the Directors and officers of the Fund as a group owned less than
1.00% of the outstanding common stock of the Fund.
A Director Emeritus may attend meetings of the Fund's Board of Directors
but has no voting rights at such meetings.
No director, officer or employee of Smith Barney or any Smith Barney
affiliates will receive 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 or any of its affiliates a fee of
$2,000
per annum plus $500 per meeting attended and reimburses them for travel and
out-of-pocket expenses. For the fiscal year ended February 28, 1994, such
fees
and expenses totalled $47,451.
INVESTMENT ADVISER AND ADMINISTRATOR--SBMFM
SBMFM 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 SBMFM, on April 7, 1993. The services
provided by SBMFM under the Advisory Agreement are described in the
Prospectus
under "Management of the Fund". SBMFM bears all expenses in connection with
the performance of its services and pays the salary of any officer or
employee
who is employed by both it and the Fund. SBMFM provides investment advisory
and management services to investment companies affiliated with Smith
Barney.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers").
As compensation for SBMFM's services, the Fund pays SBMFM a fee paid
monthly at the following annual rates: 0.35% of average daily net assets up
to
$500 million; 0.32% of average daily net assets in excess of $500 million.
For
the 1992, 1993 and 1994 fiscal years, the Fund paid Mutual Management
Corp., a
wholly owned subsidiary of Holdings and previously the Fund's investment
adviser and/or Shearson Lehman Advisors, the Fund's investment adviser
prior
to Mutual Management Corp., $1,226,008, $1,376,158 and $1,761,043,
respectively, in investment advisory fees.
3
SBMFM also serves as administrator to the Fund pursuant to a written
agreement (the "Administration Agreement") dated April 20, 1994, which was
most recently approved by the Fund's Board of Directors, including a
majority
of Directors who are not "interested persons" of the Fund or SBMFM. The
services provided by SBMFM under the Administration are described in the
Prospectus under "Management of the Fund." SBMFM pays the salary of any
officer and employee who is employed by both it and the Fund and bears all
expenses in connection with the performance of its services. SBMFM is a
wholly
owned subsidiary of Holdings.
As compensation for SBMFM's services, the Fund pays a fee paid monthly
at
the following annual rates of average daily net assets: 0.20% up to $500
million; 0.18% of the next $1 billion; and 0.16% in excess of $1.5 billion.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Prior to April 20, 1994, Boston Advisors served as administrator to the
Fund. Boston Advisors currently serves as sub-administrator to the Fund
under
a written agreement (the "Sub-Administration Agreement") dated April 20,
1994,
which was most recently approved by the Fund's Board of Directors,
including a
majority of Directors who are not "interested persons" of the Fund or
Boston
Advisors, on April 20, 1994. Prior to the close of business on May 21,
1993,
Boston Advisors also acted in the capacity as the Fund's sub-investment
adviser and administrator. Boston Advisors is a wholly owned subsidiary of
The
Boston Company, Inc. ("TBC"), a financial services holding company, which
is
in turn a wholly owned subsidiary of Mellon Bank Corporation ("Mellon").
As compensation for Boston Advisors' services rendered, the Fund paid a
fee
computed daily and paid monthly at the following annual rates: 0.20% of the
value of the Fund's average daily net assets up to $500 million and 0.18%
of
the value of its average daily net assets in excess of $1 billion. For the
1992, 1993 and 1994 fiscal years, the Fund paid Boston Advisors, $700,576,
$786,376 and $1,005,899, respectively, in sub-investment advisory and/or
administration fees.
Certain of the services provided to the Fund by SBMFM and Boston
Advisors
pursuant to the Administration Agreement are described in the Prospectus
under
"Management of the Fund." In addition to those services, SBMFM and Boston
Advisors pay the salaries of all officers and employees who are employed by
both SBMFM and Boston Advisors and the Fund, maintain office facilities for
the Fund, furnish 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, prepare reports
to
the Fund's shareholders and prepare tax returns and reports to and filings
with the Securities and Exchange Commission (the "SEC") and state Blue Sky
authorities. SBMFM and Boston Advisors bear all expenses in connection with
the performance of their services.
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; 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 maintaining corporate existence; costs of
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
shareholder meetings; and meetings of the officers or Board of Directors of
the Fund.
4
SBMFM and Boston Advisors have agreed that if in any fiscal year the
aggregate expenses of the Fund (including fees payable pursuant to the
Advisory Agreement, Administration Agreement and Sub-Administration
Agreement,
but excluding interest, taxes, brokerage and, with the prior written
consent
of the necessary state securities commissions, extraordinary expenses)
exceed
the expense limitation of any state having jurisdiction over the Fund,
SBMFM
and Boston Advisors will, to the extent required by state law, reduce their
fees by the amount of such excess expenses, such amount to be allocated
among
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 limitation currently applicable
to
the Fund would require a fee reduction in any year that such expenses
exceed
2.50% of the first $30 million of average daily net assets, 2.00% of the
next
$70 million of average daily net assets and 1.50% 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.
KPMG Peat Marwick, independent accountants, 345 Park Avenue, New York,
New
York 10154, serve as auditors of the Fund and render an opinion on the
Fund's
financial statements annually.
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."
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 SBMFM 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
SBMFMs' 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.
5
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 SBMFM 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.
The Fund generally may invest up to 25% of its total assets in
securities
rated below A, MIG3 or Prime-1 (P-1) by Moody's or A, SP-2 or A-3 by S&P,
or
in unrated securities of comparable quality. Such securities (a) will
likely
have some quality and protective characteristics that, in the judgment of
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
6
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.
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 of time (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, SBMFM 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 SBMFM 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 multiplied
by
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.
7
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 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 SBMFM 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
8
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.
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 SBMFM, which could prove to be inaccurate. Even if SBMFMs'
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.
9
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 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.
10
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.
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 SBMFM 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
SBMFM 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 SBMFM 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 SBMFM 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 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 SBMFM, 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 SBMFM are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner
11
believed by SBMFM to be equitable to each. In some cases, this procedure
may
adversely affect the price paid or received by the Fund or the size of the
position obtained or disposed of by the Fund.
PORTFOLIO TURNOVER
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 rate was 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. 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, projected the State would have an accumulated deficit of about
$2.75
billion by June 30, 1993 essentially unchanged from the prior year. The
Governor proposed to eliminate this deficit over an 18-month period. Unlike
previous years, the Governor's
13
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.
2. The 1993-94 Budget Act projected 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 was one-time funding. Congress ultimately appropriated only $450
million.
4. Reductions of $600 million in health and welfare programs, and $400
million in support for higher education (partly offset by fee increases
at
all three units of higher education) and various
14
miscellaneous cuts (totalling approximately $150 million) in State
government services in many agencies, up to 15%. The 1993-94 Budget Act
suspended the 4% automatic budget reduction "trigger", as was done in
1992-
93 so that cuts could be focused.
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. 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.
Administration reports during the course of the 1993-94 Fiscal Year have
indicated that while economic recovery appears to have started in the
second
half of the fiscal year, recessionary conditions continued longer than has
been anticipated when the 1993-94 Budget Act was adopted. Overall, revenues
for the 1993-94 Fiscal Year were about $800 million lower than original
projections, and expenditures were about $780 million higher, primarily
because of higher health and welfare caseloads, lower property taxes which
require greater State support for K-14 education to make up the shortfall,
and
lower than anticipated federal government payments for immigration-related
costs. The reports in May and June, 1994, indicated that revenues in the
second half of the 1993-94 Fiscal Year have been very close to the
projections
made in the Governor's Budget of January 10, 1994, which is consistent with
a
slow turnaround in the economy.
The Department of Finance's July 1994 Bulletin, including the final June
receipts, reported that June revenues were $114 million (2.5 percent) above
projection, with final end-of-year results at $377 million (about 1
percent)
above the May Revision projections. Part of this result was due to end-of-
year
adjustments and reconciliations. Personal income tax and sales tax
continued
to track projections very well. The largest factor in the higher than
anticipated revenues was from bank and corporation taxes, which were $140
million (18.4 percent) above projection in June. While the higher June
receipts are reflected in the actual 1993-94 Fiscal Year cash flow results,
and help the starting cash balance for the 1994-95 Fiscal Year, the
Department
of Finance has not adjusted any of its revenue projections for the 1994-95
or
1995-96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the deficit
retirement plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994 maturing December
21, 1994. This borrowing reduced the cash deficit at the end of the 1993-94
Fiscal Year. Nevertheless, because of the $1.5 billion variance from the
original 1993-94 Budget Act assumptions, the General Fund ended the fiscal
year at June 30, 1994 carrying forward an accumulated deficit of
approximately
$2 billion.
Because of the revenue shortfall and the State's reduced internal
borrowable cash resources, in addition to the $1.2 billion of revenue
anticipation warrants issued as part of the deficit retirement plan, the
State
issued an additional $2.0 billion of revenue anticipation warrants,
maturing
July 26, 1994, which were needed to fund the State's obligations and
expenses
through the end of the 1993-94 Fiscal Year.
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. Current estimates of total property damage (private and
public)
are in the range of $20 billion but these estimates still subject to
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
sustained damage. Most of the major highways (Interstate 5 and 10) have now
been repaired. The campus of California State University at Northridge
(very
near the epicenter) suffered an estimated $350 million damage, resulting in
temporary closure of the campus. It has reopened using borrowed facilities
elsewhere in the area and many temporary structures. There was also some
damage to the University of California at Los Angeles and to an office
building in Van Nuys (now open after a temporary closure). Overall, except
for
the temporary road and bridge closures, and CSU-Northridge, the earthquake
did
not and is not expected to significantly affect 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 originally proposed 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 proposed to cover $1.05 billion of these costs from a general
obligation bond which was on the June 1994 ballot, but it was not approved
by
the voters. The Governor subsequently announced that the State's share for
transportation projects would come from existing Department of
Transportation
funds (thereby delaying other, non-earthquake related projects), that the
State's share for certain other costs (including local school building
repairs) would come from reallocating existing bond funds, and that a
proposed
program for homeowner and small business aid supplemental to federal aid
would
have to be abandoned. Some other costs will be borrowed from the federal
government in a manner similar to that used by the State of Florida after
Hurricane Andrew; pursuant to Senate Bill 2383, repayment will have to be
addressed in 1995-96 or beyond.
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 proposal, as updated in May and June, 1994, recognized that the
accumulated deficit could not be repaid in one year, and proposed a two-
year
solution. The budget proposal sets forth revenue and expenditure forecasts
and
revenue and expenditure proposals which result in operating surpluses for
the
budget for both 1994-95 and 1995-96, and lead to the elimination of the
accumulated budget deficit, estimated at about $2.0 billion at June 30,
1994,
by June 30, 1996.
16
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects
revenues and transfers of $41.9 billion, $2.1 billion higher than revenues
in
1993-94. This reflects the Administration's forecast of an improving
economy.
Also included in this figure is a projected receipt of about $360 million
from
the Federal Government to reimburse the State's cost of incarcerating
undocumented immigrants. The State will not know how much the Federal
Government will actually provide until the Federal FY 1995 Budget is
completed. Completion of the Federal Budget is expected by October 1994.
The
Legislature took no action on a proposal in the January Governor's Budget
to
undertake an expansion of the transfer of certain programs to counties,
which
would also have transferred to counties 0.5% of the State's current sales
tax.
The Budget Act projects Special Fund revenues of $12.1 billion, a
decrease
of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of $40.9
billion,
an increase of $1.6 billion over 1993-94. The Budget Act also projects
Special
Fund expenditures of $13.7 billion, a 5.4% increase over 1993-94 estimated
expenditures. The principal features of the Budget Act were the following:
1. Receipt of additional federal aid in 1994-95 of about $400 million
for costs of refugee assistance and medical care for undocumented
immigrants, thereby offsetting a similar General Fund cost. The State
will
not know how much of these funds it will receive until the Federal FY
1995
Budget is passed.
2. Reductions of approximately $1.1 billion in health and welfare
costs.
3. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for California State
University. It is anticipated that student fees for both the U.C. and the
C.S.U. will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by $526
million
from 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provides approximately $4,217 per student for K-12 schools, equal
to the level in the past three years.
5. Legislation enacted with the Budget clarifies laws passed in 1992
and
1993 which require counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented a method of making such transfers which provided less money
for
schools if there were redevelopment agency projects. The new legislation
bans this method of transfer. If all counties had implemented this
method,
General Fund aid to K-12 schools would have been $300 million higher in
each of the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for anticipated growth in
the
State's prison inmate population, including provisions for implementing
recent legislation (the so-called "Three Strikes" law) which requires
mandatory life prison terms for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund transfers
($255
million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation
enacted
for the 1993-94 Budget, the renters' tax credit was suspended for two years
(1993 and 1994). A ballot proposition to permanently restore the renters'
tax
credit after this year failed at the June, 1994 election. The Legislature
enacted a
17
further one-year suspension of the renters' tax credit, for 1995, saving
about
$390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumes that the State will use a cash flow borrowing
program in 1994-95 which combines one-year notes and two-year warrants,
which
have now been issued. Issuance of warrants allows the State to defer
repayment
of approximately $1.0 billion of its accumulated budget deficit into the
1995-
96 Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal year
included
the issuance of $4.0 billion of revenue anticipation warrants on July 26,
1994, to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit.
Because preparation of cash flow estimates for the 1995-96 Fiscal Year
is
necessarily more imprecise than for the current fiscal year and entails
greater risks of variance from assumptions, and because the Governor's two-
year budget plan assumes receipt of a large amount of federal aid in the
1995-
96 Fiscal Year for immigration-related costs which is uncertain, the
Legislature enacted a backup budget adjustment mechanism to mitigate
possible
deviations from projected revenues, expenditures or internal borrowable
resources which might reduce available cash resources during the two-year
plan, so as to assure repayment of the warrants.
Pursuant to Section 12467 of the California Government Code, enacted by
Chapter 135, Statutes of 1994 (the "Budget Adjustment Law"), the State
Controller will, on November 15, 1994, in conjunction with the Legislative
Analyst's Office, review the cash flow projections for the General Fund on
June 30, 1995 and compare them to the projections for the 1994-95 Fiscal
Year
included in the Official Statement dated July 20, 1994 for the 1994 Revenue
Anticipation Warrants, Series C and D. If the State Controller's report
identifies a decrease in the unused borrowable resources on June 30, 1995
of
more than $430,000,000, then the "1995 cash shortfall" shall be the amount
of
the difference that exceeds $430,000,000. On or before February 15, 1995,
legislation must be enacted providing for sufficient General Fund
expenditure
reductions, revenue increases, or both, to offset said 1995 cash shortfall.
If
such legislation is not enacted, within five days thereafter the Director
of
Finance must reduce all General Fund appropriations for the 1994-95 Fiscal
Year, except certain appropriations required by the State Constitution and
federal law (the "Required Appropriations"), by the percentage equal to the
ratio of said 1995 cash shortfall to total remaining General Fund
appropriations for the 1994-95 Fiscal Year, excluding the Required
Appropriations.
The Director of Finance is required to include updated cash-flow
statements
for the 1994-95 and 1995-96 Fiscal Years in the May revision to the 1995-96
Fiscal Year budget proposal. By June 1, 1995, the State Controller must
concur
with these updated statements or provide a revised estimate of the cash
condition of the General Fund for the 1994-95 and the 1995-96 Fiscal Years.
For the 1995-96 Fiscal Year, Chapter 135 prohibits any external borrowing
as
of June 30, 1996, thereby requiring the State to rely solely on internal
borrowable resources, expenditure reductions or revenue increases to
eliminate
any projected cash flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction
with the Legislative Analyst's Office, review the estimated cash condition
of
the General Fund for the 1995-96 Fiscal Year. The "1996 cash shortfall"
shall
be the amount necessary to bring the balance of unused borrowable resources
on
June 30, 1996 to zero. On or before December 1, 1995, legislation must be
enacted providing for sufficient General Fund expenditure reductions,
revenue
increases, or both, to offset any such 1996 cash shortfall identified by
the
State Controller. If such legislation is not enacted, within five days
thereafter the Director of
18
Finance must reduce all General Fund appropriations for the 1995-96 Fiscal
Year, except the Required Appropriations, by the percentage equal to the
ratio
of said 1996 cash shortfall to total remaining General Fund appropriations
for
the 1995-96 Fiscal Year, excluding the Required Appropriations.
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.
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.
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.
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
19
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
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.
20
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 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 Appeals 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
21
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 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
22
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.
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
23
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 Obligations 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, (i.e., California
Municipal Obligations) 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
Obligations 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 spouse and his or her
children purchasing shares for his or her own account; (c) a trustee or
other
fiduciary purchasing shares for a single trust estate or single fiduciary
account; (d) a pension, profit sharing or other employee benefit plan
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code" and qualified employee benefit plans of employers who
are
"affiliated persons" of each other within the meaning of the 1940 Act; (e)
tax-exempt organizations enumerated in Section 501(c)(3) or (13) of the
Code;
and (f) a trustee or other professional fiduciary (including a bank, or an
investment adviser registered with the SEC under the Investment Advisers
Act
of 1940, as amended) purchasing shares of the Fund for one or
24
more trust estates or fiduciary accounts. Purchasers who wish to combine
purchase orders to take advantage of volume discounts should contact a
Smith
Barney Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in
Class A
shares of the Fund and in Class A shares of other funds of the Smith Barney
Mutual Funds that are offered with an initial sales charge, including the
purchase being made, of any purchaser is $25,000 or more. The reduced sales
charge is subject to confirmation of the shareholder's holdings through a
check of appropriate records. The Fund reserves the right to terminate or
amend the combined right of accumulation at any time after notice to
shareholders. For further information regarding the right of accumulation,
shareholders should contact a Smith Barney Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICE
The Fund offers its shares to the public on a continuous basis. The public
offering price for a Class A and Class Y share of the Fund is equal to the
net
asset value per share at the time of purchase, plus for Class A shares an
initial sales charge based on the aggregate amount of the investment. The
public offering price for a Class B and Class C share (and Class A share
purchases, including applicable rights of accumulation, equaling or
exceeding
$500,000), is equal to the net asset value per share at the time of
purchase
and no sales charge is imposed at the time of purchase. A contingent
deferred
sales charge ("CDSC"), however, is imposed on certain redemptions of Class
B
and Class C shares, and Class A shares when purchased in amounts exceeding
$500,000. The method of computation of the public offering price is shown
in
the Fund's financial statements, which are 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, so that disposal of the Fund's
investments or determination of net asset value is not reasonably
practicable
or (c) for such other periods as the SEC by order may permit for protection
of
the Fund's shareholders.
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 1.00% 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 monthly and quarterly.
25
Withdrawals of at least $100 may be made under the Withdrawal Plan by
redeeming as many shares of the Fund as may be necessary to cover the
stipulated withdrawal payment. Any applicable CDSC will not be waived on
amounts withdrawn by shareholders that exceed 1.00% per month of the value
of
a shareholder's shares at the time the Withdrawal Plan commences. (With
respect to Withdrawal Plans in effect prior to November 7, 1994, any
applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00%
per month of the value of the shareholder's shares that are subject to a
CDSC). To the extent withdrawals exceed dividends, distributions and
appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment, and continued
withdrawal payments will 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. For additional information, shareholders
should contact a Smith Barney Financial Consultant.
Effective November 7, 1994, Withdrawal Plans should be set up with any
Smith Barney Financial Consultant. A shareholder who purchases shares
directly
through TSSG may continue to do so and applications for participation in
the
Withdrawal Plan must be received by TSSG no later than the eighth day of
the
month to be eligible for participation beginning with that month's
withdrawal.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis
pursuant
to a written agreement (the "Distribution Agreement"), which was most
recently
approved by the Fund's Board of Directors on July 20, 1994. For the 1992,
1993
and 1994 fiscal years, Smith Barney or its predecessor Shearson Lehman
Brothers received $1,638,252, $1,713,689 and $937,828, respectively, in
sales
charges for the sale of the Fund's Class A shares, and did not reallow any
portion thereof to dealers. For the period from November 6, 1992 through
February 28, 1993, and for the fiscal year ended February 28, 1994, Smith
Barney or Shearson Lehman Brothers received $9,030 and $75,150,
respectively,
representing CDSCs, on redemption of the Fund's Class B shares.
When payment is made by the investor before settlement date, unless
otherwise noted by the investor, the funds will be held as a free credit
balance in the investor's brokerage account, and Smith Barney may benefit
from
the temporary use of the funds. The investor may designate another use for
the
funds prior to settlement date, such as an investment in a money market
fund
(other than the Smith Barney Exchange Reserve Fund) of the Smith Barney
Mutual
Funds. If the investor instructs Smith Barney to invest the funds in a Fund
of
the Smith Barney Mutual 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, which serve the funds in an
investment
advisory or administrative capacity, will benefit by 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 resulting from these
26
settlement procedures and will take such benefits into consideration when
reviewing the Advisory, Administration and Distribution Agreements for
continuance.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and for the expense
it
bears under the Distribution Agreement, the Fund has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, the Fund pays Smith Barney a service fee, accrued daily and
paid monthly, calculated at the annual rate of 0.15% of the value of the
Fund's average daily net assets attributable to the Class A, Class B and
Class
C shares. In addition, Class B and Class C pay distribution fees primarily
intended to compensate Smith Barney for its initial expense of paying its
Financial Consultants a commission upon sales of the respective shares. The
Class B distribution fee is calculated at the annual rate of 0.50% of the
value of the Fund's average net assets attributable to the shares of the
Class. The Class C distribution fee is calculated at the annual rate of
0.55%
of the value of the Fund's average net assets attributable to the shares of
the Class. For the period from November 6, 1992 through February 28, 1993,
Class A and Class B shares incurred $187,628 and $8,827, respectively, in
service fees. For the same period, Class B shares incurred $29,426 in
distribution fees. For the fiscal year ended February 28, 1994, Class A and
Class B shares incurred $641,265 and $115,317, respectively in service
fees.
For the same period, Class B shares incurred $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 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 vote of a
majority of the outstanding voting securities of the Class (as defined in
the
1940 Act). Pursuant to the Plan, Smith Barney will provide the Board of
Directors periodic reports of the amounts expended under the Plan and the
purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset 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,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and
on
the preceding Friday or subsequent Monday when one of these holidays falls
on
a Saturday or Sunday, respectively. Because of the differences in
distribution
fees and Class-specific expenses, the per share net asset value of each
Class
may differ. The following is a description of the procedures used by the
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,
27
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 of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same Class
of
other funds in the Smith Barney Mutual Funds, to the extent such shares are
offered for sale in the shareholder's state of residence, on the basis of
relative net asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may be
exchanged for Class A shares of any of the other funds, and the sales
charge differential, if any, will be applied. Class A shares of any
fund
may be exchanged without a sales charge for shares of the funds that
are
offered without a sales charge. Class A shares of any fund purchased
without a sales charge may be exchanged for shares sold with a sales
charge, and the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of
any
of the other funds, and the sales charge differential, if any, will be
applied.
C. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of the Fund exchanged for Class B shares of 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 must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the
account
number in order to accomplish an exchange of shares of the Smith Barney
High
Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the
same
Class in a fund with different investment objectives when they believe that
a
shift between funds is an appropriate investment decision. Prior to any
exchange, the shareholder should obtain and review a copy of the current
prospectus of each fund into which an exchange is being considered.
Prospectuses may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents,
shares submitted for exchange are redeemed at the then-current net asset
value
and, subject to any applicable CDSC, the proceeds immediately invested, at
a
price as described above, in shares of the fund being acquired. Smith
Barney
reserves the right to reject any exchange request. The exchange privilege
may
be modified or terminated at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return of a Class in
advertisements or in reports and other communications to shareholders. The
Fund may include comparative performance information in
28
advertising or marketing the Fund's shares. Such performance information
may
include the following industry and financial publications: Barron's,
Business
Week, CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall street Journal. To the
extent any advertisement or sales literature of the Fund describes the
expenses or performance of any Class, it will also disclose such
information
for the other Classes.
YIELD
A 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> <C> <S>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement).
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.
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
yield for the same period was 7.17% and 6.57%, respectively, assuming the
payment of Federal income taxes at a rate of 31% and California income
taxes
at a rate of 9.30%.
29
AVERAGE ANNUAL TOTAL RETURN
"Average annual total return" figures, as described below, are computed
according to a formula prescribed by the SEC. The formula can be expressed
as
follows:
P(1 + T)/n/ = ERV
<TABLE>
<C> <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>
The following total return figures assume that the maximum 4.00% sales
charge has been deducted from the investment at the time of purchase and
have
been restated to show the change in the maximum sales charge. The Fund's
average annual total returns for the Class A shares were as follows for the
periods indicated:
1.68% for the one-year period beginning on March 1, 1993 through February
28,
1994.
8.57% per annum during the five-year period beginning on March 1, 1989
through February 28, 1994; and
9.44% per annum during the period from commencement of operations (April
9,
1984) through February 28, 1994.
These Fund's average total return for Class B shares assuming the
maximum
applicable CDSC was for the periods indicated:
1.05% for the one-year period beginning on March 1, 1993 through February
28,
1994.
8.37% per annum during the period from commencement (November 6, 1992)
through February 28, 1994.
The Fund's average total return for Class B shares without the CDSC was
as
follows for the periods indicated:
5.40% for the one year period beginning March 1, 1993 through February 28,
1994.
11.32% per annum during the period from commencement (November 6, 1992)
through February 28, 1994.
30
AGGREGATE TOTAL RETURN
Aggregate total return figures, as described below, 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> <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 returns for the Class A shares were as follows for
the
periods indicated:
5.92% for the one-year period beginning March 1, 1993 through February 28,
1994;
57.14% for the five-year period beginning March 1, 1989 through February
28,
1994; and
154.21% for the period from commencement of operations (April 9, 1984)
through February 28, 1994.
These aggregate total return figures do not assume that the maximum
4.00%
sales charge has been deducted from the investment at the time of purchase.
If
the sales charge had been deducted at the time of purchase, the aggregate
total return for its Class A shares for those same periods would have been
1.68%, 50.85% and 144.04% respectively. The total return figures have been
restated to show the change in the maximum sales charge.
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.
These figures do not assume that the maximum 4.50% CDSC assessed by the
Fund
has been deducted from the investment at the time of purchase. If the
maximum
CDSC had been deducted at the time of purchase, the Fund's aggregate total
return for the same periods would have been 1.05% and 11.17%, respectively.
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.
It is important to note that the total return figures set forth above
are
based on historical earnings and are not intended to indicate future
performance. Each Class' net investment income changes in response to
fluctuation in interest rates and the expenses of the Fund.
31
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 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
32
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 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
33
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 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.
ADDITIONAL INFORMATION
The Fund was incorporated on February 17, 1984 under the name Shearson
California Municipals Inc. On December 15, 1988, November 19, 1992, July
30,
1993 and October 14, 1994, the Fund changed its name to SLH California
Municipals Fund Inc. to Shearson Lehman Brothers California Municipals Fund
Inc. to
34
Smith Barney Shearson California Municipals Fund Inc. and Smith Barney
California Municipals Fund Inc., respectively.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located
at
One Boston Place, Boston, Massachusetts 02108, and serves as the custodian
of
the Fund. Under the custody agreement with the Fund, 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, 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 and Semi-Annual Reports for the fiscal year ended
February
28, 1994 and semi-annual period ended August 31, 1994 accompany this
Statement
of Additional Information and are incorporated herein by reference in their
entirety.
35
SMITH BARNEY 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.
The Registrant's Semi-Annual Report for the six-month period year ended
August 31, 1994 is incorporated by reference to the Definitive 30b2-1 filed
on November 4, 1994 Accession # 0000053798-94-000511.
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
are incorporated by reference to the Registration Statement.
(b) Articles of Amendment dated August 26, 1987, December 14, 1988,
November 4, 1992 and July 30, 1993, respectively, to Articles of
Incorporation are incorporated by reference to Post-Effective Amendment No.
18 to the Registration Statement (Post-Effective Amendment No. 18).
(c) Articles of Amendment dated October 14, 1994 is filed herein.
(d) Form of Articles of Amendment to the Articles of Incorporation
is filed herein.
(e) Articles Supplementary dated November 2, 1992, to Articles of
Incorporation is incorporated by reference to Post-Effective Amendment No.
18.
(f) Form of Articles Supplementary to the 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.
(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 dated April 20, 1994 between the
Registrant and Smith, Barney Advisers, Inc. (SBA) is filed herein.
(c) Sub-Administration Agreement dated April 20, 1994 between the
Registrant, SBA and The Boston Company Advisors, Inc. is filed herein.
(10) Not Applicable.
(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) Amended Service and Distribution Plan pursuant to Rule 12b-1 between
the Registrant and Smith Barney Inc. (Smith Barney) is filed herein.
(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 September 23, 1994
Common Stock Class A - 6,660
par value $.001 per Class B - 3,374
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 - - Smith Barney Mutual Funds Management Inc., formerly
known as Smith, Barney Advisers, Inc. (SBMFM)
SBFMF was incorporated in December 1968 under the laws of the State of
Delaware. SBFMF is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly known as Primerica
Corporation) ("Travelers"). SBMFM is registered as an investment adviser
under the Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and directors of SBMFM
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 years, is incorporated by reference to
Schedules A and D of FORM ADV filed by SBMFM pursuant to the Advisers Act
(SEC File No. 801-8314).
Prior to the close of business on November 7, 1994, Greenwich Street
Advisors served as investment adviser. 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 Holdings Inc.
(formerly known as 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 Inc.
(formerly known as Smith Barney Shearson Inc.) acquired the domestic retail
brokerage and asset management business 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)
11/3/94
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney New York Municipals Fund
Inc., Smith Barney California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Global Opportunities Fund,
Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Principal Return Fund, Smith Barney Shearson Municipal
Money Market Fund Inc., Smith Barney Daily Dividend Fund Inc., Smith Barney
Government and Agencies Fund Inc., Smith Barney Managed Governments Fund
Inc., Smith Barney New York Municipal Money Market Fund, Smith Barney
California Municipal Money Market Fund, Smith Barney Income Funds, Smith
Barney Equity Funds, Smith Barney Investment Funds Inc., Smith Barney
Precious Metals and Minerals Fund Inc., Smith Barney Telecommunications
Trust, Smith Barney Arizona Municipals Fund Inc., Smith Barney 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 Fundamental
Value Fund Inc., Smith Barney Series Fund, Consulting Group Capital Markets
Funds, Smith Barney Income Trust, Smith Barney Adjustable Rate Government
Income Fund, Smith Barney Florida Municipals Fund, Smith Barney Oregon
Municipals Fund, Smith Barney 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), Smith Barney International Fund (Luxembourg)
and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings
Inc. (formerly known as Smith Barney Holdings Inc.), which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly known as Primerica
Corporation) ("Travelers"). On June 1, 1994, Smith Barney changed its
name from Smith Barney Inc. to its current name. The information required
by this Item 29 with respect to each director, officer and partner of Smith
Barney is incorporated by reference to Schedule A of FORM BD filed by Smith
Barney pursuant to the Securities Exchange Act of 1934 (SEC File No. 812-
8510).
11/4/94
Item 30. Location of Accounts and Records
(1) Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York
10013
(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.
The Registrant further represents pursuant to Rule 485(b)(2)(iv) that
the resignation of Robert E. Borgesen was not due to any disagreement with
the Registrant on any matter relating to its operations, policies or
practices. Mr. Borgesen resigned due to health reasons.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY
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 New York, State of New York
on the 3rd day of November, 1994.
SMITH BARNEY
CALIFORNIA MUNICIPALS FUND INC.
By: /s/ Heath B. McLendon*
Heath B. McLendon, Chief
Executive Officer
We, the undersigned, hereby severally constitute and appoint Heath
B. McLendon, Christina T. Sydor and Lee D. Augsburger and each of them
singly, our true and lawful attorneys, with full power to them and each of
them to sign for us, and in our hands and in the capacities indicated
below, any and all Amendments to this Registration Statement and to file
the same, with all exhibits thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto said attorneys, and
each of them, acting alone, full authority and power to do and perform each
and every act and thing requisite or necessary to be done in the premises,
as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys or any of them may
lawfully do or cause to be done by virtue thereof.
WITNESS our hands on the date set forth below.
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
11/3/94
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone * Treasurer (Chief Financial
11/3/94
Lewis E. Daidone and Accounting Officer)
/s/ Herbert Barg * Director
11/3/94
Herbert Barg
/s/ Alfred J. Bianchetti * Director
11/3/94
Alfred J. Bianchetti
/s/ Martin Brody * Director
11/3/94
Martin Brody
/s/ Dwight B. Crane * Director
11/3/94
Dwight B. Crane
/s/ James J. Crisona * Director
11/3/94
James J. Crisona
Director
11/3/94
Burt N. Dorsett
/s/ Robert A. Frankel * Director
11/3/94
Robert A. Frankel
/s/ Dr. Paul Hardin * Director
11/3/94
Dr. Paul Hardin
Director
11/3/94
Elliot S. Jaffe
/s/ Stephen E. Kaufman * Director
11/3/94
Stephen E. Kaufman
/s/ Joseph J. McCann * Director
11/3/94
Joseph J. McCann
Director
11/3/94
Cornelius C. Rose, Jr.
*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\pea20
Exhibit 1(c)
SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC.
ARTICLES OF AMENDMENT
Smith Barney Shearson 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, as
amended, are hereby further 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 California
Municipals Fund Inc.
SECOND: The foregoing amendment to the charter of the
Corporation was approved by a majority of the entire Board of Directors of
the Corporation; the charter amendment is limited to a change expressly
permitted by Section 2-605 of Title 2 of Subtitle 6 of the Maryland General
Corporation Law to be made without action by the stockholders, and the
Corporation is registered as an open-end company under the Investment
Company Act of 1940.
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, Smith Barney Shearson 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 October , 1994.
SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC.
By: Heath B. McLendon, Chairman
WITNESS:
Lee D. Augsburger
Assistant Secretary
5250/BLUSEC
Exhibit 1(d)
<PAGE> 1
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
ARTICLES OF AMENDMENT
Smith Barney 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 to provide that the Corporation's "Class D Common
Stock" is hereby redesignated as "Class C Common Stock."
SECOND: The charter of the Corporation is hereby
amended further to provide that the class of shares of "Common
Stock" of the Corporation that has not been previously further
designated is hereby designated as "Class A Common Stock."
THIRD: The foregoing amendments to the charter of
the Corporation were approved by a majority of the entire Board
of Directors of the Corporation; the charter amendments are
limited to changes expressly permitted by Section 2-605 of
Title 2 of Subtitle 6 of the Maryland General Corporation Law
to be made without action by the stockholders, and the
Corporation is registered as an open-end company under the
Investment Company Act of 1940.
FOURTH: These Articles of Amendment will become
effective at 9:00 A.M. on November 7, 1994.
The undersigned Chairman of the Board of the
Corporation 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
<PAGE> 2
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, Smith Barney
California Municipals Fund Inc. has caused these Articles of
Amendment to be signedin its name and on its behalf by its
Chairman of the Board, and witnessed by its Assistant Secretary
on , 1994.
SMITH BARNEY CALIFORNIA MUNICIPALS
FUND INC.
By:
Heath B. McLendon,
Chairman of the Board
WITNESS:
Lee D. Augsburger,
Assistant Secretary
Exhibit 1(f)
<PAGE> 1
ARTICLES SUPPLEMENTARY
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
Smith Barney 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 Corporation is authorized to issue 500,000,000 shares
of capital stock, par value $.01 per share, with an aggregate par value of
$5,000,000. These Articles Supplementary do not increase the total
authorized capital stock of the Corporation or the aggregate par value
thereof. The Board of Directors hereby classifies and reclassifies all of
the unissued shares of capital stock of all classes of the Corporation in
such manner that the Corporation's capital stock will be classified into
five classes, each with a par value of $.01 per share, designated Class A
Common Stock, Class B Common Stock, Class C Common Stock, Class Y Common
Stock and Class Z Common Stock. The Corporation shall be authorized to
issue up to 500,000,000 shares of each such class of capital stock less, at
any time, the total number of shares of all other such classes of capital
stock then issued and outstanding. At no time may the Corporation cause to
be issued and outstanding more than 500,000,000 shares of its capital stock
of all such classes in the aggregate unless such number be hereafter
increased in accordance with the Maryland General Corporation Law.
SECOND: The shares of Class A Common Stock, Class B Common Stock and
Class C Common Stock classified hereby shall have the preferences,
conversion and other rights, voting powers,
<PAGE> 2
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as currently set forth in the charter of the
Corporation with respect to those respective classes of capital stock. The
Class Y Common Stock and the Class Z Common Stock classified 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
Articles of Incorporation and shall be subject to all provisions of its
Articles of Incorporation relating to stock of the Corporation generally,
and those set forth as follows:
(1) The assets belonging to each of the Class Y Common Stock and Class Z
Common Stock shall be invested in the same investment portfolio of the
Corporation as the assets belonging to the Class A Common Stock, the Class
B Common Stock and the Class C Common Stock.
(2) The dividends and distributions of investment income and capital gains
with respect to each of the Class Y Common Stock and Class Z 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 capital stock may vary from dividends and distributions with
respect to each other class of capital 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 values per
share of each such class, to such extent and for such purposes as the Board
of Directors may deem appropriate.
<PAGE> 3
(3) The allocation of investment income, capital gains and losses,
expenses and liabilities of the
Corporation among the Class Y Common Stock, the Class Z Common Stock and
any other class of the Corporation's stock shall be determined conclusively
by the Board of Directors in a manner that is consistent with the order
dated July 7, 1992 (Investment Company Act of 1940 Release No. 18832), as
amended January 19, 1993 (Investment Company Act Release No. 19216), and
January 28, 1994 (Investment Company Act of 1940, Release No. 20042) issued
by the Securities and Exchange Commission in connection with the
application for exemption filed by Smith Barney Appreciation Fund, Inc.
(formerly Shearson Lehman Brothers Appreciation Fund Inc.) et al., and any
existing or future amendment to such order or any rule or interpretation
under the Investment Company Act of 1940 that modifies or supersedes such
order.
(4) Except as may otherwise be required by law pursuant to any applicable
order, rule, or interpretation issued by the Securities and Exchange
Commission, or otherwise, the holders of each of the Class Y Common Stock
and Class Z Common Stock shall have (i) exclusive voting rights with
respect to any matter, including any distribution plan adopted by the
Corporation pursuant to Rule 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.
THIRD: The Board of Directors of the Corporation has classified the
shares described above pursuant to authority contained in the Corporation's
charter.
FOURTH: These Articles Supplementary will become
effective at 9:01 A.M. on November 7, 1994.
The undersigned Chairman of the Board of the Corporation 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, Smith Barney 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 , 1994.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
By: Heath B. McLendon,
Chairman of the Board
WITNESS:
Lee D. Augsburger,
Assistant Secretary
Exhibit 9(b)
ADMINISTRATION AGREEMENT
SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC.
April 20, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson California Municipals Fund Inc. (the "Fund"), a
corporation organized under the laws of the State of Maryland, confirms its
agreement with Smith, Barney Advisors, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Charter dated February 16, 1984, as amended
from time to time (the "Charter"), in its Prospectus and Statement of
Additional Information as from time to time in effect and in such manner
and to such extent as may from time to time be approved by the Board of
Directors of the Fund (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Charter have been or will be
submitted to SBA. Greenwich Street Advisors, a division of Mutual
Management Corp. ("Greenwich Street Advisors") serves as the Fund's
investment adviser and the Fund desires to employ and hereby appoints SBA
to act as its administrator. SBA accepts this appointment and agrees to
furnish the services to the Fund for the compensation set forth below. SBA
is hereby authorized to retain third parties and is hereby authorized to
delegate some or all of its duties and obligations hereunder to such
persons provided that such persons shall remain under the general
supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations except
those performed by the Fund's investment adviser under its investment
advisory agreement; (b) supply the Fund with office facilities (which may
be in SBA's own offices), statistical and research data, data processing
services, clerical, accounting and bookkeeping services, including, but not
limited to, the calculation of (i) the net asset value of shares of the
Fund, (ii) applicable contingent deferred sales charges and similar fees
and charges and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationary
and office supplies; and (c) prepare reports to shareholders of the Fund,
tax returns and reports to and filings with the Securities and Exchange
Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month a
fee for the previous month at an annual rate of .20 of 1.00% of the Fund's
average daily net assets. The fee for the period from the date the Fund's
initial registration statement is declared effective by the SEC to the end
of the month during which the initial registration statement is declared
effective shall be prorated according to the proportion that such period
bears to the full monthly period. Upon any termination of this Agreement
before the end of any month, the fee for such part of a month shall be
prorated according to the proportion which such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable to SBA, the value
of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus and Statement of Additional Information
as from time to time in effect.
4. Expenses
SBA will bear all expenses in connection with the performance
of its services under this Agreement. The Fund will bear certain other
expenses to be incurred in its operation, including: taxes, interest,
brokerage fees and commissions, if any; fees of the members of the Board of
the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc. or its affiliates or any person who is an affiliate of any
person to whom duties may be delegated hereunder; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest, taxes,
brokerage and, if permitted by state securities commissions, extraordinary
expenses) exceed the expense limitations of any state having jurisdiction
over the Fund, SBA will reimburse the Fund for that excess expense to the
extent required by state law in the same proportion as its respective fees
bear to the combined fees for investment advice and administration. The
expense reimbursement obligation of SBA will be limited to the amount of
its fees hereunder. Such expense reimbursement, if any, will be estimated,
reconciled and paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the services
listed in paragraph 2 above, and SBA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, provided that
nothing herein shall be deemed to protect or purport to protect SBA against
liability to the Fund or to its shareholders to which SBA would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of SBA's reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other investment
companies, and the Fund has no objection to SBA so acting. In addition,
the Fund understands that the persons employed by SBA or its affiliates to
assist in the performance of its duties hereunder will not devote their
full time to such service and nothing contained herein shall be deemed to
limit or restrict the right of SBA or its affiliates to engage in and
devote time and attention to other businesses or to render services of
whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers, directors,
employees, affiliates, controlling persons, agents (including persons to
whom responsibilities are delegated hereunder) ("indemnitees") against any
loss, claim, expense or cost of any kind (including reasonable attorney's
fees) resulting or arising in connection with this Agreement or from the
performance or failure to perform any act hereunder, provided that no such
indemnification shall be available if the indemnitee violated the standard
of care in paragraph 6 above. This indemnification shall be limited by the
1940 Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the 1940
Act and the rules, regulations and interpretations thereof as in effect
from time to time.
10. Limitation of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Fund individually, but are binding only
upon the assets and property of the Fund, as provided in the Charter and
Bylaws. The execution and delivery of this Agreement has been duly
authorized by the Fund, SBA and Boston Advisors, and signed by an
authorized officer of each, acting as such. Neither the authorization by
the Board members of the Fund, nor the execution and delivery by the
officer of the Fund shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but
shall bind only the assets and property of the Fund as provided in the
Charter and Bylaws.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the enclosed
copy hereof.
Very truly yours,
Smith Barney Shearson
California Municipals Fund Inc.
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
Form 8613
Form 1120-RIC
Board Members' and Shareholders' 1099s
Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Articles of Incorporation and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
shared\domestic\clients\shearson\fund\camu\admin1
shared\domestic\clients\shearson\fund\camu\admin1
Exhibit 9(c)
SUB-ADMINISTRATION AGREEMENT
SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC.
April 20, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson California Municipals Fund Inc. (the
"Fund"), a corporation organized under the laws of the State of Maryland
and Smith, Barney Advisers, Inc. ("SBA") confirm their agreement with The
Boston Company Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Charter dated February 16, 1984, as amended
from time to time (the "Charter"), in its Prospectus and Statement of
Additional Information as from time to time in effect, and in such manner
and to such extent as may from time to time be approved by the Board of
Directors of the Fund (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Charter have been or will be
submitted to you. The Fund employs SBA as its administrator, and the Fund
and SBA desire to employ and hereby appoint Boston Advisors as the Fund's
sub-administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and SBA,
Boston Advisors will: (a) assist in supervising all aspects of the Fund's
operations except those performed by the Fund's investment adviser under
the Fund's investment advisory agreement; (b) supply the Fund with office
facilities (which may be in Boston Advisor's own offices), statistical and
research data, data processing services, clerical, accounting and
bookkeeping services, including, but not limited to, the calculation of (i)
the net asset value of shares of the Fund, (ii) applicable contingent
deferred sales charges and similar fees and changes and (iii) distribution
fees, internal auditing and legal services, internal executive and
administrative services, and stationery and office supplies; and (c)
prepare reports to shareholders of the Fund, tax returns and reports to and
filings with the Securities and Exchange Commission (the "SEC") and state
blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of each
month a fee for the previous month calculated in accordance with the terms
set forth in Appendix B, and as agreed to from time to time by the Fund,
SBA and Boston Advisors. Upon any termination of this Agreement before the
end of any month, the fee for such part of a month shall be prorated
according to the proportion which such period bears to the full monthly
period and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to Boston Advisors, the value
of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus and Statement of Additional Information
as from time to time in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of the Board members
of the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc., Boston Advisors of their affiliates; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and its Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston Advisory
will reimburse the Fund for that excess expense to the extent required by
state law in the same proportion as its respective fees bear to the
combined fees for investment advice and administration. The expense
reimbursement obligation of Boston Advisors will be limited to the amount
of its fees hereunder. Such expense reimbursement, if any, will be
estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in rendering
the services listed in paragraph 2 above. Boston Advisors shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport
to protect Boston Advisors against liability to the Fund or to its
shareholders to which Boston Advisors would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of Boston Advisor's reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without the
written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or more
other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and nothing
contained herein shall be deemed to limit or restrict the right of Boston
Advisors or its affiliates to engage in and devote time and attention to
other businesses or to render services of whatever kind of nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including reasonable
attorney's fees) resulting or arising in connection with this Agreement or
from the performance or failure to perform any act hereunder, provided that
not such indemnification shall be available if the indemnitee violated the
standard of care in paragraph 6 above. This indemnification shall be
limited by the 1940 Act, and relevant state law. Each indemnitee shall be
entitled to advancement of its expenses in accordance with the requirements
of the 1940 Act and the rules, regulations and interpretations thereof as
in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Fund individually, but are binding only
upon the assets and property of the Fund, as provided in the Charter and
Bylaws. The execution and delivery of this Agreement has been duly
authorized by the Fund, SBA and Boston Advisors, and signed by an
authorized officer of each, acting as such. Neither the authorization by
the Board Members of the Fund, nor the execution and delivery by the
officer of the Fund shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but
shall bind only the assets and property of the Fund as provided in the
Charter.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson
California Municipals Fund Inc.
By: /s/ Heath B. McLendon
Heath B. McLendon
Title: Chairman of the Board
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: ________________________
Title
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act" ), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
Form 8613
Form 1120-RIC
Board Members' and Shareholders' 1099s
Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for
the initial and on-going registration of shares in each state, the
Department acts as liaison between the Fund and state regulators, and
monitors and reports on shares sold and remaining registered shares
available for sale.
shared\domestic\clients\shearson\fund\camu\admin1
shearson funds camu subadmin.doc
shared\domestic\clients\shearson\fund\camu\admin1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Smith Barney California Municipals Fund Inc.:
We hereby consent to the following with respect to
Post-Effective Amendment No. 20 to the Registration Statement
on Form N-1A (File No. 2-89548) under the Securities Act of
1933, as amended, of Smith Barney California Municipals Fund
Inc. (formerly 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 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
L.L.P.
Boston, Massachusetts
November 2, 1994
Exhibit 15
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEYCALIFORNIA MUNICIPALS FUND INC.
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney California Municipals
Fund Inc., a corporation organized under the laws of the State of Maryland
(the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .15% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .15% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .15% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .55% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Directors
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Directors of the Fund
and (b) those Directors who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Directors"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Directors of the Fund and by
a majority of the Qualified Directors.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Directors. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Directors in the manner described in Section 4 above.
Section 8. Selection of Certain Directors
While the Plan is in effect, the selection and nomination of the
Fund's Directors who are not interested persons of the Fund will be
committed to the discretion of the Directors then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Directors and the Board will review, at least
quarterly, written reports complying with the requirements of the Rule,
which sets out the amounts expended under the Plan and the purposes for
which those expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
CALIFORNIA MUNICIPALS FUND INC.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
g\shared\domestic\clients\shearson\funds\camu\12b1pln2.doc9:05 PM
. November 4, 1994
VIA EDGAR
Securities and Exchange Commission
Mail Stop 0-7
6432 General Green Way
Alexandria, VA 22312
Attn.: Office of Filings, Information and Consumer Services
Re: Smith Barney California Municipals Fund Inc. (the "Fund")
(formerly Smith Barney Shearson California Municipals Fund
Inc.)
Post-Effective Amendment No. 20
File Nos. 2-89548 & 811-3970
Gentlemen:
Please find enclosed for filing pursuant to Rule 472 and Rule
485(b)(ix) under the Securities Act of 1933, as amended (the "Securities
Act"), and Rule 8b-16 under the Investment Company Act of 1940, as amended,
one copy of Post-Effective Amendment No. 20 (the "Amendment") to the Fund's
Registration Statement on Form N-1A. In addition, pursuant to Rule
102(c) of Regulation S-T, Articles of Amendment, Form of Articles
Supplementary and Form of Articles of Amendment are included as
exhibits 99.B1b. The Amendment is marked to reflect changes from Post-
Effective Amendment No. 19 ("Amendment No. 19") as filed on April 28, 1994.
On August 23, 1994, a prototype prospectus for Smith Barney Shearson
Appreciation Fund Inc. (Appreciation Fund) was filed under Rules 472 and
485(a) of the Securities Act, which had an effective date of November 7,
1994. This filing contained significant revisions to the disclosure
relating to the class and load structure of the Fund. Concurrently, Jon
Rand of Willkie Farr & Gallagher spoke with Frank Dalton of the Staff and
requested that the Commission permit several of the Smith Barney Shearson
Mutual Funds, including the Fund, to file amendments pursuant to Rule
485(b)(1)(ix) to incorporate the same revisions as they applied to the
Funds. The Staff recognized that the amendments to Rule 485(b) permitting
filings of this nature would not go into effect until October 11, 1994, but
agreed in advance of that date to permit the filings. Accordingly, this
Amendment is being filed pursuant to Rule 485(b)(1)(ix).
The undersigned was responsible for the preparation and review of the
Amendment, and hereby represents that the Amendment primarily contains
disclosure conforming the Funds prospectus to the prototype prospectus
previously reviewed by the Staff and does not contain disclosures which
would render it ineligible to become effective pursuant to Rule
485(b)(1)(ix), and that no material events other than those discussed
above, requiring disclosure in the Prospectus have occurred since the
filing date of Amendment No. 19.
Any comments on this filing should be directed to the undersigned at
(212) 767-7396 or to Maureen Tobin, Assistant Vice President,The Boston
Company Advisors, Inc., at (617) 722-3934.
Please return an electronic transmittal as evidence of receipt of
this filing.
Very truly yours,
/s/ Lee D. Augsburger
Lee D. Augsburger
First Vice President and
Deputy General Counsel
Enclosures
cc: J. DeMichaelis
M. Bucci
s/shared/domestic/shearson/funds/camu/translet
