<PAGE>1
As filed with the Securities and Exchange Commission
on October 25, 1995
____________________________________________________________
Registration No. 33-61765
____________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1 [ ] Post-Effective Amendment No.
Smith Barney California Municipals Fund Inc.
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (800) 224-7523
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip code)
Christina T. Sydor, Esq.
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
copies to:
Burton M. Leibert, Esq. John E. Baumgardner, Jr., Esq.
Willkie Farr & Gallagher Sullivan & Cromwell
One Citicorp Center 125 Broad Street
153 East 53rd Street New York, New York 10004
New York, New York 10022
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
______________________________________________________________________________
<PAGE>2
Registrant has registered an indefinite amount of securities pursuant to Rule
24f-2 under the Investment Company Act of 1940, as amended; accordingly, no
fee is payable herewith. Registrant's Rule 24f-2 Notice for the fiscal period
ended February 28, 1995 was electronically filed with the Securities and
Exchange Commission on April 26, 1995.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>3
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>4
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933, as amended
Prospectus/Proxy
Part A Item No. and Caption Statement Caption
Item 1. Beginning of Cover Page; Cross Reference
Registration Sheet
Statement and
Outside Front Cover
Page of Prospectus
Item 2. Beginning and Table of Contents
Outside Back Cover
Page of Prospectus
Item 3. Fee Table, Synopsis Fee Table; Summary; Risk
Information, and Factors; Comparison of
Risk Factors Investment Objectives
and Policies
Item 4. Information About Summary; Reasons for the
the Transaction Reorganization; Information
About the Reorganization;
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
Item 5. Information About Cover Page; Summary;
the Registrant Information About the
Reorganization; Comparison of
Investment Objectives and
Policies; Information on
Shareholders' Rights;
Information About the
Acquiring Fund; Additional
Information About Smith Barney
California Municipals Fund
Inc. and Smith Barney Muni
Funds; Prospectus of Smith
Barney California Municipals
Fund Inc. dated April 29,
1995, as supplemented by
Prospectus Supplements dated
May 25, 1995, July 11, 1995,
July 15, 1995 and July 20, 1995
<PAGE>5
Item 6. Information About Summary; Information About the
the Company Being Reorganization; Comparison of
Acquired Investment Objectives and
Policies; Information on
Shareholders' Rights;
Information About the Acquired
Fund; Additional Information
About Smith Barney California
Municipals Fund Inc. and Smith
Barney Muni Funds
Item 7. Voting Information Summary; Information About the
Reorganization; Information on
Shareholders' Rights; Voting
Information
Item 8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
Item 9. Additional Not Applicable
Information Required
for Reoffering By
Persons Deemed to be
Underwriters
Statement of Additional
Part B Item No. and Caption Information Caption
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. Additional Cover Page; Statement of
Information About Additional Information of
the Registrant Smith Barney California
Municipals Fund Inc. dated
April 29, 1995, as
supplemented on July 20, 1995
Item 13. Additional Not Applicable
Information About
the Company Being
Acquired
<PAGE>6
Item 14. Financial Statements Annual Report of Smith Barney
California Municipals Fund
Inc.; Annual Report of Smith
Barney Muni Funds --
California Portfolio; Pro
Forma Financial Statements
Part C Item No. and Caption Other Information Caption
Item 15. Indemnification Incorporated by reference to
Part A caption "Information on
Shareholders' Rights --
Liability of
Directors/Trustees"
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
<PAGE>7
[Smith Barney Letterhead]
A SPECIAL NOTICE TO SHAREHOLDERS OF
SMITH BARNEY MUNI FUNDS -- CALIFORNIA PORTFOLIO
Your Vote is Important
Dear Shareholder:
The Board of Trustees of Smith Barney Muni Funds has recently reviewed and
unanimously endorsed a proposal for a reorganization of the California
Portfolio (the "California Portfolio") of Smith Barney Muni Funds which it
judges to be in the best interests of California Portfolio's shareholders.
Under the terms of the proposal, Smith Barney California Municipals Fund Inc.
("California Fund") would acquire all or substantially all of the assets and
liabilities of California Portfolio. After the transaction, California
Portfolio will be liquidated and you will become a shareholder of California
Fund, having received shares with an aggregate value equivalent to the
aggregate net asset value of your investment in California Portfolio at the
time of the transaction. No sales charge will be imposed in the transaction.
The transaction will, in the opinion of counsel, be free from federal income
taxes to you, California Portfolio and California Fund, and it is intended
that the combined fund will be managed by the same portfolio manager who
currently manages California Fund.
The Board of Trustees of Smith Barney Muni Funds has determined that it is
advantageous to combine California Portfolio with California Fund as part of
the consolidation and integration of the two separate and distinct groups of
mutual funds currently distributed by Smith Barney Inc. that resulted from the
acquisition by Travelers Group Inc. (formerly Primerica Corporation) of
certain assets of Lehman Brothers Inc. (formerly Shearson Lehman Brothers
Inc.), including its retail brokerage and domestic asset management business.
In particular, the combination of California Portfolio and California Fund is
expected to eliminate investor confusion associated with the offering by Smith
Barney Inc. of two similar California municipal bond funds that provide
differing yields and also should permit the funds' investment personnel to
concentrate their efforts on the management of one fund rather than having to
divide their attention between two funds with similar investment objectives.
<PAGE>8
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS IMPORTANT
To consider this transaction, we have called a Special Meeting of Shareholders
to be held on November 14, 1995. WE STRONGLY INVITE YOUR PARTICIPATION BY
ASKING YOU TO REVIEW, COMPLETE AND RETURN YOUR PROXY PROMPTLY.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. On behalf of the Board of Trustees, I thank you for
your participation as a shareholder and urge you to please exercise your right
to vote by completing, dating and signing the enclosed proxy card. A self-
addressed, postage-paid envelope has been enclosed for your convenience.
If you have any questions regarding the proposed transaction, please feel free
to call your Smith Barney Financial Consultant who will be pleased to assist
you.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED PROMPTLY.
Sincerely,
Heath B. McLendon
Chairman of the Board
October 25, 1995
<PAGE>9
SMITH BARNEY MUNI FUNDS -- CALIFORNIA PORTFOLIO
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on November 14, 1995
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of the California Portfolio ("California Portfolio") of Smith
Barney Muni Funds will be held at 388 Greenwich Street, 26th Floor, New York,
New York on November 14, 1995, commencing at 3:30 p.m. for the following
purposes:
1. To approve or disapprove the Agreement and Plan of Reorganization
dated as of October 23, 1995 providing for (i) the acquisition of
all or substantially all of the assets of California Portfolio by
Smith Barney California Municipals Fund Inc. ("California Fund") in
exchange for shares of California Fund and the assumption by
California Fund of scheduled liabilities of California Portfolio,
(ii) the distribution of such shares of California Fund to
shareholders of California Portfolio in liquidation of California
Portfolio and (iii) the subsequent termination of California
Portfolio.
2. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Trustees of Smith Barney Muni Funds has fixed the close
of business on September 25, 1995 as the record date for the determination of
shareholders of California Portfolio entitled to notice of and to vote at the
Meeting and any adjournment or adjournments thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE
URGED TO SIGN AND RETURN WITHOUT DELAY THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. INSTRUCTIONS FOR THE PROPER
EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE. PROXIES MAY BE
REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY THE SUBSEQUENT EXECUTION AND
SUBMISSION OF A REVISED PROXY, BY GIVING WRITTEN NOTICE OF REVOCATION TO
CALIFORNIA PORTFOLIO AT ANY TIME BEFORE THE PROXY IS EXERCISED OR BY VOTING IN
PERSON AT THE MEETING.
<PAGE>10
By Order of the Board of Trustees
Christina T. Sydor, Esq.
Secretary
October 25, 1995
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE
EXPENSE OF FURTHER SOLICITATION.
<PAGE>11
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense involved in validating your
vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration
on the proxy card.
3. All Other Accounts: The capacity of the individual signing the
proxy card should be indicated unless it is reflected in the form of
registration. For example:
Registration Valid Signatures
Corporate Accounts
(1) ABC Corp. . . . . . . . . . . . . ABC Corp.
(2) ABC Corp. . . . . . . . . . . . . John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer . . . . John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
Trust Accounts
(1) ABC Trust . . . . . . . . . . . . Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78 . . . . . . . . . Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA. . . John B. Smith
(2) John B. Smith . . . . . . . . . . . John B. Smith, Jr., Executor
<PAGE>12
PROSPECTUS/PROXY STATEMENT DATED OCTOBER 25, 1995
Acquisition Of The Assets Of
CALIFORNIA PORTFOLIO
a separate investment portfolio of
SMITH BARNEY MUNI FUNDS
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Shares Of
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Prospectus/Proxy Statement is being furnished to shareholders
of the California Portfolio (the "Acquired Fund") of Smith Barney Muni Funds
in connection with a proposed plan of reorganization to be submitted to
shareholders of the Acquired Fund for consideration at a Special Meeting of
Shareholders to be held on November 14, 1995 at 3:30 p.m. (the "Meeting"), at
the offices of Smith Barney Inc. ("Smith Barney") located at 388 Greenwich
Street, 26th Floor, New York, New York 10013, or any adjournment or
adjournments thereof.
The plan provides for all or substantially all of the assets of the
Acquired Fund to be acquired by Smith Barney California Municipals Fund Inc.
(the "Acquiring Fund") in exchange for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of scheduled liabilities of the Acquired Fund
(hereinafter referred to as the "Reorganization"). (The Acquiring Fund and
the Acquired Fund are sometimes referred to hereinafter as the "Funds" and
individually as a "Fund".) Shares of the Acquiring Fund would be distributed
to shareholders of the Acquired Fund in liquidation of the Acquired Fund and
thereafter the Acquired Fund would be terminated. As a result of the proposed
Reorganization, each shareholder of the Acquired Fund will receive that number
of shares of the Acquiring Fund having an aggregate value equal to the
aggregate net asset value of such shareholder's shares of the Acquired Fund
immediately prior to the Reorganization. Holders of Class A shares of the
Acquired Fund will receive Class A shares of the Acquiring Fund, and no sales
charge will be imposed on the Class A shares of the Acquiring Fund received by
the Acquired Fund Class A shareholders. Holders of Class B or Class C shares
of the Acquired Fund will receive Class B or Class C shares, respectively, of
the Acquiring Fund. No contingent deferred sales charge ("CDSC") will be
imposed on Class B or Class C shares of the Acquiring Fund upon consummation
of the Reorganization. However, any CDSC which is
<PAGE>13
applicable to a shareholder's investment will continue to apply, and in
calculating the applicable CDSC payable upon the subsequent redemption of
Class B or Class C shares of the Acquiring Fund, the period during which an
Acquired Fund shareholder held Class B or Class C shares of the Acquired Fund
will be counted. This transaction is structured to be tax-free for federal
income tax purposes to shareholders and to both the Acquiring Fund and the
Acquired Fund.
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Acquiring Fund is an open-end, non-diversified management
investment company, whose investment objective is 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 the preservation of capital. The Acquired Fund is a
separate investment portfolio of Smith Barney Muni Funds, an open-end, non-
diversified management investment company, whose investment objective is to
pay its shareholders as high a level of monthly income exempt from federal
income taxes and from California personal income taxes as is consistent with
prudent investing.
Smith Barney Mutual Funds Management Inc., 388 Greenwich Street, New
York, New York 10013 (the "Manager"), serves as investment manager to both the
Acquiring Fund and the Acquired Fund. The Manager is a wholly owned
subsidiary of Smith Barney Holdings Inc. which, in turn, is a wholly owned
subsidiary of Travelers Group Inc. It is proposed that, in connection with
the Reorganization, Joseph P. Deane, the portfolio manager who manages the
Acquiring Fund's portfolio, would manage the combined fund. Mr. Deane, a
Managing Director of Smith Barney, has served as Vice President and Investment
Officer of the Acquiring Fund since November 1, 1988, and manages the day-to-
day operations of the Acquiring Fund, including making substantially all
investment decisions.
The investment policies of the Acquiring Fund are generally similar
to those of the Acquired Fund. Certain differences in the investment policies
of the Acquiring Fund and the Acquired Fund, however, are described under
"Comparison of Investment Objectives and Policies" in this Prospectus/Proxy
Statement.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Fund that
a prospective
<PAGE>14
investor should know before investing. Certain relevant documents listed
below, which have been filed with the Securities and Exchange Commission
("SEC"), are incorporated in whole or in part by reference. A Statement of
Additional Information dated October 25, 1995, relating to this Prospectus/
Proxy Statement and the Reorganization, has been filed with the SEC and is
incorporated by reference into this Prospectus/Proxy Statement. A copy of
such Statement of Additional Information is available upon request and without
charge by writing to the Acquired Fund at the address listed on the cover page
of this Prospectus/Proxy Statement or by contacting a Smith Barney Financial
Consultant.
1. The Prospectus of Smith Barney California Municipals Fund Inc. dated
April 29, 1995, as supplemented by Prospectus Supplements dated May
25, 1995, July 11, 1995, July 15, 1995 and July 20, 1995, is
incorporated in its entirety by reference and a copy accompanies
this Prospectus/Proxy Statement.
2. The Prospectus of Smith Barney Muni Funds -- California Portfolio
dated November 7, 1994, as supplemented by a Prospectus Supplement
dated July 26, 1995, is incorporated in its entirety by reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a
copy of the Agreement and Plan of Reorganization (the "Plan") for the proposed
transaction.
<PAGE>15
TABLE OF CONTENTS
PAGE
ADDITIONAL MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FEE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
REASONS FOR THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . 16
INFORMATION ABOUT THE REORGANIZATION . . . . . . . . . . . . . . . . . . 19
INFORMATION ABOUT THE ACQUIRING FUND . . . . . . . . . . . . . . . . . . 26
INFORMATION ABOUT THE ACQUIRED FUND . . . . . . . . . . . . . . . . . . . 38
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . 46
INFORMATION ON SHAREHOLDERS' RIGHTS . . . . . . . . . . . . . . . . . . . 55
ADDITIONAL INFORMATION ABOUT
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
AND SMITH BARNEY MUNI FUNDS . . . . . . . . . . . . . . . . . . . . . . . 58
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
FINANCIAL STATEMENTS AND EXPERTS . . . . . . . . . . . . . . . . . . . . 61
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
EXHIBIT A: AGREEMENT AND PLAN OF REORGANIZATION . . . . . . . . . . . . A-1
<PAGE>16
ADDITIONAL MATERIALS
The following additional materials, which have been incorporated by
reference into the Statement of Additional Information dated October 25,
1995 relating to this Prospectus/Proxy Statement and the Reorganization, will
be sent to all shareholders requesting a copy of such Statement of Additional
Information.
1. Statement of Additional Information of Smith Barney California
Municipals Fund Inc. dated April 29, 1995, as supplemented on July 11, 1995.
2. Annual Report of Smith Barney California Municipals Fund Inc. for the
fiscal year ended February 28, 1995.
3. Annual Report of Smith Barney Muni Funds -- California Portfolio for
the fiscal year ended March 31, 1995.
4. Pro Forma Financial Statements.
<PAGE>17
FEE TABLES
Following are tables showing current costs and expenses of the
Acquired Fund and the Acquiring Fund and the pro forma costs and expenses
expected to be incurred by the Acquiring Fund after giving effect to the
Reorganization, each based on the maximum sales charge or maximum CDSC that
may be incurred at the time of purchase or redemption.
CLASS A SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) . . . . . . . . . . . . . . . . . . . . . 4.00% 4.00% 4.00%
Maximum CDSC (as a percentage of
original cost or redemption proceeds,
whichever is lower) . . . . . . . . . None* None* None*
Annual Operating Expenses
(as a percentage of average net assets) 0.50%****
Management fees . . . . . . . . . . . . . . . . . . . . . 0.45% 0.55%**** *
12b-1 fees . . . . . . . . . . . . . . . . . . . . . . . . 0.15 0.15 0.15
Other expenses** . . . . . . . . . . . . . . . . . . . . . 0.07 0.10 0.07
Total Operating Expenses . . . . . . . . . . . . . . . . . . 0.67% 0.80% 0.72%
<FN>
* 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.
** "Other expenses" for Class A shares of the Acquired Fund
are based on expenses for the fiscal year ended March 31,
1995, for the Acquiring Fund are based on expenses for the
fiscal year ended February 28, 1995, and for the pro forma
financial figures are based on estimated expenses for the
fiscal year ended March 31, 1995.
*** The pro forma financial figures are intended to provide
shareholders with information about the continuing impact
of the Reorganization as if the Reorganization had taken
place as of April 1, 1994.
**** For investment advisory services, the Acquiring Fund pays
the Manager a fee at the following annual rates of average
daily net assets: 0.35% up to $500 million and 0.32% in
excess of $500 million. For administrative services
rendered, the Acquiring Fund pays the Manager a fee at the
following annual rates of average daily net assets: 0.20%
to $500 million and 0.18% in excess of $500 million.
<PAGE>18
**** Effective on November 17, 1995 (the anticipated date
of the Reorganization), the Manager has agreed to reduce
the Acquiring Fund's aggregate management fees to 0.50% of
the Acquiring Fund's average daily net assets.
</TABLE>
<PAGE>19
CLASS B SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of offering
price) . . . . . . . . . . . None None None
Maximum CDSC (as a percentage of
original cost or redemption proceeds,
whichever is lower) . . . . . 4.50% 4.50% 4.50%
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . 0.45% 0.55%**** 0.50%*****
12b-1 fees* . . . . . . . . . . . . . . . . . . . . 0.65 0.65 0.65
Other expenses** . . . . . . . . . . . . . . . . . . 0.09 0.12 0.08
Total Operating Expenses . . . . . . . . . . . . . . . 1.19% 1.32% 1.23%
<FN>
* Upon conversion of Class B shares to Class A shares, such
shares will no longer be subject to a distribution fee.
** "Other expenses" for Class B shares of the Acquired Fund
are based on expenses for the fiscal year ended March 31,
1995, for the Acquiring Fund are based on expenses for the
fiscal year ended February 28, 1995, and for the pro forma
financial figures are based on estimated expenses for the
fiscal year ended March 31, 1995.
*** The pro forma financial figures are intended to provide
shareholders with information about the continuing impact
of the Reorganization as if the Reorganization had taken
place as of April 1, 1994.
**** For investment advisory services, the Acquiring Fund pays
the Manager a fee at the following annual rates of average
daily net assets: 0.35% up to $500 million and 0.32% in
excess of $500 million. For administrative services
rendered, the Acquiring Fund pays the Manager a fee at the
following annual rates of average daily net assets: 0.20%
to $500 million and 0.18% in excess of $500 million.
***** Effective on November 17, 1995 (the anticipated date of
the Reorganization), the Manager has agreed to reduce the
Acquiring Fund's aggregate management fees to 0.50% of the
Acquiring Fund's average daily net assets.
</TABLE>
<PAGE>20
CLASS C SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of offering
price) . . . . . . . . . . . . None None None
Maximum CDSC (as a percentage of
original cost or redemption proceeds,
whichever is lower) . . . . . . . . . . . . . . . . . 1.00% 1.00% 1.00%
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . .
12b-1 fees* . . . . . . . . . . . . . . . . . . . . . 0.45% 0.55%**** 0.50%*****
Other expenses** . . . . . . . . . . . . . . . . . . 0.70 0.70 0.70
0.08 0.12 0.08
Total Operating Expenses . . . . . . . . . . . . . . . . 1.23% 1.37% 1.28%
<FN>
* 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.
** "Other expenses" for Class C shares of the Acquired Fund
are based on expenses for the fiscal year ended March
31, 1995, for the Acquiring Fund are based on expenses for
the fiscal year ended February 28, 1995, and for the pro
forma financial figures are based on estimated expenses
for the fiscal year ended March 31, 1995.
*** The pro forma financial figures are intended to provide shareholders with
information about the continuing impact of the Reorganization as if the
Reorganization had taken place as of April 1, 1994.
**** For investment advisory services, the Acquiring Fund pays the Manager a
fee at the following annual rates of average daily net assets: 0.35% up
to $500 million and 0.32% in excess of $500 million. For administrative
services rendered, the Acquiring Fund pays the Manager a fee at the
following annual rates of average daily net assets: 0.20% to $500 million
and 0.18% in excess of $500 million.
***** Effective on November 17, 1995 (the anticipated date of the
Reorganization), the Manager has agreed to reduce the Acquiring Fund's
aggregate management fees to 0.50% of the Acquiring Fund's average daily
net assets.
</TABLE>
<PAGE>21
Examples
The following examples are intended to assist an investor in
understanding the various costs that an investor will bear directly or
indirectly. The examples assume payment of operating expenses at the levels
set forth in the tables above.
<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
Acquired Fund . . . . . . . . . . . . . . . . . $47 $61 $76 $120
Acquiring Fund . . . . . . . . . . . . . . . . . 48 65 83 135
Pro Forma . . . . . . . . . . . . . . . . . . . 47 62 78 126
Class B
Acquired Fund . . . . . . . . . . . . . . . . . $57 $68 $75 $130
Acquiring Fund . . . . . . . . . . . . . . . . . 58 72 82 145
Pro Forma . . . . . . . . . . . . . . . . . . . 58 69 78 135
Class C
Acquired Fund . . . . . . . . . . . . . . . . . $23 $39 $68 $149
Acquiring Fund . . . . . . . . . . . . . . . . . 24 43 75 165
Pro Forma . . . . . . . . . . . . . . . . . . . 23 41 70 155
<FN>
* 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.
</TABLE>
<PAGE>22
An investor would pay the following expenses on the same investment, assuming
the same annual return and no redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years*
<S> <C> <C> <C> <C>
Class A
Acquired Fund . . . . . . . . . . . . . . . $47 $61 $76 $120
Acquiring Fund . . . . . . . . . . . . . . . 48 65 83 135
Pro Forma . . . . . . . . . . . . . . . . . 47 62 78 126
Class B
Acquired Fund . . . . . . . . . . . . . . . $12 $38 $65 $130
Acquiring Fund . . . . . . . . . . . . . . . 13 42 72 145
Pro Forma . . . . . . . . . . . . . . . . . 13 39 68 135
Class C
Acquired Fund . . . . . . . . . . . . . . . $13 $39 $68 $149
Acquiring Fund . . . . . . . . . . . . . . . 14 43 75 165
Pro Forma . . . . . . . . . . . . . . . . . 13 41 70 155
<FN>
* 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.
</TABLE>
The examples also provide 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, each Fund's actual return will vary and
may be greater or less than 5.00%. THESE EXAMPLES SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
<PAGE>23
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
ADDITIONAL INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT,
THE AGREEMENT AND PLAN OF REORGANIZATION, A COPY OF WHICH IS ATTACHED TO THIS
PROSPECTUS/PROXY STATEMENT AS EXHIBIT A, THE ACCOMPANYING PROSPECTUS OF THE
ACQUIRING FUND DATED APRIL 29, 1995, AS SUPPLEMENTED BY PROSPECTUS SUPPLEMENTS
DATED MAY 25, 1995, JULY 11, 1995, JULY 15, 1995 AND JULY 20, 1995, AND THE
PROSPECTUS OF THE ACQUIRED FUND DATED NOVEMBER 7, 1994, AS SUPPLEMENTED BY A
PROSPECTUS SUPPLEMENT DATED JULY 26, 1995.
PROPOSED REORGANIZATION. The Plan provides for the transfer of all
or substantially all of the assets of the Acquired Fund to the Acquiring Fund
in exchange for shares of the Acquiring Fund and the assumption by the
Acquiring Fund of scheduled liabilities of the Acquired Fund. The Plan also
calls for the distribution of shares of the Acquiring Fund to the Acquired
Fund's shareholders in liquidation of the Acquired Fund. (The foregoing
proposed transaction is referred to in this Prospectus/Proxy Statement as the
"Reorganization".) As a result of the Reorganization, each shareholder of the
Acquired Fund will become the owner of that number of full and fractional
shares of the Acquiring Fund having an aggregate value equal to the aggregate
net asset value of the shareholder's shares of the Acquired Fund as of the
close of business on the date that the Acquired Fund's assets are exchanged
for shares of the Acquiring Fund. (Shareholders of Class A, Class B or Class
C shares of the Acquired Fund will receive Class A, Class B or Class C
shares, respectively, of the Acquiring Fund.) See "Information About the
Reorganization -- Plan of Reorganization."
For the reasons set forth below under "Reasons for the
Reorganization," the Board of Trustees of Smith Barney Muni Funds, including
the Trustees of Smith Barney Muni Funds who are not "interested persons" (the
"Independent Trustees"), as that term is defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), has concluded that the Reorganization
would be in the best interests of the shareholders of the Acquired Fund and
that the interests of the Acquired Fund's existing shareholders will not be
diluted as a result of the transaction contemplated by the Reorganization and
therefore has submitted the Plan for approval by the Acquired Fund's
shareholders. The Board of Directors of the Acquiring Fund has reached
similar conclusions with respect to the Acquiring Fund and has also approved
the Reorganization in respect of the Acquiring Fund.
Approval of the Reorganization will require the affirmative vote of
a majority, as defined in the 1940 Act, of the outstanding shares of the
Acquired Fund, which is the lesser of: (i) 67% of the voting securities of the
Acquired Fund present at the Meeting, if the
<PAGE>24
holders of more than 50% of the outstanding voting securities of the Acquired
Fund are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities of the Acquired Fund. For purposes of voting
with respect to the Reorganization, the Class A, Class B and Class C shares
of the Acquired Fund will vote together as a single class. See "Voting
Information."
TAX CONSEQUENCES. Prior to completion of the Reorganization, the
Funds will have received an opinion of counsel that, upon the Reorganization
and the transfer of the assets of the Acquired Fund, no gain or loss will be
recognized by the Acquired Fund or its shareholders for federal income tax
purposes. The holding period and aggregate tax basis of the Acquiring Fund
shares received by an Acquired Fund shareholder will be the same as the
holding period and aggregate tax basis of the shares of the Acquired Fund
previously held by such shareholder. In addition, the holding period and tax
basis of the assets of the Acquired Fund in the hands of the Acquiring Fund as
a result of the Reorganization will be the same as in the hands of the
Acquired Fund immediately prior to the Reorganization.
INVESTMENT OBJECTIVES AND POLICIES. The Acquiring Fund and the
Acquired Fund have generally similar investment objectives, policies and
restrictions. The Acquiring Fund is an open-end, non-diversified management
investment company whose investment objective is to provide California
investors with as a 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 the preservation of capital. The Acquired Fund is
also an open-end, non-diversified management investment company whose
investment objective is to pay its shareholders as high a level of monthly
income exempt from federal income taxes and from California personal income
taxes as is consistent with prudent investing. For a discussion of the
differences between the investment policies of the Acquiring Fund and the
Acquired Fund, see "Comparison of Investment Objectives and Policies."
PURCHASE AND REDEMPTION PROCEDURES. The purchase and redemption
procedures available to shareholders of the Acquiring Fund are virtually
identical to those of the Acquired Fund. Purchase of shares of the Acquiring
Fund and the Acquired Fund may be made through the Funds' 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, at their respective public offering prices (net asset value
next determined plus any applicable sales charge). Class A shares of both the
Acquiring Fund and the Acquired Fund are sold subject to a maximum initial
sales charge of 4.00% of the public offering price. Class A shares of either
Fund may be purchased at a reduced sales charge or at net asset value,
determined by aggregating the dollar amount of a new purchase and the total
asset value of all Class A shares of Funds offered by Smith Barney held by
such person that are exchangeable with Class A shares of
<PAGE>25
either Fund and applying the (reduced) sales charge applicable to such
aggregate. Purchases of Class A shares of both Funds, 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. Class B and Class C shares of both Funds are sold without
an initial sales charge but are subject to higher ongoing expenses than Class
A shares and are subject to a CDSC payable upon certain redemptions. In
addition, Class Y shares of both Funds are sold without an initial sales
charge or CDSC, and are available only to investors meeting an initial
investment minimum of $5,000,000. As of September 25, 1995 (the "Record
Date"), no Class Y shares of either Fund were outstanding. In addition, the
Acquiring Fund is authorized to issue a fifth class of shares, Class Z shares,
exclusively for sale to tax-exempt employee benefit and retirement plans of
Smith Barney and to certain unit investment trusts sponsored by Smith Barney
or any of its affiliates. As of the Record Date, the Acquiring Fund had not
sold any Class Z shares. The Acquired Fund does not offer Class Z shares.
Class A shares of both the Acquiring and the Acquired Fund may be
redeemed at their respective net asset values per share next determined
without charge, except as set forth in the preceding paragraph. Class B
shares of both Funds may be redeemed at their net asset value per share,
subject to a maximum CDSC of 4.50% of the lower of original cost or redemption
proceeds, declining by 0.50% the first year after purchase and by 1.00% each
year thereafter to zero. Class C shares of both Funds may be redeemed at
their net asset value per share, subject to a CDSC of 1.00% if such shares are
redeemed during the first 12 months following their purchase. Shares of both
Funds held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other shares may
be redeemed through a Smith Barney Financial Consultant, Introducing Broker or
dealer in the selling group or by forwarding a written request for redemption
to The Shareholder Services Group, Inc. ("TSSG" or the "transfer agent"), a
subsidiary of First Data Corporation. See "Redemption of Shares" in the
accompanying Prospectus of the Acquiring Fund.
EXCHANGE PRIVILEGES. The exchange privileges available to
shareholders of the Acquiring Fund are virtually identical to those available
to shareholders of the Acquired Fund. Shareholders of both the Acquired Fund
and the Acquiring Fund may exchange at net asset value all or a portion of
their shares for shares of the same class in certain other funds of the Smith
Barney Mutual Funds. Any exchange will be a taxable event for which a
shareholder may have to recognize a gain or a loss under federal income tax
provisions. No initial sales charge is imposed on the shares being acquired
in an exchange, and no CDSC is imposed on the shares being disposed of in the
exchange. A sales charge differential, however, may apply to exchanges of
Class A shares with other Smith Barney Mutual Funds. For purposes of
computing the CDSC that may be payable upon a disposition, the Class B and
Class C shares acquired in the exchange will be deemed
<PAGE>26
to have been purchased on the same date as the Class B and Class C shares that
were exchanged therefor. Class B shares of the Funds that are exchanged for
Class B shares of other Smith Barney Mutual Funds imposing a higher CDSC will
be subject to the higher applicable CDSC. See "Exchange Privilege" in the
accompanying Prospectus of the Acquiring Fund.
DIVIDENDS. The Acquiring Fund declares dividends from its net
investment income (that is, income other than its net realized long- and
short-term capital gains) monthly, and pays dividends on the last Friday of
each calendar month to shareholders of record as of the preceding Tuesday.
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. Similarly, dividends of substantially all of the Acquired Fund's
net investment income are declared and paid monthly and any realized capital
gains are declared and distributed annually. With respect to both Funds,
unless a shareholder otherwise instructs, 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. The
distribution option currently in effect for a shareholder of the Acquired Fund
will remain in effect after the Reorganization. After the Reorganization,
however, the former Acquired Fund shareholders may change their distribution
option at any time by contacting a Smith Barney Financial Consultant. See
"Dividends and Distributions" in the accompanying Prospectus of the Acquiring
Fund.
SHAREHOLDER VOTING RIGHTS. The Acquiring Fund and Smith Barney Muni
Funds are both registered with the SEC as open-end, investment companies. The
Acquiring Fund is a Maryland corporation having a Board of Directors. The
Acquired Fund is a separate series of Smith Barney Muni Funds, a Massachusetts
business trust having a Board of Trustees. Shareholders of both Funds have
similar voting rights. Neither Fund holds a meeting of shareholders annually,
and there is normally no meeting of shareholders held for the purpose of
electing Directors/Trustees unless and until such time as less than two-thirds
of the Directors or a majority of the Trustees holding office, as the case may
be, have been elected by shareholders. At that time, the Directors/Trustees
in each Fund then in office will call a shareholders' meeting for the election
of Directors/Trustees.
In addition, under the laws of the Commonwealth of Massachusetts,
shareholders of the Acquired Fund do not have appraisal rights in connection
with a combination or acquisition of the assets of the Fund by another entity.
Shareholders of the Acquired Fund may, however, redeem their shares at net
asset value (subject to any applicable CDSC) prior to the date of the
Reorganization.
For purposes of voting with respect to the Reorganization, the Class
A, Class B and Class C shares of the Acquired Fund will vote together as a
single class. See "Information on Shareholders' Rights -- Voting Rights."
<PAGE>27
RISK FACTORS
Due to the similarities of investment objectives and policies of the
Acquiring Fund and the Acquired Fund, the investment risks are substantially
similar. Such risks are generally those typically associated with municipal
securities, primarily those of California issuers. The following is a summary
of certain risk factors associated with investing in shares of the Acquiring
Fund, certain of which are also applicable to the Acquired Fund. This summary
is qualified in its entirety by the accompanying Prospectus of the Acquiring
Fund. In addition, certain risks associated with various investment
strategies utilized by the Acquiring Fund are described herein under
"Comparison of Investment Objectives and Policies."
The Funds are more susceptible to factors adversely affecting
issuers of California municipal securities than is a municipal bond fund that
does not emphasize these issuers. Certain California Constitutional
amendments, legislative measures, executive orders, administrative regulations
and voter initiatives could result in certain adverse consequences affecting
California municipal securities. For instance, certain provisions of the
California Constitution and statutes that limit the taxing and spending
authority of Californian governmental entities may impair the ability of
issuers of some California municipal securities to maintain debt service on
their obligations.
Each 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. A 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.
There are several risks in connection with the use of certain
portfolio strategies by the Acquiring 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. Certain of these risks are also applicable in connection with the
use of certain portfolio strategies by the Acquired Fund. See "Comparison
of Investment Objectives."
REASONS FOR THE REORGANIZATION
The Board of Trustees of the Smith Barney Muni Funds has determined
that it is advantageous to combine the Acquired Fund with the Acquiring Fund.
The Funds have generally similar investment objectives and policies and have
the same investment adviser, distributor and transfer agent. In reaching this
conclusion, the Board considered a number of factors as described below.
<PAGE>28
Among the factors considered by the Board of Trustees of Smith
Barney Muni Funds was the 1993 transaction pursuant to which Travelers Group
Inc. (formerly Primerica Corporation) acquired certain assets of Lehman
Brothers Inc. (formerly Shearson Lehman Brothers Inc.), including its retail
brokerage and domestic asset management business. As a result of this
transaction, Smith Barney became the sponsor of two separate and totally
distinct families of mutual funds, each with, among other things, differing
pricing structures, classes of shares, exchange privileges, sweep functions
and types of funds. The Board was advised that, with the completion of the
merger of back-office brokerage operations and the implementation of a uniform
pricing and class structure on November 7, 1994, significant consolidation of
the two mutual fund groups had been made feasible and desirable. The Board
was further informed that the next step in this process would be to eliminate
the duplication of funds within the consolidated Smith Barney fund complex.
The Board of Trustees of Smith Barney Muni Funds was presented with
information that indicated that investors have been and will continue to be
confused in the face of similar California municipal bond funds managed by the
same investment adviser (although the Acquired Fund and the Acquiring Fund
have a different portfolio manager, i.e., the individual primarily responsible
for each Fund's day-to-day investment decisions). In particular, the Board
was presented with information to the effect that, with two different funds,
Smith Barney was confronted with certain operational and shareholder services
issues, including (i) dilution of the firm's money management and research
expertise due to the splitting of attention between the two highly similar
funds; and (ii) investor confusion associated with offering similar funds that
provide differing yields. The Board also considered that no sales charges
would be imposed in effecting the Reorganization and the advantages of
eliminating duplication inherent in marketing two funds with similar
investment objectives.
Information regarding the operating expenses of the Acquired Fund
reflecting expenses for the fiscal year ended March 31, 1995, and information
regarding the operating expenses of the Acquiring Fund reflecting expenses for
the fiscal year ended February 28, 1995, is included under the caption "Fee
Tables" in this Prospectus/Proxy Statement. Based upon these levels of
expenses, and assuming the same level of assets of the combined fund after the
Reorganization as on March 31, 1995, it is estimated that Class A, Class B and
Class C shareholders of the Acquired Fund should experience a 0.05%, 0.04% and
0.05% increase, respectively, in total operating expenses, resulting from an
increase of 0.05% in management fees paid to the Manager and, in the case of
Class B shares, an accompanying 0.01% decrease in other operating expenses.
At its June 7, 1995 meeting, the Board of Directors of the Acquired
Fund was presented by the Manager with more current information, reflecting
operating expenses as of April 30, 1995, which took into account the effects
of various changes in operating expenses applicable to the Funds, such as
changes in certain transfer agency expenses. The Board was shown pro forma
financial information which indicated that, assuming the same level of assets
for the combined fund after the Reorganization as on April 30, 1995, it is
estimated that Class A,
<PAGE>29
Class B and Class C shareholders of the Acquired Fund should experience a
0.02% increase in total operating expenses, resulting from an increase of
0.05% in management fees paid to the Manager accompanied by a decrease of
0.03% in certain other operating expenses. The pro forma total
operating expenses considered by the Board are identical to the pro
forma total operating expenses included under the caption "Fee Tables"
in this Prospectus/Proxy Statement. However, the Board considered, among
other things, the impact of the increased operating expenses on the Acquired
Fund's shareholders, the nature and quality of services provided to
shareholders, including performance, the impact of economies of scale and
comparative fee structures. Further, the Board was presented with information
illustrating that the pro forma management fee to be paid by the combined fund
following the Reorganization would be lower than the average management fee
paid by California municipal funds included in a survey using data prepared by
Lipper Analytical Services, Inc. (the "Lipper California Muni Average") with
respect to front-end load shares (which are comparable to Class A shares of
the Funds) as of March 31, 1995 (without giving effect to management fee
waivers and expense reimbursements), and that the pro forma total operating
expenses of the combined fund following the Reorganization would be only 0.01%
higher than the Lipper California Muni Average, and would be lower than the
Lipper California Muni Average before giving effect to fee waivers and expense
reimbursements. The pro forma fees, the Board was also informed, would be
more in line with fees paid by comparable funds. Further, the Board was shown
pro forma financial information which indicated that, assuming the same level
of assets for the combined fund after the Reorganization, the aggregate total
management fees paid by the combined fund to the Manager would be
approximately $166,000 less than would otherwise be paid annually to the
Manager by the Acquiring Fund and the Acquired Fund had the Reorganization and
the proposed decrease in the Acquiring Fund's management fee not taken place.
The Board also considered, among other things, the terms and conditions of the
Reorganization and the comparative investment performance of the Funds. In
addition, the Board was advised that the Reorganization would be effected as a
tax-free reorganization.
The Board of Trustees of Smith Barney Muni Funds was informed that
the Reorganization was one of a number of proposed reorganizations involving
Smith Barney Muni Funds and other municipal bond funds within the Smith Barney
mutual fund complex. In connection with these reorganizations, it has been
proposed that the surviving fund's management fee be either increased or
decreased, as the case may be, to 0.50% of such Fund's average daily net
assets. The Board members were informed that the pro forma total operating
expenses for the combined fund would be consistent with the reorganizations
involving the other series of Smith Barney Muni Funds. Based in part on this
discussion of the ongoing consolidation of the Smith Barney mutual fund
complex, the Board of Trustees of Smith Barney Muni Funds approved, subject to
shareholder approval, a new investment management agreement for the Acquired
Fund. The new investment management agreement, which is otherwise
substantively identical to the Acquired Fund's current investment management
agreement, would provide for an increase in management fees from 0.45% to
0.50% of the Acquired Fund's average daily net assets. To save unnecessary
proxy expenses to the Acquired Fund, however, the Board of Trustees has
determined first to seek shareholder approval of the Reorganization, as
approval thereof would obviate the need for a second solicitation of
shareholder votes to approve the proposed investment management agreement.
Effective on November 17, 1995 (the anticipated date of the Reorganization),
the Board of Directors of the Acquiring Fund approved a management fee of
0.50% of the Acquiring Fund's average daily net assets, representing a
decrease from the Acquiring Fund's current fee of 0.55%. No shareholder
approval is necessary to effectuate this reduced management fee.
In light of the foregoing, the Board of Trustees of Smith Barney
Muni Funds, including the Independent Trustees, has determined that it is in
the best interests of the Acquired Fund and its shareholders to combine with
the Acquiring Fund. The Board of Trustees has also determined that a
combination of the Acquired Fund and the Acquiring Fund would not result in a
dilution of the interests of the Acquired Fund's shareholders.
<PAGE>30
The Board of Directors of the Acquiring Fund has also determined
that it is advantageous to the Acquiring Fund to acquire the assets of the
Acquired Fund. The Board of Directors was presented with information that
indicated that investors will continue to be confused in the face of similar
California municipal bond funds managed by the same adviser. The Board was
presented with information to the effect that, with two different funds, Smith
Barney experienced (i) dilution of the firm's money management and research
expertise due to the splitting of attention between the two highly similar
funds; and (ii) client confusion associated with offering similar funds that
provide differing yields. In addition, among other factors, the Board of
Directors considered the proposed decrease in management fee rates as well as
pro forma financial information provided by the Manager which indicated that
the Reorganization should result in a decrease in the expense ratio on shares
of the Acquiring Fund. The Board of Directors also considered the terms and
conditions of the Reorganization and representations that the Reorganization
would be effected as a tax-free reorganization. Accordingly, the Board of
Directors, including a majority of the independent Directors, has determined
that the Reorganization is in the best interests of the Acquiring Fund's
shareholders and that the interests of the Acquiring Fund's shareholders would
not be diluted as a result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
PLAN OF REORGANIZATION. The following summary of the Plan is
qualified in its entirety by reference to the Plan (Exhibit A hereto). The
Plan provides that the Acquiring Fund will acquire all or substantially all of
the assets of the Acquired Fund in exchange for shares of the Acquiring Fund
and the assumption by the Acquiring Fund of scheduled liabilities of the
Acquired Fund on November 17, 1995 or such later date as may be agreed upon by
the parties (the "Closing Date").
Prior to the Closing Date, the Acquired Fund will endeavor to
discharge all of its known liabilities and obligations. The Acquiring Fund
will not assume any liabilities or obligations other than those reflected on
an unaudited statement of assets and liabilities of the Acquired Fund prepared
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m., New York City time, on the Closing Date. The number of full and
fractional Class A, Class B and Class C shares of the Acquiring Fund to be
issued to the Acquired Fund shareholders will be determined on the basis of
the Acquiring Fund's and the Acquired Fund's relative net asset value per
Class A, Class B and Class C shares, respectively. The net asset value per
share of each class will be determined by dividing assets, less liabilities,
by the total number of outstanding shares of the relevant class.
The Acquired Fund and the Acquiring Fund will utilize the procedures
set forth in the Prospectus of the Acquiring Fund to determine the value of
their respective portfolio securities and to determine the aggregate value of
each Fund's portfolio. The
<PAGE>31
method of valuation employed will be consistent with the requirements set
forth in the Prospectus of the Acquiring Fund, Rule 22c-1 under the 1940 Act
and the interpretation of such rule by the SEC's Division of Investment
Management.
At or prior to the Closing Date, the Acquired Fund will, and the
Acquiring Fund may, declare a dividend or dividends which, together with all
previous such dividends, will have the effect of distributing to their
respective shareholders all taxable income for the taxable period ending on or
prior to the Closing Date (computed without regard to any deduction for
dividends paid). In addition, the Acquired Fund's dividend will include its
net capital gains realized in the taxable year ending on or prior to the
Closing Date (after reductions for any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, the
Acquired Fund will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date the full and fractional shares
of the Acquiring Fund received by the Acquired Fund. Such liquidation and
distribution will be accomplished by the establishment of accounts in the
names of the Acquired Fund's shareholders on the share records of the
Acquiring Fund's transfer agent. Each account will represent the respective
pro rata number of full and fractional shares of the Acquiring Fund due to
each of the Acquired Fund's shareholders. After such distribution and the
winding up of its affairs, the Acquired Fund will be terminated.
The consummation of the Reorganization is subject to the conditions
set forth in the Plan. Notwithstanding approval of the Acquired Fund's
shareholders, the Plan may be terminated at any time at or prior to the
Closing Date (i) by mutual agreement of Smith Barney Muni Funds on behalf of
the Acquired Fund and the Acquiring Fund, (ii) by Smith Barney Muni Funds on
behalf of the Acquired Fund in the event that the Acquiring Fund shall, or the
Acquiring Fund in the event that Smith Barney Muni Funds shall, materially
breach any representation, warranty or agreement contained in the Plan to be
performed at or prior to the Closing Date; or (iii) by Smith Barney Muni Funds
on behalf of the Acquired Fund or by the Acquiring Fund if a condition to the
Plan expressed to be precedent to the obligations of the terminating party has
not been met and it reasonably appears that it will not or cannot be met.
Approval of the Plan will require the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding shares of the
Acquired Fund, which is the lesser of: (i) 67% of the voting securities of the
Acquired Fund present at the Meeting, if the holders of more than 50% of the
outstanding voting securities of the Acquired Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities of the
Acquired Fund. If the Reorganization is not approved by shareholders of the
Acquired Fund, the Board of Trustees of Smith Barney Muni Funds will consider
courses of action available to it, including re-submitting the Reorganization
proposal to shareholders.
<PAGE>32
Alternatively, the Board may choose to submit to shareholders a proposal,
already approved by Trustees, to adopt a new investment management agreement
that provides for an increase in the management fee currently payable by the
Acquired Fund to the Manager from 0.45% to 0.50% of the Acquired Fund's
average daily net assets. The new investment management agreement would
otherwise be substantively identical to the investment management agreement
currently in effect between the Acquired Fund and the Manager.
DESCRIPTION OF THE ACQUIRING FUND'S SHARES. Full and fractional
shares of common stock of the Acquiring Fund will be issued to the Acquired
Fund in accordance with the procedures detailed in the Plan and as described
in the Acquiring Fund's Prospectus. Generally, the Acquiring Fund does not
issue share certificates to shareholders unless a specific request is
submitted to the Acquiring Fund's transfer agent. See "Information on
Shareholders' Rights" and the Prospectus of the Acquiring Fund for additional
information with respect to the shares of the Acquiring Fund.
FEDERAL INCOME TAX CONSEQUENCES. The exchange of assets of the
Acquired Fund for shares of the Acquiring Fund is intended to qualify for
federal income tax purposes as a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"). As a condition
to the closing of the Reorganization, the Acquiring Fund and Smith Barney Muni
Funds on behalf of the Acquired Fund will receive an opinion from Willkie Farr
& Gallagher, counsel to the Acquiring Fund, to the effect that, on the basis
of the existing provisions of the Code, U.S. Treasury regulations issued
thereunder, current administrative rules, pronouncements and court decisions,
for federal income tax purposes, upon consummation of the Reorganization:
(1) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for the Acquiring Fund's shares and the assumption by
the Acquiring Fund of scheduled liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C)
of the Code, and the Acquiring Fund and the Acquired Fund are each a
"party to a reorganization" within the meaning of Section 368(b) of the
Code;
(2) no gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Acquired Fund in exchange for the
Acquiring Fund's shares and the assumption of scheduled liabilities of
the Acquired Fund;
(3) no gain or loss will be recognized by the Acquired Fund upon
the transfer of the Acquired Fund's assets to the Acquiring Fund in
exchange for the Acquiring Fund's shares and the assumption of scheduled
liabilities of the Acquired Fund or upon the distribution (whether actual
or constructive) of the Acquiring Fund's shares to the Acquired Fund's
shareholders;
<PAGE>33
(4) no gain or loss will be recognized by shareholders of the
Acquired Fund upon the exchange of their shares of the Acquired Fund for
shares of the Acquiring Fund;
(5) the aggregate tax basis for shares of the Acquiring Fund
received by each shareholder of the Acquired Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of shares of
the Acquired Fund surrendered therefor, and the holding period of shares
of the Acquiring Fund to be received by each shareholder of the Acquired
Fund will include the period during which shares of the Acquired Fund
exchanged therefor were held by such shareholder (provided shares of the
Acquired Fund were held as capital assets on the date of the
Reorganization); and
(6) the tax basis to the Acquiring Fund of the Acquired Fund's
assets acquired by the Acquiring Fund will be the same as the tax basis
of such assets to the Acquired Fund immediately prior to the
Reorganization, and the holding period of the assets of the Acquired Fund
in the hands of the Acquiring Fund will include the period during which
those assets were held by the Acquired Fund.
Shareholders of the Acquired Fund should consult their tax advisors
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion only relates to the
federal income tax consequences of the Reorganization, shareholders of the
Acquired Fund should also consult their tax advisors as to state and local tax
consequences, if any, of the Reorganization.
<PAGE>34
CAPITALIZATION. The following table shows the capitalization of the
Acquiring Fund and the Acquired Fund as of September 25, 1995, and on a pro
forma basis as of that date, giving effect to the proposed acquisition of
assets at net asset value.
<TABLE>
<CAPTION>
Smith Barney Muni Funds - Smith Barney California Pro Forma for
California Portfolio Municipals Fund Inc. Reorganization
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
(In thousands, except per share values)
Class A Shares
Net assets . . . . . . . . . . . . . . . . . $156,500 $409,968 $566,468
Net asset value per share . . . . . . . . . . $ 12.50 $ 15.77 $ 15.77
Shares outstanding . . . . . . . . . . . . . 12,516 26,003 35,924
Class B Shares
Net assets . . . . . . . . . . . . . . . . . $ 893 $139,129 $140,022
Net asset value per share . . . . . . . . . . $ 12.50 $ 15.76 $ 15.76
Shares outstanding . . . . . . . . . . . . . 71 8,828 8,884
Class C Shares
Net assets . . . . . . . . . . . . . . . . . $ 6,534 $ 2,548 $ 9,082
Net asset value per share . . . . . . . . . . $ 12.49 $ 15.76 $ 15.76
Shares outstanding . . . . . . . . . . . . . 523 162 576
Class Y Shares
Net assets . . . . . . . . . . . . . . . . . $0 $0 $0
Net asset value per share . . . . . . . . . . $0 $0 $0
Shares outstanding . . . . . . . . . . . . . 0 0 0
Class Z Shares
Net assets . . . . . . . . . . . . . . . . . N/A $0 $0
Net asset value per share . . . . . . . . . . N/A $0 $0
Shares outstanding . . . . . . . . . . . . . N/A 0 0
</TABLE>
As of the Record Date, there were 12,516,255 outstanding Class A
shares, 71,418 outstanding Class B shares, 523,023 outstanding Class C shares
and no outstanding Class Y shares of the Acquired Fund, and 26,002,880
<PAGE>35
outstanding Class A shares, 8,828,440 outstanding Class B shares,
161,718 outstanding Class C shares and no outstanding Class Y shares or
Class Z shares of the Acquiring Fund. As of the Record Date, the officers and
Trustees of Smith Barney Muni Funds beneficially owned as a group less than 1%
of the outstanding shares of each class of the Acquired Fund. To the best
knowledge of the Trustees of Smith Barney Muni Funds, as of the Record Date,
no shareholder or "group" (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")), except as set forth in
the table below, owned beneficially or of record more than 5% of the
outstanding shares of a class of the Acquired Fund. As of the Record Date,
the officers and Directors of the Acquiring Fund beneficially owned as a group
less than 1% of the outstanding shares of each class of the Acquiring Fund.
Except as set forth in the table below, to the best knowledge of the Directors
of the Acquiring Fund, as of the Record Date, no shareholder or "group" (as
that term is used in Section 13(d) of the Exchange Act) owned beneficially or
of record more than 5% of the outstanding shares of a class of the Acquiring
Fund.
<TABLE>
<CAPTION>
Percentage of
Class Owned
of Record
or Beneficially
Upon
Name and Fund Consummation of
the Address and Class As of the Record Date Reorganization
<S> <C> <C> <C>
William C. Lochmoeller TTEE Acquired Fund Class B 16.21% *
FBO The Lochmoeller Family Trust U/A/D
07/29/80
1270 Mesa Road
San Marino, CA 91108
Joan Barnett TTEE Acquired Fund Class B 13.47 *
Barnett 1995 Trust UAD 6/12/95
FBO Joan Barnett
3917 Alta Mesa Drive
Studio City, CA 91604
Patricia S. Gonzalez Acquired Fund Class B 11.78 *
204 Upland Court
Redwood City, CA 94062
<PAGE>36
Acquired Fund Class B 11.65 *
Jane C. Higgins,
Successor TTEE
FBO Donald R. Higgins & Janet C. Higgins
Revocable Trust A
U/A/D 06/10/85
3119 Clairidge Way
Sacramento, CA 95821
Steven H. Pettit TTEE Acquired Fund Class B 8.71 *
FBO the Tina & Tom Pettit
Irrev. Trust DTD 04/13/95
4839 Meadow Ridge Road
Santa Ysabel, CA 92070
Roberto Kelly Acquired Fund Class B 5.90 *
Irwin Weiner Sports Enterprises Inc.
19 Bradhurst Avenue
Hawthorne, NY 10532
Vivian Gilbert Strell Acquired Fund Class B 5.44 *
Laurie Gilbert and Samuel Gilbert JTWROS
7008 Lipmann Street
San Diego, CA 92122
John Nisser Acquired Fund Class C 5.15 *
16229 Woodruff Avenue
Bellflower, CA 90706
R. Philip Hammond TTEE Acquiring Fund Class C 15.85 *
F/B/O Philip Hammond &
Vivienne Hammond Trust V-3
UAD 12/12/84
P.O. Box 1735
Santa Monica, CA 90406
Edward Bavaria and Acquiring Fund Class C 7.97 *
Elizabeth J. Bavaria JTWROS
9 Rockingham Drive
Newport Beach, CA 92660
Otto Kahn and Irene Chan Kahn JTWROS Acquiring Fund Class C 7.95 *
9846 Lesterford Avenue
Downey, CA 90240
<PAGE>37
Aldo Borin TTEE FBO Acquiring Fund Class C 5.77 *
The Frank J. Borin Sr. Trust
U/A/D 10/15/90
10050 Old Redwood Highway
Penngrove, CA 94951
<FN>
____________
* Less than 1.00%
</TABLE>
INFORMATION ABOUT THE ACQUIRING FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MARKET CONDITIONS AND
PORTFOLIO REVIEW (THROUGH FEBRUARY 28, 1995).
Despite the difficult investment environment of the year ended
February 28, 1995, the Fund performed well, providing investors in Class A
shares with a total return of 2.46% and Class B shares with a total return of
1.89%. These return numbers resulted in a first quarter ranking for both
Class A (#2 of 83 funds) and Class B (#6 of 83 funds) shares by Lipper
Analytical Services, Inc., an independent mutual fund performance tracking
organization, for the twelve months ended February 28, 1995. Reflecting the
improvement in the municipal market that began late in 1994, Class C shares, a
newly-available class of shares, earned a total return of 11.72% for the
period between November 14, 1994 and February 28, 1995.
Market and Economic Overview
The past fiscal year demonstrated that volatility is becoming a
permanent feature of the fixed income landscape. Management believes this is
largely attributable to the development of new technologies, the speed of
communications and the freer movement of capital around the globe. The
municipal market has also been affected by these changes. During most of the
past fiscal year the municipal market experienced a significant rise in
interest rates which negatively impacted performance only to finish the year
with one of the most powerful bond rallies in recent memory.
Management believes the volatility of the municipal market over the
period was the result of a marketplace that initially assumed that the
superior economic growth in both the U.S. and overseas would create
inflationary problems for all the bond markets. Anticipation proved much
worse than reality, however, as the Federal Reserve moved both aggressively
and early to stave off this threat, thereby producing an inflation index below
3% for 1994. As the market gradually came to the conclusion that an elusive
"soft landing" was economically possible, its reaction was swift and forceful,
producing a powerful bond rally during the last several months of 1994.
<PAGE>38
In early December 1994, Orange County, California filed for
bankruptcy protection under Chapter 9 of the federal bankruptcy code because
of losses sustained by its investment pool. The investment pool consists of
deposits from Orange County itself, agencies within Orange County (such as
Orange County Sanitation District Authority and Orange County Transportation
Authority) and various local communities. The pool suffered substantial
losses through the use of leverage and derivative investments.
At the end of this fiscal reporting period, approximately 8% of the
Fund was invested in securities issued by various agencies located within
Orange County. However, none of these holdings are direct obligations of the
county itself, and more than half are either insured or backed by guaranteed
investment contracts. In addition, another 5% of the Fund was invested in a
San Joaquin Transportation corridor bond, whose issuer is a participant in
Orange County's investment pool.
Orange County is currently trying to negotiate a settlement with its
pool participants, and the Fund anticipates that one will be reached by early
June. The Fund believes that the bankruptcy proceedings will not have a
material impact on the ability of these issuers to make scheduled interest and
principal payments and therefore will have little, if any, effect on the Fund.
Nevertheless, management is actively monitoring the Orange County proceedings.
Investment Strategy and Portfolio Structure
In seeking to achieve the Fund's investment objective of providing
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 the preservation of capital,
management's long-term investment strategy is to provide investors with a very
competitive yield, and then produce the best total return management can,
whatever the market conditions. Management's current strategy has been to
take advantage of last autumn's bond decline by extending the average life of
the portfolio and purchasing more discount securities (bonds that are selling
below their redemption value). Discount securities typically have a dual
advantage in rising markets. First, they tend to be one of the best
performing asset classes as rates decline. Second, they tend to provide much
better call protection, which lowers the risk of having bonds prematurely
called away. This strategy greatly enhanced the performance of the Fund in
the recent bond rally, and it will continue to be management's strategy until
management sees inflation re-emerge (although this does not appear to be an
imminent possibility).
In terms of credit quality, management has focused primarily on
increasing the percentage of the Fund's AA- and AAA-rated holdings, the two
highest rating categories available. At the end of this fiscal year, nearly
70% of the portfolio was invested in AA- and AAA-rated securities. Management
believes these securities offer the Fund's shareholders the best value.
Management concentrated the portfolio in essential service revenue bonds and
debt issued by local communities for redevelopment projects and various
<PAGE>39
civic improvements. These types of bonds provide the Fund with competitive
yields and a high degree of liquidity, which makes it easier to navigate the
Fund through turbulent market periods.
Management's Update (through July 31, 1995).
The increases last year in short-term rates by the Federal Reserve
Board are clearly slowing the economy's expansion from its faster pace of last
fall. The question now on the minds of economists and investors is whether
this is merely a pause in economic activity or indicative of longer-term
economic weakness. Management does not believe that forthcoming economic data
will show conclusive evidence of a recession and instead is working under the
assumption that the economy will experience a small pause and then steady
growth with moderate inflation.
The municipal market had a spectacular rally during the first half
of 1995, and the Fund was positioned to take full advantage of it. A
significant percentage of the portfolio was invested in high-quality discount
coupons, which allowed the Fund to maximize its net asset value during a
rapidly declining interest-rate environment. Management's goal is to use
market strength to gradually increase coupons, shorten maturities and take a
more conservative approach to the market until these interest-rate levels
prove they can hold.
However, some uncertainties surround the market. Among these are
the many flat-tax proposals being championed by members of both political
parties. Real legislative action is still probably several years away and
must be revenue neutral to make any economic sense -- a very difficult
balancing act to accomplish. These discussions have caused periodic weakness
in the municipal market during the past months and will no doubt continue to
cause periodic weakness over the next few years, which management will view as
an opportunity to invest at levels that represent real value to the Fund's
shareholders.
A defining moment for the municipal market was Orange County's
filing for bankruptcy in December 1994, which immediately cast a pall on the
entire market. Its impact on the broader market since then has been minimal
but has been considerably stronger on the securities of Orange County itself.
A positive development in the Orange County bankruptcy is the expected vote by
the California Legislature on a comprehensive program, backed by the county
and many of its constituencies, that would provide key elements of the
county's debt repayment plan. Anything that demonstrates a commitment to
repaying its debt is good for Orange County and the municipal market as a
whole. Management will continue to monitor the situation closely.
The Fund has not participated in any of the recent debt offerings by
Orange County. Currently, approximately 9.42% of the portfolio is invested in
securities issued by
<PAGE>40
various agencies located within Orange County. None of these holdings,
however, are direct obligations of the county itself, and 90% are either
insured or backed by guaranteed-investment contracts. In addition, another
5.37% of the portfolio is invested in a San Joaquin Transportation corridor
bond, whose issuer is a participant in Orange County's investment pool.
Management believes that the negotiations surrounding Orange County's debt
obligations will not have a material effect on the ability of these issuers to
make scheduled interest and principal payments, and therefore will have
little, if any, effect on the Fund. At July 31, 1995, 93.2% of the portfolio
was invested in securities rated investment grade (BBB/Baa and higher) by
either Standard & Poor's or Moody's. The majority of the Fund's assets were
invested in essential-service revenue bonds and debt issued by local
communities for redevelopment projects and various civic improvements. The
average maturity of the Fund was 19.7 years. As stated earlier, management
intends to gradually increase coupons, shorten the average maturity of the
portfolio and assume a more conservative stance.
<PAGE>41
<TABLE>
<CAPTION>
Smith Barney California Municipals Fund Inc.
Historical Performance Class A Shares (unaudited)
Year Ended Net Asset Value Capital Gains Dividends Paid Return of Total Return*
February 28 Beginning Ending Paid Capital
<S> <C> <C> <C> <C> <C> <C>
1986 $13.94 $16.16 __ $1.21 -- 25.80%
1987 $16.16 $16.54 $0.33 $1.14 __ 12.13%
1988 $16.54 $15.49 $0.07 $1.09 -- 1.09%
1989 $15.49 $15.33 $0.03 $1.12 -- 6.67%
1990 $15.33 $15.61 -- $1.07 -- 9.02%
1991 $15.61 $15.66 $0.12 $1.07 -- 8.29%
1992 $15.66 $15.78 $0.27 $1.05 -- 9.50%
1993 $15.78 $16.70 $0.29 $0.97 $0.04 14.76%
1994 $16.70 $16.15 $0.65 $0.84 -- 5.92%
1995 $16.15 $15.40 $0.19 $0.89 -- 2.46%
Total $1.95 $10.45 $0.04
Cumulative Total Return - (3/1/85 through 2/28/95) 144.89%
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the front-
end sales charge (maximum 4.00%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
<PAGE>42
<TABLE>
<CAPTION>
Average Annual Total Return** Class A Shares
<S> <C> <C> <C> <C>
Without Sales Charge With Sales Charge***
With Without With Without
Fee Waiver Fee Waiver Fee Waiver Fee Waiver
and Expense and Expense and Expense and Expense
Reimbursement Reimbursement Reimbursement Reimbursement
Year Ended 2/28/95 N/A 2.46% N/A (1.64%)
Five Years Ended
2/28/95 N/A 8.11% N/A 7.23%
Ten Years Ended
2/28/95 9.37% 8.56% 8.92% 8.16%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value. The Acquiring Fund
waived investment advisory and sub-investment advisory and administration
fees from April 1984 to February 1986 and reimbursed expenses from April
1984 to February 1985. A shareholder's actual return for the period
during which waivers and reimbursements were in effect would be the
higher of the two numbers shown.
*** Average annual total return figures shown assume the deduction of the
maximum 4.00% sales charge.
Note: On November 6, 1992, existing shares of the Fund were designated
Class A shares. Class A shares are subject to a maximum 4.00% front-end
sales charge and service fee of 0.15% of the value of the average daily
net assets attributable to that class. The Acquiring Fund's average
annual rates of return would have been lower had service fees been in
effect prior to November 6, 1992.
</TABLE>
<PAGE>43
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF SMITH BARNEY CALIFORNIA
MUNICIPALS FUND INC. VS. LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE AND LEHMAN
BROTHERS MUNICIPAL BOND INDEX*
FEBRUARY 28, 1985 - FEBRUARY 28, 1995
Description of Mountain Chart -- Class A
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on
February 28, 1985 in Class A shares of the Acquiring Fund as compared with the
growth of a $10,000 investment in the Lipper California Municipal Fund Average
and the Lehman Brothers Municipal Bond Index. The plot points used to draw
the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000 Investment in
Growth of $10,000 Investment in the the
Month Invested in Class A Lipper California Lehman Brothers
Ended Shares of the Fund Municipal Fund Average Municipal Bond Index
<S> <C> <C> <C>
02/85 $ 9,600 $10,000 $10,000
03/85 $ 9,688 $10,066 $10,086
06/85 $10,413 $10,846 $10,932
09/85 $10,331 $10,713 $10,768
12/85 $11,104 $11,497 $11,639
03/86 $12,158 $12,531 $12,817
06/86 $12,022 $12,462 $12,738
09/86 $12,545 $13,056 $13,422
12/86 $13,108 $13,599 $13,886
03/87 $13,464 $13,957 $14,222
06/87 $12,701 $13,145 $13,835
09/87 $12,311 $12,690 $13,492
12/87 $12,973 $13,340 $14,095
03/88 $13,377 $13,731 $14,579
06/88 $13,681 $14,016 $14,861
09/88 $14,088 $14,413 $15,241
12/88 $14,533 $14,806 $15,524
03/89 $14,607 $14,919 $15,627
06/89 $15,431 $15,775 $16,553
09/89 $15,444 $15,729 $16,564
12/89 $15,918 $16,256 $17,201
03/90 $15,950 $16,301 $17,277
06/90 $16,304 $16,672 $17,681
09/90 $16,248 $16,562 $17,691
12/90 $17,007 $17,316 $18,455
03/91 $17,233 $17,620 $18,870
06/91 $17,551 $17,988 $19,274
09/91 $18,311 $18,702 $20,024
</TABLE>
<PAGE>44
<TABLE>
<S> <C> <C> <C>
12/91 $18,962 $19,256 $20,696
03/92 $18,882 $19,306 $20,758
06/92 $19,699 $20,058 $21,546
09/92 $20,025 $20,485 $22,120
12/92 $20,480 $20,877 $22,523
03/93 $21,258 $21,735 $23,358
06/93 $22,001 $22,468 $24,123
09/93 $22,672 $23,275 $24,938
12/93 $23,066 $23,500 $25,288
03/94 $22,004 $22,113 $23,899
06/94 $22,220 $22,175 $24,164
09/94 $22,346 $22,282 $24,329
12/94 $21,528 $21,735 $23,980
02/95 $23,510 $23,203 $25,384
<FN>
* Illustration of $10,000 invested in Class A shares on February 28, 1985
assuming deduction of the maximum 4.00% sales charge at the time of
investment and reinvestment of dividends and capital gains at net asset
value through February 28, 1995.
Lipper California Municipal Fund Average - The Lipper California Municipal
Fund Average is composed of an average of the Fund's peer group of mutual
funds (83 as of February 28, 1995) investing in California municipal bonds.
Lehman Brothers Municipal Bond Index - The Lehman Brothers Municipal Bond
Index is a weighted composite which is comprised of more than 15,000 bonds
issued within the last 5 years, having a minimum credit rating of at least
Baa and a maturity of at least 2 years, excluding all bonds subject to the
Alternative Minimum Tax and bonds with floating or zero coupons.
Index information is available at month-end only; therefore the closest
month-end to inception date of the class has been used.
Note: All figures cited here and on the previous page represent past
performance of Class A shares and do not guarantee future results.
</TABLE>
<PAGE>45
<TABLE>
<CAPTION>
Smith Barney California Municipals Fund Inc.
<S> <C> <C> <C> <C> <C> <C>
Historical Performance Class B Shares (unaudited)
Year Ended Net Asset Value Capital Gains Dividends Return of
February 28 Beginning Ending Paid Paid Capital Total Return*
11/6/92-2/28/93 $15.84 $16.70 $0.29 $0.28 $0.01 9.27%
1994 $16.70 $16.15 $0.65 $0.76 -- 5.40%
1995 $16.15 $15.40 $0.19 $0.80 -- 1.89%
Total $1.13 $1.84 $0.01
Cumulative Total Return (11/6/92 through 2/28/95) 17.35%
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the CDSC.
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return** Class B Shares
<S> <C> <C>
Without CDSC With CDSC***
Year Ended 2/28/95 1.89% (2.40)%
Inception 11/6/92 through 2/28/95 7.15% 5.99%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital
gains at net asset value.
*** Average annual total return figures assume the deduction of the maximum
applicable CDSC
which is described in the prospectus.
Note: The Fund began offering Class B shares on November 6, 1992. Class
B shares are subject to a maximum 4.50% CDSC and service and distribution
fees of 0.15% and 0.50%, respectively, of the value of the average daily
net assets attributable to that class.
</TABLE>
<PAGE>46
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. VS.
LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE AND
LEHMAN BROTHERS MUNICIPAL BOND INDEX*
NOVEMBER 6, 1992 - FEBRUARY 10, 1995
Description of Mountain Chart -- Class B
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on
November 6, 1992 in Class B shares of the Acquiring Fund as compared with the
growth of a $10,000 investment in the Lipper California Municipal Fund Average
and the Lehman Brothers Municipal Bond Index. The plot points used to draw
the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000 Investment in
Growth of $10,000 Investment in the the
Month Invested in Class B Lipper California Lehman Brothers
Ended Shares of the Fund Municipal Fund Average Municipal Bond Index
<S> <C> <C> <C>
10/31/92 - $10,000 $10,000
11/06/92 $10,000 - -
11/92 $10,174 $10,270 $10,179
12/92 $10,338 $10,406 $10,283
03/93 $10,718 $10,833 $10,664
06/93 $11,080 $11,199 $11,013
09/93 $11,403 $11,601 $11,385
12/93 $11,588 $11,713 $11,545
03/94 $11,039 $11,022 $10,911
06/94 $11,133 $11,053 $11,032
09/94 $11,181 $11,106 $11,108
12/94 $10,757 $10,834 $10,948
02/95 $11,735** $11,565 $11,589
02/95 $11,443***
</TABLE>
* Illustration of $10,000 invested in Class B shares on March 28, 1988
assuming deduction of the maximum CDSC at the time of investment and
reinvestment of dividends and capital gains at net asset value through
July 31, 1994.
** Value does not assume deduction of applicable CDSC.
*** Value assumes deduction of applicable CDSC (assuming deduction on
February 28, 1995).
Lipper California Municipal Fund Average - The Lipper California Municipal
Fund Average is composed of an average of the Fund's peer group of mutual
funds (83 as of February 28, 1995) investing in California municipal bonds.
Lehman Brothers Municipal Bond Index - The Lehman Brothers Municipal Bond
Index is a weighted composite which is comprised of more than 15,000 bonds
issued within the last 5 years, having a minimum
<PAGE>47
credit rating of at least Baa and a maturity of at least 2 years, excluding
all bonds subject to the Alternative Minimum Tax and bonds with floating or
zero coupons.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
Note: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
<PAGE>48
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Historical Performance Class C Shares (unaudited)
Year Ended Net Asset Value Capital Dividends Total
July 31 Beginning Ending Gains Paid Paid Return*
<S> <C> <C> <C> <C> <C>
11/14/94-2/28/95 $14.19 $15.40 $0.19 $0.23 11.72%
Total $0.19 $0.23
Cumulative Total Return (11/14/94 through 2/28/95) 11.72%
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions
at net asset value and do not assume deduction of the CDSC.
</TABLE>
<TABLE>
<CAPTION>
Aggregate Total Return** -- Class C Shares
Without CDSC With CDSC
Actual Actual***
<S> <C> <C>
Inception 11/14/94 through 2/28/95 11.72% 10.72%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the maximum
applicable CDSC.
Note: The Fund began offering Class C shares on November 14,
1994. Class C shares are subject to a maximum 1.00%
CDSC and annual service and distribution fees of 0.15%
and 0.55%, respectively, of the value of the average
daily net assets attributable to that class.
</TABLE>
Performance information is not available for Class Y shares of the
Acquiring Fund because, as of the Record Date, no Class Y shares of the
Acquiring Fund had been sold.
<PAGE>49
INFORMATION ABOUT THE ACQUIRED FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MARKET CONDITIONS AND
PORTFOLIO REVIEW (THROUGH MARCH 31, 1995).
Market and Economic Overview
Since management's last report to shareholders in November 1994, the
fixed-income markets, and municipal bonds in particular, have enjoyed a
powerful rally. Municipal bond yields have declined more than a full
percentage point, as evidenced by the drop in the average yield on The Bond
Buyer's weekly 25-Bond Revenue Index of 30-year municipal bonds from a high of
7.37% on November 17, 1994 to 6.29% on March 31, 1995. This was substantially
better than the performance of the benchmark 30-year Treasury bond, which
experienced a decline in yield of 70 basis points from 8.13% to 7.43% during
the same time frame.
The vastly improved bond markets reflect a growing consensus that
inflation will remain under control, and the Federal Reserve Board will be
successful in engineering a "soft landing" by slowing the economy down to a
more sustainable, non-inflationary rate of growth. The seven increases in the
federal funds rate (the rate banks charge each other for overnight loans),
orchestrated by the Federal Reserve Board since February 1994, appear to be
slowing the pace of economic growth. Recent economic reports show a slower
rate of increase in employment, producer prices, and retail prices, and retail
sales. Industrial production and capacity utilization were also lower than
expected, signalling a possible slowdown in the country's strong manufacturing
sector. These generally favorable economic fundamentals are more than
offsetting concerns about the substantial decline in the value of the dollar
relative to the Japanese yen and German mark on the foreign exchange markets.
Late in April, several tax-reform proposals which recommend a flat
federal income tax rate began to receive increased attention in the national
financial press and from municipal bond market participants. Adoption of a
flat tax would diminish the advantages of tax exemption for municipal bonds.
Although the various plans being circulated are only proposals, the publicity
surrounding them has recently caused some investors to back away from the
municipal bond market. In management's opinion it is much too early in the
process to predict what changes in the tax laws, if any, will actually take
place, but tax reform will certainly be a major topic of political debate over
the next few years. Many observers believe that the more radical proposals
for changes in the way taxes are collected have little chance for enactment.
Absent these tax-reform concerns, municipals would probably continue
to be strong performers relative to Treasuries and other taxable investments
due to the low supply of new issues. Not only did last year's spike in
interest rates sharply reduce refinancing
<PAGE>50
activity in the municipal market, but voter pressure on states and
municipalities to rein in spending and cut taxes, or at least avoid tax
increases, has also resulted in a roughly 30% decline in new-money financing.
In addition, the universe of existing municipal bonds is shrinking. In 1995,
an estimated $230 billion of older, high-coupon issues will mature or be
called as they reach their first optional call dates. With estimates of new-
issue volume at less than $150 billion, the net reduction in municipal debt
outstanding could approach $100 billion this year, contracting the market by
about eight percent. Ordinarily, a reduction in supply of this magnitude would
be expected to provide a powerful boost for municipal bond values as it did
earlier this year. Uncertainties about various tax proposals, however, will
probably keep municipals from trading any better than their normal
relationship to taxable investment alternatives.
Management would also like to briefly discuss the Orange County,
California financial crisis that forced both the county and its investment
pool to declare bankruptcy late in 1994. The seeds of this situation were
sown in the declining interest-rate environment of prior years. As short-term
interest rates plummeted through late 1993, some market participants, such as
Orange County's investment pool manager, turned to leverage or derivatives as
a way of boosting yields. Leverage is simply the process of borrowing in the
short-term market and investing in longer-term bonds in order to take
advantage of the difference in yield between the two sectors. Derivatives are
securities that have a rate of return that is derived from an underlying asset
or market index. In many cases, the use of derivatives had the same effect as
leverage by allowing investors to magnify returns, but without actually
borrowing money. When short-term rates rebounded, many of these portfolios
suffered serious damage, with Orange County the most prominent example due to
its size and the severity of its losses. Leverage, rather than the use of
derivatives, caused the bulk of the harm that occurred in this situation.
Fortunately, the extent of the problems facing the county and other
participants in its investment pool appear to be virtually unique. While
certain other municipalities experienced losses as a result of higher interest
rates, none of these losses appear to be of sufficient magnitude to create the
risk of default or bankruptcy. However, should Orange County default on
upcoming repayments of short-term notes -- and its disclosed plans for dealing
with this crisis have so far demonstrated a less than forthright willingness
to pay -- there could be serious repercussions for other California local
government issuers and possibly the entire municipal market. In any case, the
California Portfolio did not hold bonds issued by Orange County, and only one
issue held by the California Portfolio (that was not insured or otherwise
credit enhanced) was identified as a pool participant. This solid-waste
system issue represents less than one percent of the Portfolio's assets and is
secured by a separate, ongoing revenue stream that should not be encumbered
because revenue bond payments are not subject to the automatic stay of a
bankruptcy.
<PAGE>51
The California Economy
Economic conditions in California are stronger than they have been
in four years. Nevertheless California was the only state to experience a
rating reduction from the two major rating agencies in 1994. Moody's lowered
its rating from Aa to A1 and Standard & Poor's reduced its rating from A+ to
A. Rating agencies look at both a state's economy and its budget; and
expenditures for social services, although more realistic than in previous
years, are still high in California's current budget proposal.
California Portfolio
The California Portfolio had a total return of 6.47% (Class A
shares) for the fiscal year. That was well above the 5.94% average total
return for all California municipal bond funds over the same period, as
reported by Lipper Analytical Services.
Long-term performance of the Portfolio is also excellent relative to
its peers. The Portfolio's five-year cumulative total return (excluding sales
charge) of 48.62% (Class A shares) substantially outperformed the average
cumulative total return of 44.09% for all California municipal bond funds in
the Lipper survey for the period ended March 31, 1995. It is also noteworthy
that this strong performance over the last five years has been achieved with
the need for only minimal capital gains distributions, an important
consideration for investors interested in after-tax income.
While management has a generally positive outlook for the fixed-
income markets, the size of the rally experienced so far would seem to leave
little room for disappointment, and any sign of a rebound in economic activity
is likely to result in a return to higher interest rates. Management also
believes that the unique supply and demand characteristics of the municipal
market and tax-reform uncertainties will tend to exaggerate price swings
relative to taxable investments.
In light of this viewpoint, management is maintaining a balanced
approach to structuring the interest-rate sensitivity of the Portfolio by
investing in a combination of both long and short effective maturities. Most
long-term municipal bonds are callable prior to their stated maturity date.
When a bond has a coupon higher than prevailing market yields, its maturity is
effectively shortened to the call date for trading purposes because of the
possibility that the issuer will exercise its option to replace the bond with
lower-cost debt. Management is retaining high-coupon bonds that trade well
above their face value for the defensiveness of their shorter effective
maturities and the above-market level of income they provide. However,
management is also focusing on eliminating bonds with shorter call dates when
they are trading near face value. Such bonds have unfavorable performance
characteristics because they retain the downside risk of their longer maturity
if rates should rise, but their appreciation potential is limited by the
shorter call date if interest rates decline.
<PAGE>52
Management is replacing such issues with bonds that have similar stated
maturities but greater call protection.
Although this strategy sacrifices some of the current income being
generated by the Fund, it enhances long-term performance potential if interest
rates continue to decline without adding to downside risk if interest rates
rise. Management believes that positioning the Fund in this manner is the
best way to achieve its objective of the highest tax-free income consistent
with prudent investment risk.
Management's Update (through September 13, 1995).
The fixed-income markets have been rallying in recent weeks in
response to economic reports pointing to slower growth and lower inflation.
This rally has pushed the yield on the benchmark 30-year Treasury bond to the
low end of the 6.5% to 7% range, where it has been trading over the last
several months. After significantly underperforming Treasuries during the
strong rally earlier in the year, long-term municipals have kept pace with 30-
year Treasuries as reflected in the movement in the yield of The Bond Buyer's
25 Revenue Bond Index to 6.16% from its recent peak of 6.44% reached in mid-
August. However, municipal bonds are still quite cheap relative to Treasuries
with long-term single A issues providing over 90% of the yield available on
long-term Treasuries. The primary reason for this historically high
taxable/tax-exempt yield ratio is investor concern over the potential impact
of various highly publicized "flat tax" proposals discussed in management's
last report to shareholders. At these levels management believes that all but
the most radical tax reform proposals have been more than fully discounted,
and that long-term municipals represent excellent value.
While inflation remains quite subdued, and management does not
expect it to accelerate meaningfully from current levels, in management's
opinion, any sign of a rebound in economic activity is likely to result in a
move to higher interest rates over the near term. Management intends to
retain most of the Portfolio's more defensive high-coupon issues for income
purposes but will have a bias toward putting new cash flows to work in non-
callable and lower-coupon bonds in what it believes will be a positive
environment for fixed-income investments over the longer term.
Update on Orange County
A positive development in the Orange County bankruptcy is the
expected vote by the California Legislature on a comprehensive program, backed
by the county and many of its constituencies, that would provide key elements
of the county's debt repayment plan. Anything that demonstrates a commitment
to repaying its debt is good for Orange County and the municipal market as a
whole. Management will continue to monitor the situation closely. The
California Portfolio did not hold any bonds issued by Orange County.
<PAGE>53
The California Economy
The California economy has hit its trough and has now started to
make incremental improvements from a very deep recession. California is
currently rated A1 by Moody's and A (with a stable outlook) from Standard &
Poor's.
<PAGE>54
Smith Barney Muni Funds -- California Portfolio
<TABLE>
<CAPTION>
Historical Performance Class A Shares
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
<S> <C> <C> <C> <C> <C>
3/31/95 $12.27 $12.28 $0.75 $0.00 6.47%
3/31/94 12.78 12.27 0.77 0.03 2.15
3/31/93 12.05 12.78 0.78 0.00 12.93
3/31/92 11.62 12.05 0.80 0.00 11.11
3/31/91 11.47 11.62 0.84 0.00 8.90
3/31/90 11.17 11.47 0.85 0.00 10.44
3/31/89 10.96 11.17 0.86 0.00 10.07
Inception* - 3/31/88 12.50 10.96 0.88 0.00 (5.79)
Total $6.53 $0.03
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class B Shares
Net Asset Value
<S> <C> <C> <C> <C> <C>
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
Inception* - 3/31/95 $11.52 $12.29 $0.28 $0.00 9.18%
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class C Shares
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
<S> <C> <C> <C> <C> <C>
3/31/95 $12.26 $12.28 $0.66 $0.00 5.80%
3/31/94 12.77 12.26 0.68 0.03 1.45
Inception* - 3/31/93 12.46 12.77 0.18 0.00 3.95
Total $1.52 $0.03
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital
gains, if any, annually.
<PAGE>55
Smith Barney Muni Funds -- California Portfolio
<TABLE>
<CAPTION>
Average Annual Total Return
<S> <C> <C> <C>
Without Sales Charge(1)
Class A Class B Class C
Year Ended 3/31/95 6.47% N/A 5.80%
Five Years Ended 3/31/95 8.24 N/A N/A
Inception* through 3/31/95 6.88 9.18 5.02
<CAPTION>
With Sales Charge(2)
Class A Class B Class C
Year Ended 3/31/95 2.22% N/A 4.80%
Five Years Ended 3/31/95 7.36 N/A N/A
Inception* through 3/31/95 6.33 4.68% 5.02
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return
<S> <C>
Without Sales Charge(1)
Class A (Inception* through 3/31/95) 70.16%
Class B (Inception* through 3/31/95) 9.18
Class C (Inception* through 3/31/95) 11.57
<FN>
(1) Assumes reinvestment of all dividends and capital gain distributions at
net asset value and does not reflect deduction of the applicable sales
charge with respect to Class A shares or the applicable CDSC with
respect to Class B and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at
net asset value. In addition, Class A shares reflect the deduction of
the maximum initial sales charge of 4.00%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed less
than one year from initial purchase. This CDSC declines by 0.50% the
first year after purchase and by 1.00% per year thereafter until no CDSC
is incurred. Class C shares reflect the deduction of a 1.00% CDSC which
applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, Class B and Class C shares are April 3,
1987, November 11, 1994 and January 5, 1993, respectively.
</TABLE>
<PAGE>56
Growth of $10,000 Invested in
Class A Shares of California Portfolio vs.
Lehman Long Bond Index*
(unaudited)
April 1987 - March 1995
Description of Mountain Chart - Class A
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on April
3, 1987 in Class A shares of the Acquired Fund as compared with the growth of
a $10,000 investment in the Lehman Long Bond Index. The plot points used to
draw the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Investment in Growth of $10,000 Investment in
Month Ended March 31 Class A Shares Lehman Long Bond Index
<S> <C> <C>
April 3, 1987 9,600.61 10,000.00
1985 9,394.40 10,165.60
1989 10,307.00 11,126.60
1990 11,350.40 12,337.77
1991 12,324.80 13,298.21
1992 13,657.00 14,805.68
1993 15,383.50 16,967.65
1994 15,677.10 17,156.89
1995 16,666.70 18,706.04
<FN>
* Hypothetical illustration of $10,000 invested in Class A shares at
inception on April 3, 1987, assuming deduction of the maximum 4.00% sales
charge at the time of investment and reinvestment of dividends (after
deduction of applicable sales charges, if any) and capital gains (at net
asset value) through March 31, 1995. The index is unmanaged and is not
subject to the same management and trading expenses of a mutual fund.
The performance of the Portfolio's other classes may be greater or less
than the Class A shares' performance indicated on this chart, depending
on whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
</TABLE>
Performance information is not available for Class Y shares of the
Acquired Fund because, as of the Record Date, no Class Y shares of the
Acquired Fund had been sold.
<PAGE>57
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing investment objectives, policies
and restrictions of the Acquiring Fund and the Acquired Fund is based upon and
qualified in its entirety by the disclosure in the prospectuses of the
Acquiring Fund and the Acquired Fund with respect to the Funds' respective
investment objectives, policies and restrictions. For a full discussion of
these issues as they relate to the Acquiring Fund, refer to the Prospectus of
the Acquiring Fund, which accompanies this Prospectus/Proxy Statement, under
the caption "Investment Objective and Management Policies," and for a
discussion of these issues as they relate to the Acquired Fund, refer to the
Prospectus of the Acquired Fund under the caption "Investment Objectives and
Management Policies."
INVESTMENT OBJECTIVE. The Acquiring Fund and the Acquired Fund have
generally similar investment objectives. The Acquiring Fund 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 the preservation of capital. The
Acquired Fund seeks to provide as high level of monthly income exempt from
federal income taxes and from California personal income taxes as is
consistent with prudent investing. There can be no assurance that either Fund
will be able to achieve its investment objective. Both the Acquiring Fund's
and the Acquired Fund's investment objectives are considered fundamental
policies which cannot be changed without the affirmative vote of a majority,
as defined in the 1940 Act, of the outstanding voting securities of the
respective Fund, which is the lesser of: (i) 67% of the voting securities of
the Fund present at a meeting of shareholders, if the holders of more than 50%
of the outstanding voting securities of such Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities of such
Fund.
PRIMARY INVESTMENTS. The Acquiring Fund operates subject to an
investment policy providing that, under normal market conditions, it 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 California state personal income tax. Such
obligations are issued to raise money for a variety of public projects, such
as health facilities, housing, airports, schools, highways and bridges. The
Acquiring 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 the federal alternative minimum tax), but which is subject to
California state personal income tax. When the Manager believes that market
conditions warrant adoption of a temporary defensive investment posture, the
Acquiring Fund may invest without limit in non-California municipal issuers
and in temporary investments as described below. Similarly, the Acquired Fund
operates subject to a fundamental policy that under normal market conditions
it will seek to invest 100% of its assets, and will invest not less than 80%
of its assets, in municipal
<PAGE>58
obligations the interest on which is exempt from federal income taxes (other
than the alternative minimum tax) and not less than 65% of its assets in
municipal obligations the interest on which is also exempt from California
personal income taxes in the opinion of bond counsel to the issuers. The
Acquired Fund may invest up to 20% of its assets in taxable fixed income
securities, but only in obligations issued or guaranteed by the full faith and
credit of the United States ("U.S. government securities"), and may invest
more than 20% of its assets in U.S. government securities during periods when
in the Manager's opinion a temporary defensive posture is warranted, including
any period when the Acquired Fund's monies available for investment exceed
California's municipal obligations available for purchase that meet the
Acquired Fund's rating, maturity and other investment criteria.
The Acquiring Fund generally will invest at least 80% of its total
assets in investment grade debt obligations rated no lower than Baa, MIG 3 or
Prime-1 by Moody's Investors Services, Inc. ("Moody's") or BBB, SP-2 or A-1 by
Standard & Poor's Corporation ("S&P"), or in unrated obligations of comparable
quality. Unrated obligations will be considered to be of investment grade if
deemed by the Manager to be comparable in quality to instruments so rated, or
if other outstanding obligations of the issuers thereof are rated Baa or
better by Moody's or BBB or better by S&P. The balance of the Acquiring
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. (These securities are sometimes
referred to as junk bonds.) 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.
Low-rated and comparable unrated securities 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 are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the securities. While the market values of low-rated and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than the market values of higher-rated securities, the market value of certain
low-rated and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in general economic conditions
than higher-rated securities. In addition, low-rated securities and
comparable unrated securities generally present a higher degree of credit
risk. Issuers of low-rated and comparable unrated securities are often highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their debt obligations during an
economic downturn or during sustained periods of rising interest rates 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 subordinated to the prior payment of senior
indebtedness. 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
<PAGE>59
repurchase the securities from the holders, such as the Acquiring Fund. If an
issuer exercises these rights during periods of declining interest rates, the
Acquiring Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to the Acquiring Fund.
Municipal bonds purchased by the Acquired Fund must, at the time of
purchase, be investment grade municipal bonds and at least two-thirds of the
Acquired Fund's municipal bonds must be rated in the category of A or better.
Investment grade bonds are those rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P or have an equivalent rating by any nationally recognized
statistical rating organization; pre-refunded bonds escrowed by U.S. Treasury
obligations will be considered AAA rated even though the issuer does not
obtain a new rating. Up to one-third of the assets of the Acquired Fund may
be invested in municipal bonds rated Baa or BBB (this grade, while regarded as
having an adequate capacity to pay interest and repay principal, is considered
to be of medium quality and has speculative characteristics; in addition,
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than is the
case with higher grade bonds) or in unrated municipal bonds if, based upon
credit analysis by the Manager, it is believed that such securities are at
least of comparable quality to those securities in which the Acquired Fund may
invest. After the Acquired Fund purchases a municipal bond, the issuer may
cease to be rated or its rating may be reduced below the minimum required for
purchase. Such an event would not require the elimination of the issue from
the Acquired Fund's portfolio but the Manager will consider such an event in
determining whether the Acquired Fund should continue to hold the security.
The Acquired Fund's short-term municipal obligations will be limited to high
grade obligations (obligations that are secured by the full faith and credit
of the United States or rated MIG1 or MIG2, VMIG1 or VMIG2 or Prime-1 or Aa or
better by Moody's or SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or have
an equivalent rating by any nationally recognized statistical rating
organization or obligations determined by the Manager to be equivalent).
Among the types of short-term instruments in which the Acquired Fund may
invest are floating or variable rate term demand instruments, tax-exempt
commercial paper (generally having a maturity of less than nine months), and
other types of notes generally having maturities of less than three years,
such as Tax Anticipation Notes, Revenue Anticipation Notes, Tax and Revenue
Anticipation Notes and Bond Anticipation Notes. Demand instruments usually
have an indicated maturity of more than one year, but contain a demand feature
that enables the holder to redeem the investment on no more than 30 days'
notice; variable rate demand instruments provide for automatic establishment
of a new interest rate on set dates; floating rate demand instruments provide
for automatic adjustment of their interest rates whenever some other specified
interest rate changes (e.g., the prime rate). The Acquired Fund may purchase
participation interests ("Participations") in variable rate tax-exempt
securities (such as Industrial Development Bonds) owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank that the Manager has determined meets the prescribed
quality standards for the
<PAGE>60
Acquired Fund. Participations will be purchased only if management believes
interest income on such Participations will be tax-exempt when distributed as
dividends to shareholders.
Each Fund's average weighted maturity will vary from time to time
based on the judgment of the Manager. The Acquiring Fund intends to focus on
intermediate- and long-term obligations, that is, obligations with remaining
maturities at the time of purchase of between three and twenty years. The
average maturity of the Acquired Fund's bonds will typically range between
five and thirty years.
The Acquiring 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 property or equipment. Although lease obligations do
not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain non-appropriation clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. In addition
to the non-appropriation risk, these securities represent a relatively new
type of financing that has not yet developed the depth of marketability
associated with more conventional bonds. Although non-appropriation lease
obligations are often secured by the underlying property, disposition of the
property in the event of foreclosure might prove difficult. There is no
limitation on the percentage of the Acquiring Fund's assets that may be
invested in municipal lease obligations. The Acquired Fund does not have an
expressed position with respect to investing in municipal leases.
Each 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 purposes of the federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be subject to a federal
alternative minimum tax to the extent that a 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 purposes of the federal corporate alternative minimum tax. The Acquiring
Fund may invest without limit in debt obligations that are repayable out of
revenue streams generated from economically related projects or facilities or
debt obligations whose issuers are located in the same state. Sizable
investments in such obligations could involve an increased risk to the
Acquiring Fund should any of the related projects or facilities experience
financial difficulties.
Each 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
<PAGE>61
assets that it may invest in the obligations of a single issuer. Each Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of 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, each 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 such 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.
California Municipal Securities. 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 revenues 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 California 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 issuing municipality.
In attempting to achieve its investment objective, the Funds 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. Each Fund will not accrue income with respect to a when-issued
security prior to its stated delivery date. When-issued securities may
decline or appreciate in value before their actual delivery to a Fund. Each
Fund will establish a segregated account with the Fund's custodian consisting
of cash, 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. A
Fund generally will make commitments to purchase California municipal
securities (and other tax-exempt obligations) on a when-issued basis only with
the intention of actually acquiring the securities, but the Fund may sell such
securities before the delivery date if it is deemed advisable.
<PAGE>62
Temporary Investments. Under normal market conditions, the
Acquiring 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 the Manager believes that market conditions
warrant, including when acceptable California municipal securities are
unavailable, the Acquiring Fund may take a temporary defensive posture and
invest without limitation in Temporary Investments. Securities eligible for
short-term investment by the Acquiring Fund under such circumstances 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. Since the
commencement of its operations, the Acquiring Fund has not found it necessary
to invest in taxable Temporary Investments and it is not expected that such
action will be necessary. Similarly, the Acquired Fund may invest up to 20%
of its assets in taxable fixed income securities, but only in U.S. government
securities, and may invest more than 20% of its assets in U.S. government
securities during periods when in the Manager's opinion a temporary defensive
posture is warranted, including any period when the Acquired Fund's monies
available for investments exceed California's municipal obligations available
for purchase that meet the Acquired Fund's rating, maturity and other
investment criteria. To the extent a Fund holds Temporary Investments, it may
not achieve its investment objective.
Financial Futures and Options Transactions. The Acquiring 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 Acquiring 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 appropriate to the reduction of
risks inherent in the management of the Acquiring Fund. The futures contracts
or options on futures contracts that may be entered into by the Acquiring Fund
will be restricted to those that are either based on a municipal bond index or
related to debt securities, the prices of which are anticipated by the Manager
to correlate with the prices of the California municipal securities owned or
to be purchased by the Acquiring Fund. Regulations of the Commodity Futures
Trading Commission applicable to the Acquiring Fund (and the Acquired 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 Acquiring
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
in the accompanying Prospectus of the Acquiring Fund under "Dividends,
Distributions and Taxes."
<PAGE>63
The Acquired Fund may also invest in municipal bond index futures
contracts (currently traded on the Chicago Board of Trade) or in listed
contracts based on U.S. government securities as a hedging policy in pursuit
of its investment objective; provided that immediately thereafter not more
than 33-1/3% of its net assets would be hedged or the amount of margin
deposits on the Acquired Fund's net assets would not exceed 5% of the value of
its total assets. Since any income would be taxable, it is anticipated that
such investments would be made only in those circumstances when the Manager
anticipates the possibility of an extreme change in interest rates or in
market conditions but does not wish to liquidate the Acquired Fund's
securities.
Lending of Portfolio Securities. The Acquiring 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
Acquiring 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 (determined by marking to market
daily) of the loaned securities. The Acquired Fund does not have an expressed
policy regarding lending of portfolio securities. The risks in lending
portfolio securities consist of possible delays in receiving additional
collateral or in recovery of the securities or possible loss of rights in
collateral should the borrower fail financially. Loans will not be made
unless, in the judgment of the Manager, the consideration to be earned from
such loans would justify the risk.
Illiquid Securities. The Acquired Fund will not invest more than
10% of its net assets in illiquid securities, including those that are not
readily marketable or for which there is no established market. The Acquiring
Fund adheres to an operating policy of not investing more than 15% of its net
assets in illiquid securities.
INVESTMENT RESTRICTIONS. Each Fund has adopted the following
investment restrictions for the protection of shareholders. These
restrictions may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the voting securities of the Fund.
1. The Acquiring Fund may not issue senior securities, as defined
in the 1940 Act and the rules and orders thereunder, except insofar as the
Acquiring Fund may be deemed to have issued senior securities by reason
of borrowing money or purchasing securities on a when-issued or delayed-
delivery basis, purchasing or selling futures contracts and options on futures
contracts and other similar instruments, and issuing separate classes of
shares. The Acquired Fund does not have a similar investment restriction.
2. The Acquiring Fund may not invest more than 25% of its total
assets in securities of issuers in the same industry. For purposes of this
limitation, U.S. government
<PAGE>64
securities and securities of state or municipal governments and their
political subdivisions are not considered to be issued by members of any
industry. Similarly, the Acquired Fund may not invest more than 25% of its
total assets taken at market value in any one industry, except that municipal
obligations and securities of the U.S. government, its agencies and
instrumentalities, and California municipal obligations are not considered an
industry for purposes of this limitation.
3. Neither Fund may borrow money, except that a 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
respective Fund's total assets (including, in the case of the Acquiring Fund,
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 a Fund's total assets, such Fund will not make any
additional investments. The Acquired Fund is further prohibited from
mortgaging or pledging its assets, except to secure borrowing permitted by the
previous sentence.
4. Neither Fund may make loans. For the Acquiring Fund, this
restriction does not apply to the purchase of the debt obligations in which
the Fund may invest consistent with its investment objective and policies,
repurchase agreements, and loans of its portfolio securities. For the
Acquired Fund, this restriction does not apply to the purchase of bonds or
other evidences of indebtedness, the entry into repurchase agreements or
deposits with banks, including the Acquired Fund's custodian.
5. The Acquiring Fund may not engage in the business of
underwriting securities issued by other persons, except to the extent that the
Acquiring Fund may technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of portfolio securities.
Similarly, the Acquired Fund may not underwrite the securities of other
issuers.
6. The Acquiring Fund may not purchase or sell real estate, real
estate mortgages, real estate investment trust ("REIT") securities,
commodities or commodity contracts, but this shall not prevent the Acquiring
Fund from investing in securities of issuers engaged in the real estate
business and securities which are secured by real estate or interests therein,
holding or selling real estate received in connection with securities it
holds, or trading in futures contracts and options on futures contracts. The
Acquired Fund may not purchase or hold any real estate, except that it may
invest in securities secured by real estate or interests therein or issued by
persons (other than REITs) which deal in real estate or interests therein, and
may not purchase or sell commodities and commodity contracts, except that it
may invest in or sell municipal bond futures index contracts, provided
immediately thereafter not more than 33-1/3% of its net assets would be hedged
or the amount of margin
<PAGE>65
deposits on the Acquired Fund's existing futures contracts would not exceed 5%
of the value of its total assets.
7. Neither Fund may purchase any securities on margin (except, in
the case of the Acquiring Fund, for such short-term credits as are necessary
for the clearance of purchases and sales of portfolio securities) or sell any
securities short (except, in the case of the Acquiring Fund, against the box).
For purposes of this restriction, the deposit or payment by the Acquiring Fund
of initial 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. The Acquired Fund will not invest more than 10% of its net
assets in illiquid securities, including those that are not readily marketable
or for which there is no established market. The Acquiring Fund may not
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. This is not
a fundamental investment restriction with respect to the Acquiring Fund and
may be changed by the Acquiring Fund's Board of Directors at any time.
9. The Acquired Fund may not write or purchase put, call, straddle
or spread options. The Acquiring Fund may not 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. This is not a fundamental investment restriction with respect to
the Acquiring Fund and may be changed by the Acquiring Fund's Board of
Directors at any time.
Other Non-Fundamental Investment Restrictions
1. The Acquiring Fund may not 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. This is not a fundamental investment restriction and
may be changed by the Acquiring Fund's Board of Directors at any time. For
purposes of this restriction, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and originators of
underlying assets. Similarly, as a matter of operating policy, the Acquired
Fund will not invest more than 5% of its assets in unseasoned issuers,
including their predecessors, which have been in operation for less than three
years.
2. The Acquiring Fund may not invest in companies for the purpose
of exercising control. This is not a fundamental investment restriction and
may be changed by the Acquiring Fund's Board of Directors at any time. The
Acquired Fund does not have a similar investment restriction.
<PAGE>66
3. The Acquiring Fund may not invest in securities of other
investment companies, except as they may be acquired as part of a merger,
consolidation or acquisition of assets. This is not a fundamental investment
restriction and may be changed by the Acquiring Fund's Board of Directors at
any time. The Acquired Fund does not have a similar investment restriction.
4. The Acquired Fund, as a matter of operating policy, will not
purchase oil, gas, or other mineral leases, rights or royalty contracts or
exploration or development programs, except that the Acquired Fund may invest
in the securities of issuers which operate, invest in, or sponsor such
programs. The Acquiring Fund may not purchase or sell oil and gas interests.
This is not a fundamental investment restriction with respect to the Acquiring
Fund and may be changed by the Acquiring Fund's Board of Directors at any
time.
INFORMATION ON SHAREHOLDERS' RIGHTS
General. The Acquiring Fund and Smith Barney Muni Funds are open-
end, management investment companies registered under the 1940 Act, which
continuously offer to sell shares at their current net asset value. The
Acquiring Fund is a Maryland corporation which was incorporated on February
17, 1984 and is governed by its Articles of Incorporation, By-Laws and Board
of Directors. The Acquired Fund is a series of Smith Barney Muni Funds, which
was organized on August 14, 1985 under the laws of the Commonwealth of
Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." Smith Barney Muni Funds is governed by its Declaration of
Trust, By-Laws and Trustees. Each Fund is also governed by applicable state
and federal law. The Acquiring Fund has an authorized capital of 500,000,000
shares of common stock with a par value of $.01 per share. The beneficial
interest in the Acquired Fund is divided into shares, all with a par value of
$.001 per share. The number of authorized shares of Smith Barney Muni Funds
that may be issued is unlimited. The Trustees of Smith Barney Muni Funds have
authorized the issuance of twenty series of shares, each representing shares
in one of twenty separate portfolios, and may authorize the issuance of
additional series of shares in the future. In both the Acquiring Fund and the
Acquired Fund, Class A shares, Class B shares and Class C shares represent
interests in the assets of the Fund and have identical voting, dividend,
liquidation and other rights on the same terms and conditions except that
expenses related to the distribution of each class of shares are borne solely
by each class and each class of shares has exclusive voting rights with
respect to provisions of each Fund's Rule 12b-1 distribution plan which
pertains to a particular class. Notwithstanding the foregoing, Class B shares
of either Fund will convert automatically to Class A shares of such Fund,
based upon relative net asset value, eight years after the date of the
original purchase of such shares. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain
portion of Class B shares that
<PAGE>67
have been acquired through reinvestment of dividends and distributions will be
converted to Class A shares of the respective Fund at that time.
Directors/Trustees. The By-Laws of the Acquiring Fund provide that
Directors shall be elected by written ballot at any meeting of shareholders
held for that purpose, and the term of office of each director shall be from
the time of his or her election and qualification until his or her successor
shall have been elected and shall have qualified or until his death,
resignation or removal, or as otherwise provided by law. The Declaration of
Trust of Smith Barney Muni Funds provides that the term of office of each
Trustee shall be from the time of his or her election until the termination of
the Trust or until such Trustee sooner dies, resigns or is removed. Any
Director of the Acquiring Fund may be removed by the vote of at least a
majority of votes then entitled to be cast for the election of Directors. A
Trustee of Smith Barney Muni Funds may be removed with cause by written
instrument, signed by at least two-thirds of the remaining Trustees.
Vacancies on the Boards of either the Acquiring Fund or Smith Barney Muni
Funds may be filled by the Directors or Trustees, as the case may be,
remaining in office. A meeting of shareholders will be required for the
purpose of electing additional Directors or Trustees whenever fewer than two-
thirds of the Directors of the Acquiring Fund or a majority of the Trustees of
Smith Barney Muni Funds then in office were elected by shareholders.
Voting Rights. Neither the Acquiring Fund nor the Acquired Fund
holds a meeting of shareholders annually, and there normally is no meeting of
shareholders for the purpose of electing Directors/Trustees unless and until
such time as less than two-thirds of the Directors or a majority of the
Trustees holding office have been elected by shareholders. A meeting of
shareholders of the Acquired Fund or the Acquiring Fund, for any purpose, must
be called upon the written request of shareholders holding at least 25% of
such Fund's outstanding shares, except that a meeting of shareholders of the
Acquiring Fund for the purpose of removal of a Director must be called upon
the written request of shareholders holding at least 10% of the Acquiring
Fund's outstanding shares. On each matter submitted to a vote of the
shareholders of the Acquired Fund or the Acquiring Fund, each shareholder is
entitled to one vote for each whole share owned and a proportionate,
fractional vote for each fractional share outstanding in the shareholder's
name on the Fund's books. With respect to the Acquiring Fund, a majority of
the votes cast on an action at a shareholder meeting at which a quorum is
present shall decide any questions except when a different vote is required or
permitted by any provision of the 1940 Act or other applicable law or as may
otherwise be set forth in the Acquiring Fund's organizational documents, or in
cases where the vote is submitted to the holders of one or more but not all
classes, a majority of the votes cast of the particular class affected by the
matter shall decide such matter. With respect to matters relating to Smith
Barney Muni Funds requiring a majority shareholder vote as described in the
Declaration of Trust, a majority of shares represented in person or by proxy
and entitled to vote at a meeting of shareholders at which a quorum is present
shall decide such matter. In cases where the vote is submitted to the holders
of one or more but not all
<PAGE>68
series or classes, a majority of the outstanding shares of the particular
series or class affected by the matter shall decide such matter.
Liquidation or Dissolution. In the event of the liquidation or
termination of any of the portfolios of Smith Barney Muni Funds or the
liquidation or dissolution of the Acquiring Fund, the shareholders of the
respective Fund are entitled to receive, when, and as declared by the Trustees
or Directors, as the case may be, the excess of the assets over the
liabilities belonging to the liquidated or terminated portfolio of Smith
Barney Muni Funds or the liquidated or dissolved Acquiring Fund, as the case
may be. The assets so distributed to shareholders of Smith Barney Muni Funds
will be distributed among the shareholders in proportion to the number of
shares of the particular class held by them and recorded on the books of the
liquidated or terminated portfolio of the Smith Barney Muni Funds. The assets
so distributed to shareholders of the Acquiring Fund will be distributed among
the shareholders in proportion to the number of shares of the particular class
held by them and recorded on the books of the Acquiring Fund.
Liability of Directors/Trustees. The Articles of Incorporation of
the Acquiring Fund provide that the Directors and officers shall not be liable
for monetary damages as a Director or officer, except to the extent such
exemption is not permitted by law. The Acquiring Fund's By-Laws further
provide that the Acquiring Fund shall indemnify each Director and officer to
the fullest extent permitted by Maryland General Corporation Law. Under the
Declaration of Trust and By-Laws of the Smith Barney Muni Funds, a Trustee
will be personally liable only for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee. The Declaration of Trust further provides
that Trustees and officers will be indemnified for the expenses of litigation
against them unless it is determined that the person did not act in good faith
in the reasonable belief that the person's actions were in or not opposed to
the best interest of the Smith Barney Muni Funds or the person's conduct is
determined to constitute willful misfeasance, bad faith, gross negligence or
reckless disregard of the person's duties.
Rights of Inspection. Maryland law permits any shareholder of the
Acquiring Fund or any agent of such shareholder to inspect and copy during the
Acquiring Fund's usual business hours the Acquiring Fund's By-Laws, minutes of
shareholder proceedings, annual statements of the Acquiring Fund's affairs and
voting trust agreements on file at its principal office. Shareholders of
Smith Barney Muni Funds have the same inspection rights as are permitted
shareholders of a Massachusetts corporation under Massachusetts corporate law.
Currently, each shareholder of a Massachusetts corporation is permitted to
inspect the records, accounts and books of a corporation for any legitimate
business purpose.
Shareholder Liability. Under Maryland law, the Acquiring Fund's
shareholders do not have personal liability for the Acquiring Fund's corporate
acts and
<PAGE>69
obligations. Shares of the Acquiring Fund issued to the shareholders of the
Acquired Fund in the Reorganization will be fully paid and nonassessable when
issued, transferable without restrictions and will have no preemptive rights.
Under Massachusetts law, shareholders of the Acquired Fund may, under certain
circumstances, be held personally liable for the obligations of the Acquired
Fund. Smith Barney Muni Funds' Declaration of Trust, however, disclaims
shareholder liability for acts or obligations of the Acquired Fund and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Fund. The Declaration of Trust
also provides indemnification out of the property of the Acquired Fund for all
losses and expenses of any shareholder held personally liable for the
obligations of the Acquired Fund.
The foregoing is only a summary of certain characteristics of the
operations of the Acquiring Fund and the Acquired Fund. The foregoing is not
a complete description of the documents cited. Shareholders should refer to
the provisions of the corporate documents or trust documents and state laws
governing each Fund for a more thorough description.
ADDITIONAL INFORMATION ABOUT
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
AND
SMITH BARNEY MUNI FUNDS
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. Information about the
Acquiring Fund is incorporated herein by reference from its current Prospectus
dated April 29, 1995, as supplemented by Prospectus Supplements dated May 25,
1995, July 11, 1995, July 15, 1995 and July 20, 1995 and its Statement of
Additional Information dated April 29, 1995 as supplemented on July 11, 1995.
A copy of such Prospectus accompanies this Prospectus/Proxy Statement and a
copy of the Statement of Additional Information is available upon request and
without charge by writing to the Acquiring Fund at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling (800) 224-7523.
SMITH BARNEY MUNI FUNDS. Information about the Acquired Fund is
incorporated by reference from its current Prospectus dated November 7, 1994,
as supplemented by a Prospectus Supplement dated July 26, 1995, and Smith
Barney Muni Fund's Statement of Additional Information dated July 31, 1995.
A copy of such Prospectus and Statement of Additional Information is available
upon request and without charge by writing to the Acquired Fund at the address
listed on the cover page of this Prospectus/Proxy Statement or by calling
(800) 224- 7523.
<PAGE>70
Both the Acquiring Fund and Smith Barney Muni Funds are subject to
the informational requirements of the Exchange Act and in accordance therewith
file reports and other information including proxy material, reports and
charter documents with the SEC. These materials can be inspected and copies
obtained at the Public Reference Facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the New York Regional Office of
the SEC at 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can also be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services, SEC,
Washington, D.C. 20549 at prescribed rates.
OTHER BUSINESS
The Trustees of Smith Barney Muni Funds do not intend to present any
other business at the Meeting. If, however, any other matters are properly
brought before the Meeting, the persons named in the accompanying form of
proxy will vote thereon in accordance with their judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of Smith Barney Muni Funds to
be used at the Special Meeting of Shareholders of the Acquired Fund to be held
at 3:30 p.m. on November 14, 1995, at 388 Greenwich Street, New York, New York
10013 and at any adjournment or adjournments thereof. This Prospectus/Proxy
Statement, along with a Notice of the Meeting and a proxy card, is first being
mailed to shareholders of the Acquired Fund on or about October 26, 1995.
Only shareholders of record as of the close of business on the Record Date
will be entitled to notice of, and to vote at, the Meeting or any adjournment
thereof. The holders of one-third of the shares of the Acquired Fund
outstanding at the close of business on the Record Date present in person or
represented by proxy will constitute a quorum for the Meeting. For purposes
of determining a quorum for transacting business at the Meeting, abstentions
and broker "non-votes" (that is, proxies from brokers or nominees indicating
that such persons have not received instructions from the beneficial owner or
other persons entitled to vote shares on a particular matter with respect to
which the brokers or nominees do not have discretionary power) will be treated
as shares that are present but which have not been voted. For this reason,
abstentions and broker non-votes will have the effect of a "no" vote for
purposes of obtaining the requisite approval of the Plan. If the enclosed
form of proxy is properly executed and returned in time to be voted at the
Meeting, the proxies named therein will vote the shares represented by the
proxy in accordance with the instructions marked thereon. Unmarked proxies
will be voted FOR approval of the proposed Reorganization and FOR approval of
any other matters deemed appropriate. A proxy may be revoked at any time on
or before the Meeting by written notice to the
<PAGE>71
Secretary of the Acquired Fund, Christina T. Sydor, Esq., 388 Greenwich
Street, New York, New York 10013. Unless revoked, all valid proxies will be
voted in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding shares of the
Acquired Fund, which is the lesser of: (i) 67% of the voting securities of the
Acquired Fund present at the Meeting, if the holders of more than 50% of the
outstanding voting securities of the Acquired Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities of the
Acquired Fund. Shareholders of Class A, Class B and Class C shares of the
Acquired Fund will vote together as a single class. Shareholders of the
Acquired Fund are entitled to one vote for each share. Fractional shares are
entitled to proportional voting rights.
Proxy solicitations will be made primarily by mail, but proxy
solicitations also may be made by telephone, telegraph or personal interviews
conducted by officers and employees of Smith Barney and its affiliates and/or
by TSSG. In addition, Applied Mailing Systems, Inc., an affiliate of TSSG
("Applied Mailing"), or an agent of Applied Mailing, may call shareholders to
ask if they would be willing to have their votes recorded by telephone. The
latter telephone voting procedure is designed to authenticate the shareholder's
identity by asking the shareholder to provide his or her social security
number (in the case of an individual) or taxpayer identification number (in
the case of an entity). The shareholder's telephone vote will be recorded and
a confirmation will be sent to the shareholder to ensure that the vote has
been taken in accordance with the shareholder's instructions. Although a
shareholder's vote may be taken by telephone, each shareholder will receive a
copy of this Prospectus/Proxy Statement and may vote by mail using the
enclosed proxy card. The Acquired Fund has been advised by Massachusetts
counsel that this telephonic voting system complies with Massachusetts law.
The aggregate cost of solicitation of the shareholders of the Acquired Fund is
expected to be approximately $4,350. Expenses of the Reorganization,
including the costs of the proxy solicitation and the preparation of
enclosures to the Prospectus/Proxy Statement, reimbursement of expenses of
forwarding solicitation material to beneficial owners of shares of the
Acquired Fund and expenses incurred in connection with the preparation of this
Prospectus/Proxy Statement will be borne by the Acquiring Fund and the
Acquired Fund in proportion to their assets.
In the event a quorum necessary for a shareholders meeting is not
present or that sufficient votes to approve the Reorganization are not
received by November 14, 1995, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the
information to be
<PAGE>72
provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at
the Meeting. The persons named as proxies will vote upon a decision to
adjourn the Meeting.
The votes of the shareholders of the Acquiring Fund are not being
solicited by this Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The statement of assets and liabilities of the Acquired Fund,
including the schedule of investments, as of March 31, 1995, the related
statement of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended and the
financial highlights for each of the years in the five-year period then ended,
have been incorporated by reference into this Prospectus/Proxy Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent accountants,
given on the authority of such firm as experts in accounting and auditing.
The statement of assets and liabilities of the Acquiring Fund, including the
schedule of investments, as of February 28, 1995, the related statement of
operations for the year then ended, the statements of changes in net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the ten-year period then ended, have been
incorporated by reference into this Prospectus/Proxy Statement in reliance
upon the report of Coopers & Lybrand L.L.P., independent accountants, and upon
the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the
Acquiring Fund will be passed upon by Willkie Farr & Gallagher, One Citicorp
Center, 153 East 53rd Street, New York, New York 10022. In rendering such
opinion, Willkie Farr & Gallagher may rely on an opinion of Venable, Baetjer
and Howard, LLP as to certain matters under Maryland law.
THE BOARD OF TRUSTEES OF THE SMITH BARNEY MUNI FUNDS, INCLUDING THE
INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS APPROVAL OF THE PLAN, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR
OF APPROVAL OF THE PLAN.
<PAGE>73
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this 23rd day of October, 1995, by and between Smith Barney California
Municipals Fund Inc., a Maryland corporation with its principal place of
business at 388 Greenwich Street, New York, New York 10013 (the "Acquiring
Fund"), and Smith Barney Muni Funds, a Massachusetts business trust, with its
principal place of business at 388 Greenwich Street, New York, New York 10013,
on behalf of its California Portfolio (the "Acquired Fund").
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of
the United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of all or
substantially all of the assets of the Acquired Fund in exchange for Class A,
Class B and Class C shares of common stock of the Acquiring Fund
(collectively, the "Acquiring Fund Shares" and each, an "Acquiring Fund
Share") and the assumption by the Acquiring Fund of scheduled liabilities of
the Acquired Fund and the distribution, after the Closing Date herein referred
to, of Acquiring Fund Shares to the shareholders of the Acquired Fund in
liquidation of the Acquired Fund and termination of the Acquired Fund, all
upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquiring Fund and Smith Barney Muni Funds are
registered investment companies of the management type and the Acquired Fund
owns securities that generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Acquiring Fund is authorized to issue shares of common
stock and Smith Barney Muni Funds is authorized to issue shares of beneficial
interest in respect of its sub-trusts;
WHEREAS, the Board of Trustees of Smith Barney Muni Funds has
determined that the exchange of all or substantially all of the assets and
scheduled liabilities of the Acquired Fund for Acquiring Fund Shares and the
assumption of such liabilities by the Acquiring Fund is in the best interests
of the Acquired Fund's shareholders and that the interests of the existing
shareholders of the Acquired Fund would not be diluted as a result of this
transaction;
WHEREAS, the Board of Directors of the Acquiring Fund has determined
that the exchange of all or substantially all the assets and scheduled
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption
of such liabilities by the Acquiring Fund is in the best interests of the
Acquiring Fund's shareholders and that the interests of the
<PAGE>74
existing shareholders of the Acquiring Fund would not be diluted as a result
of this transaction.
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter set forth, the parties hereto covenant
and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ACQUIRING FUND
SHARES AND ASSUMPTION OF SCHEDULED LIABILITIES OF THE ACQUIRED FUND AND
LIQUIDATION AND TERMINATION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on
the basis of the representations and warranties contained herein, Smith Barney
Muni Funds agrees on behalf of the Acquired Fund to transfer the Acquired
Fund's assets as set forth in paragraph 1.2 to the Acquiring Fund, and the
Acquiring Fund agrees in exchange therefor: (i) to deliver to the Acquired
Fund the number of Class A Acquiring Fund Shares, including fractional Class A
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets attributable to its Class A shares, computed in the manner and as
of the time and date set forth in paragraph 2.1, by the net asset value of one
Class A Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; (ii) to deliver to the Acquired Fund the
number of Class B Acquiring Fund Shares, including fractional Class B
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets attributable to its Class B shares, computed in the manner and as
of the time and date set forth in paragraph 2.1, by the net asset value of one
Class B Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; (iii) to deliver to the Acquired Fund the
number of Class C Acquiring Fund Shares, including fractional Class C
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets attributable to its Class C shares, computed in the manner and as
of the time and date set forth in paragraph 2.1, by the net asset value of one
Class C Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; and (iv) to assume scheduled liabilities of
the Acquired Fund, as set forth in paragraph 1.3. Such transactions shall
take place at the closing provided for in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired Fund to be acquired by the
Acquiring Fund shall consist of all or substantially all property, including,
without limitation, all cash, securities and dividends or interest receivables
which are owned by the Acquired Fund and any deferred or prepaid expenses
shown as an asset on the books of the Acquired Fund on the closing date
provided in paragraph 3.1 (the "Closing Date").
(b) The Acquired Fund has provided the Acquiring Fund with a
list of all of the Acquired Fund's assets as of the date of execution of this
Agreement. The
<PAGE>75
Acquired Fund reserves the right to sell any of these securities but will not,
without the prior approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest. The Acquiring Fund will, within a reasonable time prior
to the Closing Date, furnish the Acquired Fund with a statement of the
Acquiring Fund's investment objectives, policies and restrictions and a list
of the securities, if any, on the Acquired Fund's list referred to in the
first sentence of this paragraph which do not conform to the Acquiring Fund's
investment objectives, policies and restrictions. In the event that the
Acquired Fund holds any investments which the Acquiring Fund may not hold, the
Acquired Fund will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the portfolios of the Acquired Fund and the
Acquiring Fund, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Acquired Fund, if requested by the Acquiring Fund, will
dispose of and/or reinvest a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
1.3. The Acquired Fund will endeavor to discharge all the Acquired
Fund's known liabilities and obligations prior to the Closing Date. The
Acquiring Fund shall assume all liabilities, expenses, costs, charges and
reserves reflected on an unaudited Statement of Assets and Liabilities of the
Acquired Fund prepared by Smith Barney Mutual Fund Management Inc. (the
"Manager"), as adviser of the Acquired Fund, as of the Valuation Date (as
defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Acquired Fund reflected in
that unaudited Statement of Assets and Liabilities and shall not assume any
other liabilities, whether absolute or contingent, not reflected thereon.
1.4. As provided in paragraph 3.3, as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), the Acquired Fund
will liquidate and distribute pro rata to the Acquired Fund's shareholders of
record determined as of the close of business on the Closing Date (the
"Acquired Fund Shareholders"), the Acquiring Fund Shares it receives pursuant
to paragraph 1.1. Shareholders of Class A, Class B and Class C of the
Acquired Fund shall receive Class A, Class B and Class C shares,
respectively, of the Acquiring Fund. Such liquidation and distribution will
be accomplished by the transfer of the Acquiring Fund Shares then credited to
the account of the Acquired Fund on the books of the Acquiring Fund to open
accounts on the share records of the Acquiring Fund in the name of the
Acquired Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Acquired Fund will simultaneously be cancelled on the books of
the Acquired Fund, although any outstanding share certificates representing
interests in the Acquired Fund will represent a number of Acquiring Fund
Shares after the Closing Date as determined in accordance with paragraph 1.1.
The Acquiring Fund shall not issue certificates representing the Acquiring
Fund Shares in connection with such exchange.
<PAGE>76
1.5. Ownership of Acquiring Fund Shares will be shown on the books
of the Acquiring Fund's transfer agent. Acquiring Fund Shares will be issued
in the manner described in the Acquiring Fund's current prospectus and
statement of additional information.
1.6. Any transfer taxes payable upon issuance of the Acquiring Fund
Shares in a name other than the registered holder of the Acquired Fund Shares
on the books of the Acquired Fund as of that time shall, as a condition of
such issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7. Any reporting responsibility of the Acquired Fund is and shall
remain the responsibility of the Acquired Fund up to and including the Closing
Date and such later dates on which the Acquired Fund is terminated.
1.8. The Acquired Fund shall, following the Closing Date and the
making of all distributions pursuant to paragraph 1.4, be terminated under the
laws of the Commonwealth of Massachusetts and in accordance with its governing
documents.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") on
the Closing Date (such time and date being hereinafter called the "Valuation
Date"), using the valuation procedures set forth in the Acquiring Fund's then
current prospectus or statement of additional information.
2.2. The net asset value of Acquiring Fund Shares shall be the net
asset value per share computed as of the close of regular trading on the NYSE
on the Valuation Date, using the valuation procedures set forth in the
Acquiring Fund's then current prospectus or statement of additional
information.
2.3. All computations of value shall be made by the Manager in
accordance with its regular practice as pricing agent for the Acquired Fund
and the Acquiring Fund, respectively.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be November 17, 1995, or such later
date as the parties may agree to in writing. All acts taking place at the
Closing shall be deemed to take place simultaneously as of the close of
business on the Closing Date unless otherwise provided. The Closing shall be
held as of 5:00 p.m. at the offices of Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013, or at such other time and/or place as the
parties may agree.
<PAGE>77
3.2. In the event that on the Valuation Date (a) the NYSE or
another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereon shall be
restricted or (b) trading or the reporting of trading on the NYSE or elsewhere
shall be disrupted so that accurate appraisal of the value of the net assets
of the Acquiring Fund or the Acquired Fund is impracticable, the Closing Date
shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
3.3. Smith Barney Muni Funds shall deliver on behalf of the
Acquired Fund at the Closing a list of the names and addresses of the Acquired
Fund's Shareholders and the number and percentage ownership of outstanding
shares owned by each such shareholder immediately prior to the Closing,
certified on behalf of the Acquired Fund by the Chairman of the Board or the
President of Smith Barney Muni Funds. The Acquiring Fund shall issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited to
the Acquired Fund's account on the Closing Date to the Secretary of Smith
Barney Muni Funds, or provide evidence satisfactory to Smith Barney Muni Funds
that such Acquiring Fund Shares have been credited to the Acquired Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts or other documents as such other party or its
counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. Smith Barney Muni Funds and the Acquired Fund represent and
warrant to the Acquiring Fund as follows:
(a) The Acquired Fund is a portfolio of Smith Barney Muni Funds,
which is a business trust, duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts;
(b) Smith Barney Muni Funds is a registered investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), is in full force and effect;
(c) Smith Barney Muni Funds is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Declaration of Trust or By-laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which Smith Barney Muni Funds or the
Acquired Fund is a party or by which it is bound;
<PAGE>78
(d) Smith Barney Muni Funds has no material contracts or other
commitments (other than this Agreement) which will be terminated with
liability to the Acquired Fund prior to the Closing Date;
(e) No litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to Smith
Barney Muni Fund's knowledge threatened against Smith Barney Muni Funds with
respect to the Acquired Fund or any of the Acquired Fund's properties or
assets (other than that previously disclosed to the other party to the
Agreement) which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business. Smith Barney
Muni Funds or the Acquired Fund know of no facts which might form the basis
for the institution of such proceedings and is not party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects the Acquired Fund's business or the
ability of Smith Barney Muni Funds on behalf of the Acquired Fund to
consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the Acquired Fund
for each of the seven fiscal years ended March 31, 1995 and for the period
from April 3, 1987 (commencement of operations) to March 31, 1988 have been
audited by KPMG Peat Marwick LLP, independent accountants, and are in
accordance with generally accepted accounting principles consistently applied,
and such statements (copies of which have been furnished to the Acquiring
Fund) fairly reflect the financial condition of the Acquired Fund as of such
dates, and there are no known contingent liabilities of the Acquired Fund as
of such dates not disclosed therein;
(g) The Acquired Fund will file its final federal and other tax
returns for the period ending on the Closing Date in accordance with the Code.
At the Closing Date, all federal and other tax returns and reports of the
Acquired Fund required by law then to have been filed prior to the Closing
Date shall have been filed, and all federal and other taxes shown as due on
such returns shall have been paid so far as due, or provision shall have been
made for the payment thereof and, to the best of the Acquired Fund's
knowledge, no such return is currently under audit and no assessment has been
asserted with respect to such returns;
(h) For the most recent fiscal year of its operation, the Acquired
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company;
(i) All issued and outstanding shares of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable. All of the issued and outstanding shares of the
Acquired Fund will, at the time of Closing, be held by the persons and in the
amounts set forth in the records of the transfer agent as
<PAGE>79
provided in paragraph 3.3. The Acquired Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any shares of
the Acquired Fund, nor is there outstanding any security convertible into any
shares of the Acquired Fund (other than Class B shares of the Acquired Fund
which, under certain circumstances, are convertible into Class A shares of the
Acquired Fund);
(j) At the Closing Date, the Acquired Fund will have good and
marketable title to its assets to be transferred to the Acquiring Fund
pursuant to paragraph 1.2 and full right, power and authority to sell, assign,
transfer and deliver such assets hereunder and, upon delivery and payment for
such assets, the Acquiring Fund will acquire good and marketable title
thereto, subject to no restrictions on the full transfer thereof, including
such restrictions as might arise under the Securities Act of 1933, as amended
(the "1933 Act"), other than as disclosed to the Acquiring Fund;
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action on the part of the Smith Barney
Muni Funds' Board of Trustees, and subject to the approval of the Acquired
Fund's shareholders, this Agreement, assuming due authorization, execution and
delivery by the Acquiring Fund, will constitute a valid and binding obligation
of the Acquired Fund, enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
(l) The information to be furnished by the Acquired Fund for use in
no-action letters, applications for exemptive orders, registration statements,
proxy materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto; and
(m) The proxy statement of the Acquired Fund (the "Proxy
Statement") to be included in the Registration Statement referred to in
paragraph 5.7 (other than information therein that relates to the Acquiring
Fund) will, on the effective date of the Registration Statement and on the
Closing Date, not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such statements
were made, not misleading.
4.2. The Acquiring Fund represents and warrants to the Smith Barney
Muni Funds and to the Acquired Fund as follows:
(a) The Acquiring Fund is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland;
<PAGE>80
(b) The Acquiring Fund is a registered investment company
classified as a management company of the open-end type and its registration
with the Commission as an investment company under the 1940 Act is in full
force and effect;
(c) The current prospectus and statement of additional information
of the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not materially misleading;
(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets;
(e) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Articles of Incorporation or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking with respect to the Acquiring
Fund to which the Acquiring Fund is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against the Acquiring Fund or any of the Acquiring Fund's properties or
assets. The Acquiring Fund knows of no facts which might form the basis for
the institution of such proceedings and the Acquiring Fund is not a party to
or subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects the Acquiring Fund's
business or ability to consummate the transactions contemplated herein;
(g) The Statement of Assets and Liabilities of the Acquiring Fund
for the ten fiscal years ended February 28, 1995 have been audited by Coopers
& Lybrand L.L.P., independent accountants, and are in accordance with
generally accepted accounting principles consistently applied, and such
statements (copies of which have been furnished to the Acquired Fund) fairly
reflect the financial condition of the Acquiring Fund as of such dates, and
there are no known contingent liabilities of the Acquiring Fund as of such
dates not disclosed therein;
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to have been filed by such
date shall have been filed, and all federal and other taxes shown as due on
said returns and reports shall have been paid so far as due, or provision
shall have been made for the payment thereof and, to the best of the Acquiring
Fund's knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
<PAGE>81
(i) For the most recent fiscal year of its operation, the Acquiring
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company and the Acquiring Fund intends
to do so in the future;
(j) At the date hereof, all issued and outstanding shares of the
Acquiring Fund are, and at the Closing Date will be, duly and validly issued
and outstanding, fully paid and non-assessable. The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for or
purchase any shares of the Acquiring Fund, nor is there outstanding any
security convertible into shares of the Acquiring Fund (other than Class B
shares of the Acquiring Fund which, under certain circumstances, are
convertible into Class A shares of the Acquiring Fund);
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action, if any, on the part of the
Acquiring Fund's Board of Directors, and this Agreement, assuming due
authorization, execution and delivery by the Acquired Fund, constitutes a
valid and binding obligation of the Acquiring Fund, enforceable in accordance
with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights and to general equity principles;
(l) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to
the terms of this Agreement, will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly issued
Acquiring Fund Shares, and will be fully paid and non-assessable with no
personal liability attaching to the ownership thereof;
(m) The information to be furnished by the Acquiring Fund for use
in no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
(n) The Proxy Statement to be included in the Registration
Statement (only insofar as it relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements were made,
not misleading; and
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act
and such of the state
<PAGE>82
Blue Sky or securities laws as it may deem appropriate in order to continue
the Acquiring Fund's operations after the Closing Date.
5. COVENANTS OF THE ACQUIRED FUND, SMITH BARNEY MUNI FUNDS AND THE ACQUIRING
FUND
5.1. The Acquiring Fund and Smith Barney Muni Funds on behalf of
the Acquired Fund each will operate its business in the ordinary course
between the date hereof and the Closing Date. It is understood that such
ordinary course of business will include the declaration and payment of
customary dividends and distributions and any other dividends and
distributions deemed advisable, in each case payable either in cash or in
additional shares.
5.2. The Acquired Fund will call a meeting of its shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein.
5.3. The Acquired Fund covenants that the Acquiring Fund Shares to
be issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this
Agreement.
5.4. The Acquired Fund will assist the Acquiring Fund in obtaining
such information as the Acquiring Fund reasonably requests concerning the
beneficial ownership of the Acquired Fund's shares.
5.5. Subject to the provisions of this Agreement, the Acquiring
Fund and Smith Barney Muni Funds on behalf of the Acquired Fund, each will
take, or cause to be taken, all action, and do or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6. As promptly as practicable, but in any case within sixty days
after the Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in
such form as is reasonably satisfactory to the Acquiring Fund, a statement of
the earnings and profits of the Acquired Fund for federal income tax purposes
which will be carried over to the Acquiring Fund as a result of Section 381 of
the Code and which will be certified by the Chairman of the Board or President
and the Treasurer of Smith Barney Muni Funds.
5.7. The Acquired Fund will provide the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus (the
"Prospectus") which will include the Proxy Statement, referred to in paragraph
4.1(m), all to be included in a Registration Statement on Form N-14 of the
Acquiring Fund (the "Registration Statement"),
<PAGE>83
in compliance with the 1933 Act, the Securities Exchange Act of 1934 (the
"1934 Act") and the 1940 Act in connection with the meeting of the Acquired
Fund's shareholders to consider approval of this Agreement and the
transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH BARNEY MUNI FUNDS IN RESPECT
OF THE ACQUIRED FUND
The obligations of Smith Barney Muni Funds on behalf of the Acquired
Fund to consummate the transactions provided for herein shall be subject, at
its election, to the performance by the Acquiring Fund of all of the
obligations to be performed by them hereunder on or before the Closing Date
and, in addition thereto, the following further conditions:
6.1. All representations and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;
6.2. The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its Chairman of the Board, President or
Vice President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to the Acquired Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquiring Fund made in
this Agreement are true and correct in all material respects at and as of the
Closing Date, except as they may be affected by the transactions contemplated
by this Agreement; and
6.3. The Acquired Fund shall have received on the Closing Date a
favorable opinion from Willkie Farr & Gallagher, counsel to the Acquiring
Fund, dated as of the Closing Date, in a form reasonably satisfactory to
Christina T. Sydor, Esq., Secretary of the Acquired Fund, covering the
following points:
That (a) the Acquiring Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland; (b) the Acquiring Fund
is an open-end management investment company registered under the 1940
Act; (c) this Agreement, the Reorganization provided for hereunder and
the execution of this Agreement have been duly authorized and approved by
all requisite action of the Acquiring Fund, and this Agreement has been
duly executed and delivered by the Acquiring Fund and, assuming due
authorization by Smith Barney Muni Funds on behalf of the Acquired Fund,
is a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms against the assets of the Acquiring Fund,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general
<PAGE>84
equity principles; and (d) the Acquiring Fund Shares to be issued to the
Acquired Fund for distribution to its shareholders pursuant to this Agreement
have been, to the extent of the number of Acquiring Fund Shares of the
particular class authorized to be issued by the Acquiring Fund in its Articles
of Incorporation and then unissued, duly authorized and, subject to the
receipt by the Acquiring Fund of consideration equal to the respective net
asset values thereof (but in no event less than the par value thereof), such
Acquiring Fund Shares, when issued in accordance with this Agreement, will be
validly issued and fully paid and non-assessable.
Such opinion may state that it is solely for the benefit of Smith
Barney Muni Funds, its Trustees and its officers. Such counsel may rely, as
to matters governed by the laws of the State of Maryland, on an opinion of
Maryland counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by
Smith Barney Muni Funds and the Acquired Fund of all the obligations to be
performed by them hereunder on or before the Closing Date and, in addition
thereto, the following conditions:
7.1. All representations and warranties of Smith Barney Muni Funds
and the Acquired Fund contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the Closing
Date with the same force and effect as if made on and as of the Closing Date;
7.2. Smith Barney Muni Funds on behalf of the Acquired Fund shall
have delivered to the Acquiring Fund a statement of the Acquired Fund's assets
and liabilities, together with a list of the Acquired Fund's portfolio
securities showing the tax basis of such securities by lot and the holding
periods of such securities, as of the Closing Date, certified by the Treasurer
or Assistant Treasurer of Smith Barney Muni Funds;
7.3. Smith Barney Muni Funds on behalf of the Acquired Fund shall
have delivered to the Acquiring Fund on the Closing Date a certificate
executed in its name by its Chairman of the Board, President or Vice President
and its Treasurer or Assistant Treasurer, in form and substance satisfactory
to the Acquiring Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Smith Barney Muni Funds and the Acquired
Fund made in this Agreement are true and correct in all material respects at
and as of the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement; and
<PAGE>85
7.4. The Acquiring Fund shall have received on the Closing Date a
favorable opinion of Sullivan & Cromwell, counsel to the Acquired Fund, in a
form satisfactory to Christina T. Sydor, Esq., Secretary of the Acquiring
Fund, covering the following points:
That (a) the Acquired Fund is a series of Smith Barney Muni Funds, which
is a business trust duly organized and validly existing under the laws of
the Commonwealth of Massachusetts; (b) Smith Barney Muni Funds is an
open-end management investment company registered under the 1940 Act; and
(c) this Agreement, the Reorganization provided for hereunder and the
execution of this Agreement have been duly authorized and approved by all
requisite action of Smith Barney Muni Funds, and this Agreement has been
duly executed and delivered by Smith Barney Muni Funds and, assuming due
authorization, execution and delivery by the Acquiring Fund, is a valid
and binding obligation of Smith Barney Muni Funds with respect to the
Acquired Fund enforceable in accordance with its terms against the assets
of the Acquired Fund, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
Such opinion may state that it is solely for the benefit of the
Acquiring Fund, its Directors and its officers. Such counsel may rely, as to
matters governed by the laws of the Commonwealth of Massachusetts, on an
opinion of Massachusetts counsel.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND, SMITH
BARNEY MUNI FUNDS AND THE ACQUIRING FUND
If any of the conditions set forth below do not exist on or before
the Closing Date with respect to the Acquiring Fund, or Smith Barney Muni
Funds on behalf of the Acquired Fund, the other party to this Agreement shall,
at its option, not be required to consummate the transactions contemplated by
this Agreement:
8.1. This Agreement and the transactions contemplated herein shall
have been approved by the requisite vote of the holders of the outstanding
shares of the Acquired Fund in accordance with the provisions of Smith Barney
Muni Fund's Declaration of Trust and By-laws and certified copies of the votes
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund
nor Smith Barney Muni Funds on behalf of the Acquired Fund may waive the
conditions set forth in this paragraph 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or
<PAGE>86
obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders
and permits of federal, state and local regulatory authorities (including
those of the Commission and of state Blue Sky and securities authorities,
including "no-action" positions of and exemptive orders from such federal and
state authorities) deemed necessary by the Acquiring Fund or the Acquired Fund
to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain
any such consent, order or permit would not involve a risk of a material
adverse effect on the assets or properties of the Acquiring Fund or the
Acquired Fund, provided that either party hereto may for itself waive any of
such conditions;
8.4. The Registration Statement shall have become effective under
the 1933 Act and no stop orders suspending the effectiveness thereof shall
have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or be
pending, threatened or contemplated under the 1933 Act;
8.5. The Acquired Fund shall have declared and paid a dividend or
dividends on the outstanding shares of the Acquired Fund which, together with
all previous such dividends, shall have the effect of distributing to the
shareholders of the Acquired Fund all of the investment company taxable income
of the Acquired Fund for all taxable years ending on or prior to the Closing
Date. The dividend declared and paid by the Acquired Fund shall also include
all of such fund's net capital gain realized in all taxable years ending on or
prior to the Closing Date (after reduction for any capital loss carryforward);
8.6. The parties shall have received a favorable opinion of Willkie
Farr & Gallagher, addressed to the Acquiring Fund and Smith Barney Muni Funds
in respect of the Acquired Fund and satisfactory to Christina T. Sydor, Esq.,
as Secretary of each of the Funds, substantially to the effect that for
federal income tax purposes:
(a) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for Acquiring Fund Shares and the assumption by the
Acquiring Fund of scheduled liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C)
of the Code, and the Acquiring Fund and the Acquired Fund are each a
"party to a reorganization" within the meaning of Section 368(b) of the
Code; (b) no gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Acquired Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of
scheduled liabilities of the Acquired Fund; (c) no gain or loss will be
recognized by the Acquired Fund upon the transfer of the Acquired Fund's
assets to the Acquiring Fund in exchange for Acquiring Fund Shares and
the assumption by the Acquiring Fund of scheduled liabilities of the
Acquired
<PAGE>87
Fund or upon the distribution (whether actual or constructive) of Acquiring
Fund Shares to Acquired Fund's shareholders; (d) no gain or loss will be
recognized by shareholders of the Acquired Fund upon the exchange of their
Acquired Fund shares for the Acquiring Fund Shares; (e) the aggregate tax
basis for Acquiring Fund Shares received by each of the Acquired Fund's
shareholders pursuant to the Reorganization will be the same as the aggregate
tax basis of the Acquired Fund shares held by such shareholder immediately
prior to the Reorganization, and the holding period of Acquiring Fund Shares
to be received by each Acquired Fund shareholder will include the period
during which the Acquired Fund shares exchanged therefor were held by such
shareholder (provided that the Acquired Fund shares were held as capital
assets on the date of the Reorganization); and (f) the tax basis to the
Acquiring Fund of the Acquired Fund's assets acquired by the Acquiring Fund
will be the same as the tax basis of such assets to the Acquired Fund
immediately prior to the Reorganization, and the holding period of the assets
of the Acquired Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Acquired Fund.
Notwithstanding anything herein to the contrary, neither the
Acquiring Fund nor Smith Barney Muni Funds on behalf of the Acquired Fund may
waive the conditions set forth in this paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1. The Acquiring Fund represents and warrants to Smith Barney
Muni Funds on behalf of the Acquired Fund, and Smith Barney Muni Funds on
behalf of the Acquired Fund represents and warrants to the Acquiring Fund,
that there are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
9.2. (a) Except as may be otherwise provided herein, Smith
Barney Inc., the distributor of the Acquiring Fund and the Acquired Fund,
shall be liable for the expenses incurred in connection with entering into and
carrying out the provisions of this Agreement, including the expenses of: (i)
counsel and independent accountants associated with the Reorganization; (ii)
printing and mailing the Prospectus/Proxy Statement and soliciting proxies in
connection with the meeting of shareholders of the Acquired Fund referred to
in paragraph 5.2 hereof; (iii) any special pricing fees associated with the
valuation of the Acquired Fund's or the Acquiring Fund's portfolio on the
Closing Date; (iv) expenses associated with preparing this Agreement and
preparing and filing the Registration Statement under the 1933 Act covering
the Acquiring Fund Shares to be issued in the Reorganization; (v) registration
or qualification fees and expenses of preparing and filing such forms, if any,
necessary under applicable state securities laws to qualify the Acquiring Fund
Shares to be issued in connection with the Reorganization. The Acquired Fund
shall be liable for: (x) all
<PAGE>88
fees and expenses related to the liquidation and termination of the Acquired
Fund; and (y) fees and expenses of the Acquired Fund's custodian and transfer
agent incurred in connection with the Reorganization. The Acquiring Fund
shall be liable for any fees and expenses of the Acquiring Fund's custodian
and transfer agent incurred in connection with the Reorganization.
(b) Consistent with the provisions of paragraph 1.3, the Acquired
Fund, prior to the Closing, shall pay for or include in the unaudited
Statement of Assets and Liabilities prepared pursuant to paragraph 1.3 all of
its known and reasonably estimated expenses associated with the transactions
contemplated by this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that no party has made any
representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
10.2. The representations, warranties and covenants contained in
this Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any time prior to the
Closing Date by: (i) the mutual agreement of Smith Barney Muni Funds on
behalf of the Acquired Fund and the Acquiring Fund; (ii) Smith Barney Muni
Funds on behalf of the Acquired Fund in the event that the Acquiring Fund
shall, or the Acquiring Fund in the event that Smith Barney Muni Funds or the
Acquired Fund shall, materially breach any representation, warranty or
agreement contained herein to be performed at or prior to the Closing Date; or
(iii) Smith Barney Muni Funds on behalf of the Acquired Fund or by the
Acquiring Fund if a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably
appears that it will not or cannot be met.
11.2. In the event of any such termination, there shall be no
liability for damages on the part of either Smith Barney Muni Funds on behalf
of the Acquired Fund or the Acquiring Fund or their respective Trustees,
Directors or officers to the other party, but each shall bear the expenses
incurred by it incidental to the preparation and carrying out of this
Agreement as provided in paragraph 9.
<PAGE>89
12. AMENDMENTS; WAIVERS
12.1. This Agreement may be amended, modified or supplemented in
such manner as may be mutually agreed upon in writing by the authorized
officers of Smith Barney Muni Funds and the Acquiring Fund; provided, however,
that following the meeting of the Acquired Fund shareholders called by the
Acquired Fund pursuant to paragraph 5.2 of this Agreement, no such amendment
may have the effect of changing the provisions for determining the number of
Acquiring Fund Shares to be issued to the Acquired Fund's shareholders under
this Agreement to the detriment of such shareholders without their further
approval.
12.2. At any time prior to the Closing Date either party hereto
may by written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by hand
delivery, prepaid telegraph, telecopy or certified mail addressed to Smith
Barney Muni Funds, 388 Greenwich Street, 26th Floor, New York, New York 10013,
Attention: Jessica Bibliowicz; or to Smith Barney California Municipals Fund
Inc., 388 Greenwich Street, 26th Floor, New York, New York 10013, Attention:
Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF
LIABILITY
14.1. The article and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
14.4. This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment
or transfer hereof or of any rights or obligations hereunder shall be made by
any party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer
<PAGE>90
upon or give any person, firm, corporation or other entity, other than the
parties hereto and their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
14.5. It is expressly agreed that the obligations of Smith
Barney Muni Funds in respect of the Acquired Fund shall not be binding upon
any Trustees, shareholders, nominees, officers, agents or employees
personally, but bind only the trust property of Smith Barney Muni Funds as
provided in the Declaration of Trust of Smith Barney Muni Funds. The
execution and delivery of this Agreement have been authorized by the Trustees
of Smith Barney Muni Funds and this Agreement has been executed by authorized
officers of Smith Barney Muni Funds, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such
officers 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 trust
property of Smith Barney Muni Funds as provided in Smith Barney Muni Funds'
Declaration of Trust.
<PAGE>91
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its Chairman of the Board, President or Vice
President and attested by its Secretary or Assistant Secretary.
Attest: SMITH BARNEY MUNI FUNDS
on behalf of CALIFORNIA PORTFOLIO
/s/ Christina T. Sydor By: /s/ Jessica Bibliowicz
Name: Christina T. Sydor Name: Jessica Bibliowicz
Title: Secretary Title: President
Attest: SMITH BARNEY CALIFORNIA MUNICIPALS
FUND INC.
/s/ Christina T. Sydor By: /s/ Heath B. McLendon
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
<PAGE>92
PROSPECTUS
OF
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
DATED APRIL 29, 1995, AS SUPPLEMENTED BY
PROSPECTUS SUPPLEMENTS
DATED MAY 25, 1995, JULY 11, 1995, JULY 15, 1995 AND JULY 20, 1995
<PAGE>93
SMITH BARNEY
Adjustable Rate Government Income Fund
Arizona Municipals Fund
California Municipals Fund
Diversified Strategic Income Fund
Florida Municipals Fund
Government Securities Fund
Intermediate Maturity California Municipals Fund
Intermediate Maturity New York Municipals Fund
Investment Grade Bond Fund
Limited Maturity Municipals Fund
Limited Maturity Treasury Fund
Managed Governments Fund
Managed Municipals Funds
Massachusetts Municipals Fund
New York Municipals Fund
Oregon Municipals Fund
Tax-Exempt Income Fund
Utilities Fund
Supplement Dated May 25, 1995 to Prospectuses*
The following information supplements, and to the extent inconsistent
therewith, supersedes the information set forth in the Prospectuses of the
above mentioned Funds.
Dividend Declaration
Beginning July 1, 1995, each Fund will declare dividends from its net
investment income monthly. Dividends will be ordinarily paid by each Fund on
the last Friday of each month, to shareholders of record as of the preceding
Tuesday.
Payment for and Redemption of Shares
Beginning June 7, 1995, in accordance with certain regulatory changes,
payment for Fund shares is due to Smith Barney or an Introducing Broker or an
investment dealer in the selling group on the third business day after trade
date. In addition, redemption proceeds will be remitted to shareholders no
later than the third business day after receipt of proper tender of a
redemption request.
* Prospectuses dated:
Adjustable Rate Government Income Fund............... 7/30/94
Arizona Municipals Fund.............................. 7/30/94
California Municipals Fund........................... 4/29/95
Diversified Strategic Income Fund.................... 11/07/94
<PAGE>94
Florida Municipals Fund.............................. 12/30/94
Government Securities Fund........................... 3/01/95
Intermediate Maturity California Municipals Fund..... 1/29/95
Intermediate Maturity New York Municipals Fund....... 1/29/95
Investment Grade Bond Fund........................... 3/01/95
Limited Maturity Municipals Fund..................... 1/29/95
Limited Maturity Treasury Fund....................... 1/29/95
Managed Governments Fund ............................ 11/07/94
Managed Municipals Funds............................. 4/29/95
Massachusetts Municipals Fund........................ 1/29/95
New York Municipals Fund............................. 11/07/94
Oregon Municipals Fund............................... 5/23/94
Tax-Exempt Income Fund............................... 11/07/94
Utilities Fund....................................... 11/07/94
<PAGE>95
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
(the "Fund")
Supplement to Prospectus and
Statement of Additional Information
dated April 29, 1995
On July 10, 1995, Smith Barney Mutual Funds Management Inc. assumed
responsibility for all administrative functions for the Fund, including
functions previously performed by The Boston Company Advisors, Inc. ("Boston
Advisors"). As of that date, Boston Advisors ceased to serve as sub-
administrator to the Fund.
Also as of July 10, 1995, PNC Bank, National Association ("PNC")
assumed responsibility as the custodian for the Fund. As of that date, Boston
Safe Deposit and Trust Company, an affiliate of Boston Advisors, ceased to
serve as the Fund's custodian. PNC is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania.
__________________________________
Supplement dated July 11, 1995
<PAGE>96
SMITH BARNEY MUTUAL FUNDS
Supplement dated July 15, 1995 to the Prospectuses of the Funds indicated
below:
Effective immediately, employees of members of the National Association
of Securities Dealers, Inc. may purchase Class A shares of Smith Barney mutual
funds at net asset value.
<TABLE>
<CAPTION>
FUND DATE
<S> <C>
Smith Barney Adjustable Rate Government Income Fund July 30, 1994
Smith Barney Aggressive Growth Fund Inc. November 7, 1994
Smith Barney Appreciation Fund Inc. March 1, 1995
Smith Barney Arizona Municipals Fund Inc. July 30, 1994
Smith Barney California Municipals Fund Inc. April 29, 1995
Smith Barney Equity Fund April 1, 1995
Smith Barney Florida Municipals Fund December 30, 1994
Smith Barney Fundamental Value Fund Inc. February 1, 1995
Smith Barney Funds, Inc. April 28, 1995
Smith Barney Growth Opportunity Fund May 1, 1995
Smith Barney Income Funds November 7, 1994
Smith Barney Income Trust January 29, 1995
Smith Barney Investment Funds March 1, 1995
Smith Barney Managed Governments Fund Inc. November 7, 1994
Smith Barney Managed Municipals Fund Inc. April 29, 1995
Smith Barney Massachusetts Municipals Fund Inc. March 1, 1995
Smith Barney New Jersey Municipals Fund Inc. May 29, 1995
Smith Barney New York Municipals Fund Inc. March 1, 1995
Smith Barney Oregon Municipals Fund June 29, 1995
<PAGE>97
March 1, 1995
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Telecommunications Growth Fund May 1, 1995
Smith Barney World Funds, Inc. February 28, 1995
</TABLE>
<PAGE>98
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
Supplement to Prospectus
dated April 29, 1995
On July 19, 1995, the Board of Directors of Smith Barney California
Municipals Fund Inc. (the "Fund") approved a reduction in the investment
advisory fee paid by the Fund to Smith Barney Mutual Funds Management Inc.
Accordingly, effective November 17, 1995, the Fund's investment advisory fee
will decrease from 0.35% to 0.30% of the average daily net assets of the Fund.
____________________________________
Supplement dated July 20, 1995
<PAGE>99
PROSPECTUS
[LOGO OF SMITH BARNEY Smith Barney Mutual Funds
APPEARS HERE] Investing for your future.
Every day.
SMITH BARNEY
California
Municipals
Fund Inc.
APRIL 29, 1995
Prospectus begins on page one
<PAGE>100
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS
April 29, 1995
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 April 29, 1995, 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
<PAGE>101
SMITH BARNEY
California Municipals Fund Inc.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS 11
- ---------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
- ---------------------------------------------------
CALIFORNIA MUNICIPAL SECURITIES 22
- ---------------------------------------------------
VALUATION OF SHARES 23
- ---------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 23
- ---------------------------------------------------
PURCHASE OF SHARES 26
- ---------------------------------------------------
EXCHANGE PRIVILEGE 34
- ---------------------------------------------------
REDEMPTION OF SHARES 37
- ---------------------------------------------------
MINIMUM ACCOUNT SIZE 39
- ---------------------------------------------------
PERFORMANCE 40
- ---------------------------------------------------
MANAGEMENT OF THE FUND 41
- ---------------------------------------------------
DISTRIBUTOR 43
- ---------------------------------------------------
ADDITIONAL INFORMATION 44
- ---------------------------------------------------
</TABLE>
2
<PAGE>102
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% of the purchase price 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 initial sales charge, but will be subject to a contin-
gent 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
<PAGE>103
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 and Class B 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 redemp-
tions 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
<PAGE>104
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 certain other 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."
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
5
<PAGE>105
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
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. 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 subsequent invest-
ment for all Classes through the Systematic Investment Plan described below is
$50. 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 $50. 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.
SBMFM also serves as the Fund's administrator and The Boston Company Advi-
sors, Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Bos-
6
<PAGE>106
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
ton 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. As
of June 1, 1995, dividends from net investment income will be declared on the
Tuesday preceding the last Friday of the calendar month and paid on the last
Friday of the calendar 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 Tax-
es."
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 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 Municipal
Securities will be excluded from gross income for Federal income tax purposes
and exempt from California state personal income taxes (but not from California
state franchise tax or California state corporate income tax). Dividends
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 secu
7
<PAGE>107
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
rities (including California Municipal Securities), however, may be a specific
tax item for Federal alternative minimum tax purposes. The Fund may invest
without limit in securities subject to the Federal alternative minimum tax. See
"Investment Objective and Management Policies" and "Dividends, Distributions
and Taxes."
The Fund is more susceptible to factors adversely affecting issuers of Cali-
fornia municipal securities than is a municipal bond fund that does not empha-
size these issuers. See "California Municipal Securities" in the Prospectus and
"Special Considerations Relating to California Municipal Securities" in the
Statement of Additional Information for further details about the risks of
investing in California obligations.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that it
may invest in the obligations of a single issuer. The Fund's assumption of
large positions in the obligations of a small number of issuers may cause the
Fund's share price to fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers. See "Investment Objective and Management Policies."
The Fund generally will invest at least 80% 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
<PAGE>108
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 0.12 0.12 0.10
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.80% 1.32% 1.37% 0.65%
- ------------------------------------------------------------------------------
<FN>
* 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 Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares because no Class Y shares have been sold as of
April 29, 1995.
</TABLE>
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
<PAGE>109
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 58 72 82 145
Class C 24 43 75 165
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 13 42 72 145
Class C 14 43 75 165
Class Y 7 21 36 81
- ------------------------------------------------------------------------------
<FN>
* 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.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
10
<PAGE>110
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, 1995. 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 YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
2/28/95 2/28/94# 2/28/93* 2/28/92* 2/28/91 2/28/90
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating performance:
Net asset value,
beginning of year $16.15 $16.70 $15.78 $15.66 $15.61 $15.33
- -------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.89 0.86 0.97 1.04 1.07 1.09
Net realized and
unrealized gain/(loss)
on investments (0.56) 0.08 1.25 0.40 0.17 0.26
- -------------------------------------------------------------------------------------
Total from investment
operations 0.33 0.94 2.22 1.44 1.24 1.35
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net
investment income (0.87) (0.83) (0.97) (1.05) (1.07) (1.07)
Distributions in excess
of net investment income (0.02) (0.01) -- -- -- --
Distributions from net
realized gains (0.19) (0.65) (0.29) (0.27) (0.12) --
Return of capital -- -- (0.04) -- -- --
- -------------------------------------------------------------------------------------
Total distributions (1.08) (1.49) (1.30) (1.32) (1.19) (1.07)
- -------------------------------------------------------------------------------------
Net asset value, end of
year $15.40 $16.15 $16.70 $15.78 $15.66 $15.61
- -------------------------------------------------------------------------------------
Total return+ 2.46% 5.92% 14.76% 9.50% 8.29% 9.02%
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of year
(in 000's) $401,743 $425,181 $423,504 $364,809 $334,599 $328,938
Ratio of operating
expenses to average net
assets 0.80% 0.80% 0.70% 0.65% 0.65% 0.72%
Ratio of net investment
income to average net
assets 5.76% 5.20% 6.04% 6.54% 6.85% 6.95%
Portfolio turnover rate 59% 76% 72% 86% 53% 35%
- -------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on April 9, 1984. On November 6, 1992, the
Fund commenced selling Class B shares. Any shares in existence prior to
November 6, 1992 were designated as Class A shares.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income 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.
</TABLE>
11
<PAGE>111
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
2/28/89 2/28/88 2/28/87 2/28/86
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of year $15.49 $16.54 $16.16 $13.94
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.12 1.09 1.14 1.21+
Net realized and unrealized
gain/(loss) on investments (0.13) (0.98) 0.71 2.22
- ----------------------------------------------------------------------------
Total from investment operations 0.99 0.11 1.85 3.43
- ----------------------------------------------------------------------------
Less distributions:
Distributions from net investment
income (1.12) (1.09) (1.14) (1.21)
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)
- ----------------------------------------------------------------------------
Net asset value, end of year $15.33 $15.49 $16.54 $16.16
- ----------------------------------------------------------------------------
Total return++ 6.67% 1.09% 12.13% 25.80%
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) $313,059 $156,464 $207,872 $111,705
Ratio of operating expenses to
average net assets 0.67% 0.64% 0.67% 0.73%*
Ratio of net investment income to
average net assets 7.19% 7.26% 6.99% 8.08%
Portfolio turnover rate 27% 22% 16% 14%
- ----------------------------------------------------------------------------
<FN>
* Annualized expense ratios before waiver of fees and voluntary reimbursement
of expenses by the investment adviser and sub-investment adviser and
administrator was 0.82% for the fiscal year ended February 28, 1986.
+ 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 for the fiscal year ended February 28, 1986.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
</TABLE>
12
<PAGE>112
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
2/28/95 2/28/94# 2/28/93*
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating performance:
Net asset value, beginning of year $16.15 $16.70 $15.84
- -------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.81 0.77 0.29
Net realized and unrealized gain/(loss) on
investments (0.57) 0.09 1.15
- -------------------------------------------------------------------------------
Total from investment operations 0.24 0.86 1.44
- -------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.78) (0.75) (0.28)
Distributions in excess of net investment
income (0.02) (0.01) --
Distributions from net realized gains (0.19) (0.65) (0.29)
Return of capital -- -- (0.01)
- -------------------------------------------------------------------------------
Total distributions (0.99) (1.41) (0.58)
- -------------------------------------------------------------------------------
Net asset value, end of year $15.40 $16.15 $16.70
- -------------------------------------------------------------------------------
Total return+ 1.89% 5.40% 9.27%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) $127,888 $107,740 $37,924
Ratio of operating expenses to average net
assets 1.32% 1.33% 1.30%**
Ratio of net investment income to average net
assets 5.25% 4.67% 5.44%**
Portfolio turnover rate 59% 76% 72%
- -------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class B shares on November 6, 1992.
** Annualized.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since use of the undistributed net investment income 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 charge.
</TABLE> 13
<PAGE>113
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
PERIOD
ENDED
2/28/95*
- ----------------------------------------------------------------
<S> <C>
Operating performance:
Net asset value beginning of period $14.19
- ----------------------------------------------------------------
Income from investment operations:
Net investment income 0.24
Net realized and unrealized gain on investments 1.39#
- ----------------------------------------------------------------
Total from investment operations 1.63
- ----------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.23)
Distributions in excess of net investment income (0.00)++
Distributions from net realized gains (0.19)
- ----------------------------------------------------------------
Total distributions (0.42)
- ----------------------------------------------------------------
Net asset value end of period $15.40
- ----------------------------------------------------------------
Total return+ 11.72%
- ----------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $ 762
Ratio of operating expenses to average net assets 1.37%**
Ratio of net investment income to average net assets 5.19%**
Portfolio turnover rate 59%
- ----------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares on November 14, 1994.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
++ Amount represents less than $0.01.
# The amount shown may not accord with the change in aggregate gains and
losses of portfolio securities due to the timing of sales and the redemp-
tions of Fund shares.
</TABLE>
As of April 29, 1995, the Fund had not sold any Class Y shares and, according-
ly, no comparable financial information is available at this time for that
Class.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>114
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 80% 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 obligations 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. (These securities are sometimes referred to as junk bonds.) Securi-
ties 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. A description of the rating systems of Moody's and S&P is contained
in the Statement of Additional Information.
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.
15
<PAGE>115
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The value of debt securities varies inversely to changes in the direction of
interest rates. When interest rates rise, the value of debt securities gener-
ally falls, and when interest rates fall, the value of debt securities gener-
ally rises.
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.
16
<PAGE>116
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.
17
<PAGE>117
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. The Fund also is authorized
to borrow an amount of up to 10% of its total assets (including the amount bor-
rowed) 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.
18
<PAGE>118
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
19
<PAGE>119
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 invest
in 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 contracts 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 related 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-
20
<PAGE>120
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.
21
<PAGE>121
SMITH BARNEY
California Municipals Fund Inc.
CALIFORNIA MUNICIPAL SECURITIES
The interest on California Municipal Securities is, in the opinion of bond
counsel to the issuers, excluded from gross income for Federal income tax pur-
poses 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 15, 1994, Moody's, citing the State's deteriorating financial posi-
tion, lowered California's general obligation bond rating from Aa to A1. On
July 15, 1994, S&P, citing the State's deteriorating financial position, low-
ered California's general obligations bond ratings from A+ to A. Investors
should be aware that certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could result in certain adverse consequences affecting California Municipal
Securities. For instance, certain provisions of the California Constitution and
statutes that limit the taxing and spending authority of California governmen-
tal entities may impair the ability of the issuers of some California Municipal
Securities to maintain debt service on their obligations. Other measures
affecting the taxing or
22
<PAGE>122
SMITH BARNEY
California Municipals Fund Inc.
CALIFORNIA MUNICIPAL SECURITIES (CONTINUED)
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 Securities are sum-
marized 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. Amortized cost valuation involves valuing an
instrument at its cost initially and, thereafter, assuming a constant amortiza-
tion to maturity of any discount or premium, regardless of the impact of fluc-
tuating interest rates on the market value of the instrument. Further informa-
tion regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
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. Beginning June 1, 1995, the Fund will
declare dividends on the Tuesday preceding the lst Friday of each calendar
month and pay dividends on the last Friday of each calendar month. Distribu-
tions 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.
23
<PAGE>123
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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. Until June 1,
1995 the Fund's earnings for Saturdays, Sundays and holidays will be declared
as dividends on the next business day. In addition, in order to avoid the
application of a 4% nondeductible excise tax on certain undistributed amounts
of ordinary income and capital gains, the Fund may make an additional distribu-
tion shortly before December 31 of each year of any undistributed ordinary
income or capital gains and expects to pay any other distributions as are nec-
essary 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 may
be treated as a tax-free return of capital (up to the amount of the sharehold-
er's tax basis in his or her shares). The amount treated as a tax-free return
of capital will reduce a shareholder's adjusted basis in his or her shares.
Pursuant to the requirements of the 1940 Act and other applicable laws, a
notice will accompany any distribution paid from sources other than net invest-
ment income. In the event the Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the Fund's
expense ratio.
The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class C shares. The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be
in the same amount for Class A, B, C and Y shares.
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
24
<PAGE>124
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
7, 1986 and (b) all exempt-interest dividends will be a component of the "cur-
rent earnings" adjustment item for purposes of the Federal corporate alterna-
tive minimum tax. In addition, corporate shareholders may incur a greater Fed-
eral "environmental" tax liability through the receipt of the Fund's dividends
and distributions. Dividends derived from interest on California Municipal
Securities also will be exempt from California state personal income (but not
corporate franchise or corporate income) taxes. On April 6, 1995, the House of
Representatives passed H.R. 1215, which would, among other things, alter the
corporate alternative minimum tax by repealing the preference relating to tax-
exempt interest on private activity bonds for interest accruing after December
31, 1995 and would otherwise repeal the corporate alternative minimum tax for
taxable years beginning after December 31, 2000. There can be no assurance that
this proposed legislation will be enacted or, if enacted, will include the pro-
visions described herein.
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 Fund
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
25
<PAGE>125
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Federal individual and corporate alternative minimum taxes. Shareholders should
consult their tax advisors with specific reference to their own tax situations.
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
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 in the
Fund by making an initial investment of at least $1,000. Investors in Class Y
shares may open an account by making an initial investment of $5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes. For the Fund's
Systematic Investment Plan, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $50. There are no minimum investment requirements for Class
A shares for employees of Travelers and its subsidiaries, including Smith Bar-
ney, unitholders who invest 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 Share-
holder Services Group, Inc., a subsidiary of First Data Corporation ("TSSG").
Share certificates are issued only upon a shareholder's written request to
TSSG.
26
<PAGE>126
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Fund calculates its net asset val-
ue, 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 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, provided the order is
received by the Fund or 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.
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 $50 or more to charge an account with a bank or other
financial institution on a monthly or quarterly basis as indicated by the
shareholder to provide for 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 Invest-
ment 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 informa-
tion is available from the Fund or a Smith Barney Financial Consultant.
27
<PAGE>127
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
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* * * *
----------------------------------------------------------------------------------
<FN>
* 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."
</TABLE>
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, 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
28
<PAGE>128
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
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; (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 suffi-
cient information at the time of purchase to permit verification that the pur-
chase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregat-
ing the dollar amount of the new purchase and the total net asset value of all
Class A shares of the Fund and of funds sponsored by Smith Barney which are
offered with a sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur-
chase at net asset value will also be available to employees (and partners) of
the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
29
<PAGE>129
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
under "Initial Sales Charge Alternative--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be
open to specified partners or employees of the employer and its subsidiaries,
if any. Such plan may, but is not required to, provide for payroll deductions.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that
Smith Barney will realize economies of sales efforts and sales related
expenses. An individual who is a member of a qualified group may also purchase
Class A shares at the reduced sales charge applicable to the group as a whole.
The sales charge is based upon the aggregate dollar value of Class A shares
offered with a sales charge that have been previously purchased and are still
owned by the group, plus the amount of the current purchase. A "qualified
group" is one which (a) has been in existence for more than six months, (b) has
a purpose other than acquiring Fund shares at a discount and (c) satisfies 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 permit verification that the purchase qualifies for the reduced
sales charge. Approval of group purchase reduced sales charge plans is subject
to the discretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes (i) all
Class A shares of the Fund and other funds of the Smith Barney Mutual Funds
offered with a sales charge acquired during the term of the Letter plus (ii)
the value of all Class A shares previously purchased and still owned.
30
<PAGE>130
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
Each investment made during the period receives the reduced sales charge appli-
cable to the total amount of the investment goal. If the goal is not achieved
within the period, the investor must pay the difference between the sales
charges applicable to the purchases made and the charges actually paid, or an
appropriate number of escrowed shares will be redeemed. The term of the Letter
will commence upon the date the Letter is signed, or at the option of the
investor, up to 90 days before such date. Please contact a Smith Barney Finan-
cial Consultant or TSSG to obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for investors to
meet the minimum investment requirement for Class Y shares. Such investors must
make an initial minimum purchase of $1,000,000 in Class Y shares of the Fund
and agree to purchase a total of $5,000,000 of Class Y shares of the Fund
within 6 months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six month period, all Class Y shares pur-
chased to date will be transferred to Class A shares, where they will be sub-
ject to all fees (including a service fee of 0.25%) and expenses applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. Please contact
TSSG or a Smith Barney Financial Consultant for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class 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 purchase; or (d) with respect to Class C shares and Class A shares that
are CDSC Shares, shares redeemed more than 12 months after their purchase.
31
<PAGE>131
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
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."
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 ini-
32
<PAGE>132
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
tially acquired in one of the other Smith Barney Mutual Funds, and Fund shares
being redeemed will be considered to represent, as applicable, capital appreci-
ation 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 will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 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 company by merger, acquisition of assets or other-
wise. 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 case
of all other shareholders) of the shareholder's status or holdings, as the case
may be.
33
<PAGE>133
SMITH BARNEY
California Municipals Fund Inc.
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 Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Funds, Inc.--Utilities Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*Smith Barney Funds, Inc.--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 Government Securities Fund
Smith Barney High Income Fund
34
<PAGE>134
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt 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 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.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Precious Metals and Minerals Fund Inc.
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
35
<PAGE>135
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
++Smith Barney Money Funds, Inc.--Government Portfolio
**Smith Barney Money Funds, Inc.--Retirement Portfolio
++Smith Barney Municipal Money Market Fund, Inc.
++Smith Barney Muni Funds--California Money Market Portfolio
++Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the Fund.
** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class 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 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.
36
<PAGE>136
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
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.
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
37
<PAGE>137
SMITH BARNEY
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
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. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to TSSG together with the redemption request. Any
signature appearing on a redemption request, share certificate or stock power
must
38
<PAGE>138
SMITH BARNEY
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
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 $50 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.
39
<PAGE>139
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
40
<PAGE>140
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 by the Board to the Fund's investment adviser and sub-administra-
tor. 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
41
<PAGE>141
SMITH BARNEY
California Municipals Fund Inc.
MANAGEMENT OF THE FUND (CONTINUED)
that had aggregate assets under management as of March 31, 1995, in excess of
$53 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated invest-
ment objective and policies, makes investment decisions for the Fund, places
orders to purchase and sell securities and employs professional portfolio man-
agers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a fee at the follow-
ing 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, 1995, the SBMFM was paid investment advisory
fees equal to 0.35% of the value of the average daily net assets of the Fund.
PORTFOLIO MANAGEMENT
Joseph P. Deane, Vice President and 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, 1995 is included in the
Annual Report dated February 28, 1995. 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 this 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 and 0.18% of the value of its average daily net assets in excess
of $500 million.
42
<PAGE>142
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 March 31, 1995, in
excess of $16 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
43
<PAGE>143
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
44
<PAGE>144
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.
45
<PAGE>145
SMITH BARNEY
Aggressive Growth Fund Inc.
Participants
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney Mutual Funds Management
388 Greenwich Street
New York, New York 10013
ADMINISTRATOR
Smith Barney Mutual Funds Management
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
KPMG Peat Marwick L.L.P.
345 Park Avenue
New York, New York 10054
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit
and Trust Company
One Boston Place
Boston, Massachusetts 02108
46
<PAGE>146
SMITH BARNEY
------------
[LOGO OF SMITH BARNEY A MEMBER OF TRAVELERS GROUP APPEARS HERE]
Smith Barney
California
Municipals
Fund Inc.
388 Greenwich Street
New York, New York 100013
[LOGO OF RECYCLABLE FUND 14,198,463,478
PAPER APPEARS HERE] FD0209 d5
<PAGE>147
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 25, 1995
Acquisition Of The Assets Of
CALIFORNIA PORTFOLIO
a separate investment portfolio of
SMITH BARNEY MUNI FUNDS
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Shares Of
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Statement of Additional Information, relating specifically to
the proposed transfer of all or substantially all of the assets of the
California Portfolio (the "Acquired Fund") of Smith Barney Muni Funds to Smith
Barney California Municipals Funds Inc. (the "Acquiring Fund") in exchange for
shares of the Acquiring Fund and the assumption by the Acquiring Fund of
scheduled liabilities of the Acquired Fund, consists of this cover page and
the following described documents, each of which accompanies this Statement of
Additional Information and is incorporated herein by reference.
1. Statement of Additional Information of Smith Barney California
Municipals Fund Inc., dated April 29, 1995, as supplemented on
July 11, 1995.
2. Annual Report of Smith Barney California Municipals Fund Inc. for
the fiscal year ended February 28, 1995.
3. Annual Report of Smith Barney Muni Funds -- California Portfolio for
the fiscal year ended March 31, 1995.
4. Pro Forma Financial Statements.
This Statement of Additional Information is not a prospectus. A
Prospectus/Proxy Statement, dated October 25, 1995, relating to the above-
referenced matter may be obtained without charge by calling or writing either
the Acquiring Fund or the Acquired Fund at the telephone numbers or addresses
set forth above or by contacting any Smith Barney Financial Consultant or by
calling toll-free (800) 224-7523. This Statement of
<PAGE>148
Additional Information should be read in conjunction with the Prospectus/Proxy
Statement dated October 25, 1995.
The date of this Statement of Additional Information is October 25,
1995.
<PAGE>149
STATEMENT OF ADDITIONAL INFORMATION
OF
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
DATED APRIL 29, 1995,
AS SUPPLEMENTED ON JULY 11, 1995
<PAGE>150
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
(the "Fund")
Supplement to Prospectus and
Statement of Additional Information
dated April 29, 1995
On July 10, 1995, Smith Barney Mutual Funds Management Inc. assumed
responsibility for all administrative functions for the Fund, including
functions previously performed by The Boston Company Advisors, Inc. ("Boston
Advisors"). As of that date, Boston Advisors ceased to serve as sub-
administrator to the Fund.
Also as of July 10, 1995, PNC Bank, National Association ("PNC")
assumed responsibility as the custodian for the Fund. As of that date, Boston
Safe Deposit and Trust Company, an affiliate of Boston Advisors, ceased to
serve as the Fund's custodian. PNC is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania.
__________________________________
Supplement dated July 11, 1995
<PAGE>151
Smith Barney
CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION APRIL 29, 1995
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 April 29, 1995, 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.
TABLE OF 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...................................................... 22
Redemption of Shares.................................................... 23
Distributor............................................................. 24
Valuation of Shares..................................................... 25
Exchange Privilege...................................................... 25
Performance Data (See in the Prospectus "The Fund's Performance")....... 26
Taxes (See in the Prospectus "Dividends, Distributions and Taxes")...... 29
Additional Information.................................................. 32
Financial Statements.................................................... 32
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.
<PAGE>152
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, Age 72, Director. Private investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
* Alfred J. Bianchetti, Age 72, Director. Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 17466.
Martin Brody, Age 73, 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, Age 57, 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, Age 64, 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.
Elliot S. Jaffe, Age 68, Director. Chairman of the Board and President of
The Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern New York 10901.
Stephen E. Kaufman, Age 63, Director. Attorney. His address is 277 Park
Avenue, New York, New York 10172.
Joseph J. McCann, Age 64, Director. Financial Consultant; formerly, Vice
President of Ryan Homes, Inc. His address is 200 Oak Park Place, Pittsburgh,
Pennsylvania 15243.
* Heath B. McLendon, Age 61, Chairman of the Board and Investment Officer.
Managing Director of Smith Barney, Chairman of the Board of Smith Barney
Strategy Advisers Inc. and President of SBMFM; prior to July 1993, Senior
Executive Vice President of Shearson Lehman Brothers Inc. ("Shearson Lehman
Brothers"); Vice Chairman of Asset Management Division of Shearson Lehman
Brothers; a Director of PanAgora Asset Management, Inc. and PanAgora Asset
Management Limited. His address is 388 Greenwich Street, New York, New York
10013.
Cornelius C. Rose, Jr., Age 61, Director. President, Cornelius C. Rose
Associates, Inc., financial consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is P.O.
Box 335, Fair Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Age 87, 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.
Jessica M. Bibliowicz, Age 35, President. Executive Vice President of Smith
Barney; prior to 1994, Director of Sales and Marketing for Prudential Mutual
Funds; prior to 1990, first Vice President Asset Management Division of
Shearson Lehman Brothers. Ms. Bibliowicz also serves as President of 40 other
mutual funds of the Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
2
<PAGE>153
Joseph P. Deane, Age 47, Vice President and Investment Officer. Investment
Officer of SBMFM; prior to July 1993, Managing Director of Shearson Lehman
Advisors. Mr. Deane is also an Investment Officer of five other mutual funds
of the Smith Barney Mutual funds. His address is 388 Greenwich Street, New
York, New York 10013.
David Fare, Age 32, Investment Officer. Investment Officer of SBMFM; prior
to July 1993, Vice President of Shearson Lehman Advisors. Mr. Fare is also an
Investment Officer of 4 other mutual funds of the Smith Barney Mutual Funds.
His address is 388 Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Age 37, Senior Vice President and Treasurer. Managing
Director of Smith Barney; Director and Senior Vice President of SBMFM. Mr.
Daidone also serves as Senior Vice President and Treasurer of 41 other mutual
funds of the Smith Barney Mutual Funds. His address is 388 Greenwich Street,
New York, NY 10013.
Christina T. Sydor, Age 44, Secretary. Managing Director of Smith Barney;
General Counsel and Secretary of SBMFM. Ms. Sydor also serves as Secretary of
41 other mutual funds of the Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, NY 10013.
As of March 30, 1995, the Directors and officers of the Fund as a group
owned less than 1.00% of the outstanding common stock of the Fund.
No director, officer or employee of Smith Barney or any parent or
subsidiary receives 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 each Director emeritus who is not
an officer, director or employee of Smith Barney or any of its affiliates a
fee of $1,000 per annum plus $250 per meeting attended. All Directors are
reimbursed for travel and out-of-pocket expenses. For the fiscal year ended
February 28, 1995, such fees and expenses totalled $44,641.
For the fiscal year ended February 28, 1995, the Directors of the Fund were
paid the following compensation:
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
AGGREGATE COMPENSATION FROM THE SMITH BARNEY
DIRECTOR* FROM THE FUND MUTUAL FUNDS
<S> <C> <C>
Herbert Barg (17).............. $4,500 $ 77,850
Alfred J. Bianchetti (12)...... 4,500 38,850
Martin Brody (20).............. 3,500 111,675
Dwight B. Crane (22)........... 4,500 129,975 Burt N.
Dorsett (12)................... 2,000 34,300 Robert
Frankel(7)..................... 3,500 79,100 Paul
Hardin(25)..................... 3,500 96,400 Elliot
S. Jaffe (12).................. 2,000 33,300 Stephen
E. Kaufman (14)............... 4,500 83,600 Joseph
J. McCann (12)................ 4,500 51,100 Heath B.
McLendon (29).................. -- --
Cornelius C. Rose, Jr.(12).... 2,000 33,300
James J. Crisona** (10)....... 4,000 67,350
<FN>
--------
* Number of directorships/trusteeships held with other mutual funds of
the Smith Barney Mutual Funds.
** Director Emeritus. A Director emeritus may attend meetings of the Fund's
Board of Directors but has no voting rights at such meetings.
</TABLE>
3
<PAGE>154
INVESTMENT ADVISER AND ADMINISTRATOR--SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a transfer of the
investment advisory agreement effective November 7, 1994 from its affiliate,
Mutual Management Corp. (Mutual Management Corp. and SBMFM are both wholly
owned subsidiaries of Smith Barney Holdings Inc. ("Holdings").) Holdings is a
wholly owned subsidiary of The Travelers Inc. ("Travelers"). The advisory
agreement is dated July 30, 1993 (the "Advisory Agreement"), and was first
approved by the Board of Directors, including a majority of those 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 pays the salary of any
officer or employee who is employed by both it and the Fund. SBMFM bears all
expenses in connection with the performance of its services.
As compensation for investment advisory services, the Fund pays SBMFM a fee
computed daily and paid monthly at the following annual percentage of the
Fund's average daily net assets: 0.35% up to $500 million and 0.32% in excess
of $500 million. For the fiscal years ended February 28, 1993, 1994 and 1995,
the Fund incurred $1,376,158, $1,761,043 and $1,776,849, respectively, in
investment advisory fees.
SBMFM also serves as administrator to the Fund pursuant to a written
agreement dated April 20, 1994 (the "Administration Agreement"), which was
most recently approved by the Fund's Board of Directors, including a majority
of Directors who are not "interested persons" of the Fund or SBMFM on July 20,
1994. The services provided by SBMFM under the Administration Agreement are
described in the Prospectus under "Management of the Fund." SBMFM pays the
salary of any officer and employee who is employed by both it and the Fund and
bears all expenses in connection with the performance of its services.
As compensation for administrative services rendered to the Fund, SBMFM
receives a fee paid monthly at the following annual percentage 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. For the fiscal years ended February 28, 1993,
1994 and for the period beginning March 1 through April 20, 1994 the Fund paid
Boston Advisors $786,376, $1,005,899, and $141,817, respectively, for in sub-
investment advisory and/or administration fees. For the period beginning April
21, 1994 through February 28, 1995, the Fund paid SBMFM $873,148 for
administration fees.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors serves as sub-administrator to the Fund pursuant to a
written agreement (the "Sub-Administration Agreement") dated April 20, 1994,
which was most recently approved by the Fund's Board of Directors, including a
majority of Directors who are not "interested persons" of the Fund or Boston
Advisors, on July 20, 1994. Under the Sub-Administration Agreement, Boston
Advisors is paid a portion of the administration fee paid by the Fund to SBMFM
at a rate agreed upon from time to time between Boston Advisors and SBMFM.
Boston Advisors is a wholly owned subsidiary of The Boston Company, Inc.
("TBC"), a financial services holding company, which is in turn a wholly owned
subsidiary of Mellon Bank Corporation ("Mellon").
Prior to April 20, 1994, Boston Advisors served as the Fund's sub-
investment adviser and/or administrator. For the fiscal years ended February
28, 1993, 1994 and 1995, the Fund paid Boston Advisors, $786,376, $1,005,899
and $141,817, respectively, in sub-investment advisory and/or administration
fees.
Certain of the services provided to the Fund by Boston Advisors pursuant to
the Sub-Administration Agreement are described in the Prospectus under
"Management of the Fund." In addition to those services, Boston Advisors
maintains office facilities for the Fund, furnishes the Fund with statistical
and research data,
4
<PAGE>155
clerical help and accounting, data processing, bookkeeping, internal auditing
and legal services and certain other services required by the Fund, prepares
reports to the Fund's shareholders and prepares tax returns and reports to and
filings with the Securities and Exchange Commission (the "SEC") and state Blue
Sky authorities. Boston Advisors 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.
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, SBMFM or
Boston Advisors; SEC fees and state Blue Sky qualification fees; charges of
custodian; transfer and dividend disbursing agent fees; certain insurance
premiums; outside auditing and legal expenses; costs of maintaining corporate
existence; costs of investor services (including allocated telephone and
personnel expenses); costs of 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.
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 fees paid pursuant to the Fund's
services and distribution plan, 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 SBMFM and Boston Advisors to reduce their fees in any year that
such expenses exceed 2.50% of the first $30 million of average daily net
assets, 2.00% of the next $70 million and 1.50% of the remaining average daily
net assets. No fee reduction was required for the fiscal years ending February
28, 1993, 1994, and 1995.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund. The Directors
who are not "interested persons" of the Fund have selected Stroock & Stroock &
Lavan as their legal counsel.
KPMG Peat Marwick LLP ("Peat Marwick"), independent accountants, 345 Park
Avenue, New York, New York 10154, serve as auditors of the Fund and will
render an opinion on the Fund's financial statements annually beginning with
the fiscal year ending February 28, 1996. Prior to Peat Marwick's appointment,
Coopers & Lybrand L.L.P., independent auditors, served as auditors of the Fund
and rendered an opinion on the financial statements for the fiscal year ended
February 28, 1995.
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
5
<PAGE>156
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
SBMFM's credit analysis of such securities than would be the case for a
portfolio consisting entirely of higher-rated securities. The Appendix
contains information concerning the ratings of Moody's and S&P and their
significance.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds may
cease to be rated or its rating may be reduced below the rating given at the
time the securities were acquired by the Fund. Neither event will require the
sale of such Municipal Bonds by the Fund, but 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 20% 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.
6
<PAGE>157
Current Federal income tax laws may require the holder of a zero coupon
security to accrue income with respect to that security prior to the receipt
of cash payments. To maintain its qualification as a registered investment
company and avoid liability for Federal income taxes, the Fund may be required
to distribute income accrued with respect to zero coupon securities and may
have to dispose of portfolio securities under disadvantageous circumstances in
order to generate cash to satisfy these distribution requirements.
TEMPORARY INVESTMENTS
When the Fund is maintaining a defensive position, the Fund may invest in
short-term investments ("Temporary Investments") consisting of: (a) the
following tax-exempt securities: notes of municipal issuers having, at the
time of purchase, a rating within the three highest grades of Moody's or S&P
or, if not rated, having an issue of outstanding Municipal Bonds rated within
the three highest grades by Moody's or S&P; and (b) the following taxable
securities: obligations of the United States government, its agencies or
instrumentalities ("U.S. government securities"), repurchase agreements, other
debt securities rated within the three highest grades by Moody's or S&P,
commercial paper rated in the highest grade by either of such rating services,
and certificates of deposit of domestic banks with assets of $1 billion or
more. The Fund may invest in Temporary Investments for defensive reasons in
anticipation of a market decline. At no time will more than 20% of the Fund's
total assets be invested in Temporary Investments unless the Fund has adopted
a defensive investment policy. The Fund intends, however, to purchase tax-
exempt Temporary Investments pending the investment of the proceeds of the
sale of portfolio securities or shares of the Fund's common stock, or in order
to have highly liquid securities available to meet anticipated redemptions.
Since commencement of operations, the Fund has not found it necessary to
purchase taxable Temporary Investments.
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
7
<PAGE>158
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.
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's 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
8
<PAGE>159
prices during a single trading day. The daily limit establishes the maximum
amount the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and, therefore, does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. In such event, it will not be possible to close
a futures position and, in the event of adverse price movements, the Fund
would be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the portfolio being
hedged, if any, may partially or completely offset losses on the futures
contract. As described above, however, there is no guarantee that the price of
Municipal Bonds will, in fact, correlate with the price movements in the
municipal bond index futures contract and thus provide an offset to losses on
a futures contract.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of the Municipal Bonds held in its
portfolio and rates decrease instead, the Fund will lose part or all of the
benefit of the increased value of the Municipal Bonds it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may, but
will not necessarily, be at increased prices which reflect the decline in
interest rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
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
9
<PAGE>160
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 SBMFM's
expectations are correct there may be an imperfect correlation between the
change in the value of the options and of the Fund's portfolio securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for the protection
of shareholders. Restrictions 1 through 7 below may not be changed without the
approval of the holders of a majority of the outstanding shares of the Fund,
defined as the lesser of (a) 67% of the Fund's shares present at a meeting if
the holders of more than 50% of the outstanding shares are present in person
or by proxy or (b) more than 50% of the Fund's outstanding shares. The
remaining restrictions may be changed by the Fund's Board of Directors at any
time.
The Fund may not:
1.Issue senior securities as defined in the 1940 Act and any rules and
orders thereunder, except insofar as the Fund may be deemed to have issued
senior securities by reason of: (a) borrowing money 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
10
<PAGE>161
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 originators of
underlying assets.
11.Invest in companies for the purpose of exercising control.
12.Invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of assets.
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 commissions
for fiscal years ended February 28, 1993, 1994 and 1995.
11
<PAGE>162
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 SBMFM 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 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 1994 and 1995 fiscal years,
the Fund's portfolio turnover rate was 76% and 59%, 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.
12
<PAGE>163
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 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.
13
<PAGE>164
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
THE FOLLOWING DISCUSSION OF THE 1993-94 AND 1994-1995 FISCAL YEAR BUDGETS
IS BASED IN LARGE PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL
STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT DOCUMENT, THE STATE
INDICATED THAT ITS DISCUSSION OF THE 1994-95 FISCAL YEAR BUDGET WAS BASED ON
ESTIMATES AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL
YEAR AND MUST NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER
THAT THE ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH
MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN
THE STATE AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE
ESTIMATES WILL BE ACHIEVED.
Since the start of the 1990-91 fiscal year, the State has faced the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
have all been severely affected. Job losses have been the worst of any post-
war recession and have continued through the end of 1993. Employment levels
are expected to stabilize before net employment starts to increase and pre-
recession job levels are not expected to be reached for several more years.
Unemployment is expected to remain above 9% through 1994.
The recession has seriously affected State tax revenues, which basically
mirror economic conditions. It has also caused increased expenditures for
health and welfare programs. The State is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund--K-14
education (kindergarten through community college), health, welfare and
corrections--growing at rates significantly higher than the growth rates for
the principal revenue sources of the General Fund. As a result, the State
entered a period of chronic budget imbalance, with expenditures exceeding
revenues for four of the last five fiscal years. Revenues declined in 1990-91
over 1989-90, the first time since the 1930s. By June 30, 1993, the State's
General Fund had an accumulated deficit, on a budget basis, of approximately
$2.8 billion. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for specific
purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction Plan to
repay this deficit over two years. The original budget for 1993-94 reflected
revenues which exceeded expenditures by approximately $2.8 billion. As a
result of continuing recession, the excess of revenues over expenditures for
the fiscal year is now expected to be only about $500 million. Thus, the
accumulated budget deficit at June 30, 1994 is now estimated by the Department
of Finance to be approximately $2 billion, and the deficit will not be retired
by June 30, 1995 as planned. The accumulated budget deficits over the past
several years, together with expenditures for school funding which have not
been reflected in the budget, and the reduction of available internal
borrowable funds, have combined to significantly deplete the State's cash
resources to pay ongoing expenses. In order to meet its cash needs, the State
has had to rely for several years on a series of external borrowings,
including borrowings past the end of a fiscal year.
The State's tax revenue clearly reflects sharp declines in employment,
income and retail sales on a scale not seen in over 50 years. The May 1994
revision to the 1994-95 Governor's Budget (the "May Revision"), released May
20, 1994, assumes that the State will start recovery from recessionary
conditions in 1994, with a modest upturn beginning in 1994 and continuing into
1995, a year later than predicted in the May 1993 Department of Finance
economic projection. Pre-recession job levels are not expected to be reached
until 1997.
14
<PAGE>165
However, there is growing evidence that California is showing signs of an
economic turnaround, and the May Revision is revised upward from the
Governor's January Budget forecast. Since the Governor's January Budget
forecast, 1993 non-farm employment has been revised upward by 31,000 jobs.
Employment in the early months of 1994 has shown encouraging signs of growth,
several months sooner than was contemplated in the January Budget forecast.
Between December 1993 and April 1994, payrolls are up by 50,000 jobs.
On January 17, 1994 the Northridge 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
northern Los Angeles County, Ventura County, and parts of Orange and San
Bernadino 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 or more, but these estimates are 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 emergency by the State and local agencies.
Damage to State-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Most of the major highways (Interstates 5 and 10) have now been reopened.
The campus at California State University Northridge (very near the epicenter)
suffered an estimated $350 million damage, resulting in the temporary closure
of the campus. It reopened using borrowed facilities elsewhere and many
temporary structures. There was also some damage to the University of
California at Los Angeles and to the Van Nuys State Office Building (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 has
provided substantial earthquake assistance. The President immediately
allocated some available disaster funds, and Congress has approved additional
funds for a total of $9.5 billion of federal funds for earthquake relief,
including assistance to homeowners and small businesses, and costs for repair
of damaged public facilities. It is now estimated that the overall effect of
the earthquake on the regional and State economy will not be serious. The
earthquake may have dampened economic activity briefly during late January and
February, but the rebuilding efforts are now adding a small measure of
stimulus.
Sectors which are now contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. These trends are expected to continue, and by next year,
most of the restructuring in the finance and utilities industries should be
nearly completed. As a result of these factors, average 1994 non-farm
employment is now forecast to maintain 1993 levels compared to a projected
0.6% decline in the Governor's January Budget forecast. 1995 employment is
expected to be up 1.6% compared to 0.7% in the January Budget forecast.
15
<PAGE>166
The Northridge earthquake resulted in a downward revision of this year's
personal income growth--from 4% in the Governor's January Budget forecast to
3.6%. However, this decline is more than explained by the $5.5 billion charge
against rental and proprietor's income--equal to 0.8% of total income--
reflecting uninsured damage from the quake. Next year, without the quake's
effects, income is projected to grow 6.1% compared to 5% projected in the
January Budget forecast. Without the quake's effects, income was little
changed in the May Revision compared to the January Budget forecast.
The housing forecast remains essentially unchanged from the January Budget
forecast. Although existing sales have strengthened and subdivision surveys
indicated increased new home sales, building permits are up only slightly from
recession lows. Gains are expected in the months ahead, but higher mortgage
interest rates will dampen the upturn. Essentially, the Northridge earthquake
adds a few thousand housing units to the forecast, but this effect is offset
by higher interest rates.
Interest rates represent one of several downside risks to the forecast. The
rise in interest rates has occurred more rapidly than contemplated in the
Governor's January Budget forecast. In addition to affecting housing, higher
rates may also dampen consumer spending, given the high percentage of
California homeowners with adjustable-rate mortgages. The May Revision
forecast includes a further rise in the Federal Funds rate to nearly 5% by the
beginning of 1995. Should rates rise more steeply, housing and consumer
spending would be adversely affected.
The unemployment upturn is still tenuous. The Employment Development
Department revised down February's employment gain and March was revised to a
small decline. Unemployment rates in California have been volatile since
January, ranging from 10.1% to a low of 8.6%, with July's figure at 9%. The
small sample size coupled with changes made to the survey instrument in
January contributed to this volatility.
1993-94 BUDGET
The Governor's 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 May Revision of the governor's budget, 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 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 1993-94 Budget Act was signed by the Governor on June 30, 1993, along
with implementing legislation. The governor vetoed about $71 million in
spending. With enactment of the Budget Act, the State carried out its regular
cash flow borrowing program for the fiscal year with the issuance of $2
billion of revenue anticipation notes maturing June 28, 1994.
The 1993-94 Budget Act was predicated on revenue and transfer estimates of
$40.6 billion, $400 million below 1992-93 (and the second consecutive year of
actual decline). The principal reasons for declining revenue were 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.
16
<PAGE>167
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9 billion,
an increase of 2.9% over 1992-93. The 1993-94 Budget Act included 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 Budget also included Special Fund expenditures of
$12.1 billion, a 4.2% increase. The Budget Act reflected 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. The property tax losses
for cities and counties were offset in part by additional sales tax
revenues and relief from some state mandated programs. Litigation by local
governments challenging this shift has so far been unsuccessful. In
November 1993 the voters approved the permanent extension of the 0.5% sales
tax for local public safety purposes.
2. The Budget 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 Budget assumed receipt of $692 million in aid to the State from
the federal government to offset health and welfare costs associated with
foreign immigrants living in the State. About $411 million of this amount
was one-time funding. Congress ultimately appropriated only $450 million.
4. Reduction of $600 million in health and welfare programs.
5. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
6. 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.
Administration reports during the course of the 1993-94 fiscal year have
indicated that, although economic recovery appears to have started in the
second half of the fiscal year, recessionary conditions continued longer than
had 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 most recent reports, however, 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.
During the 1993-94 fiscal year, the State implemented the Deficit Reduction
Plan, which was a 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 Budget
Act assumption, 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 borrowing cash
resources, in addition to the $1-2 billion of revenue anticipation warrants
issued as part of the Deficit Reduction Plan, the State issued an additional
$2 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.
17
<PAGE>168
1994-95 BUDGET
The 1994-95 fiscal year represents the fourth consecutive year the Governor
and Legislature were 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 May Revision to his Budget
proposal recognized that the accumulated deficit could not be repaid in one
year, and proposed a two-year solution. The May Revision 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 deficit, estimated at about $2 billion
at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects
revenues and transfers of $41.9 billion, about $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an
improved economy. Also included in this figure is the projected receipt of
about $360 million from the Federal Government to reimburse the State for the
cost of incarcerating undocumented immigrants. The State will not know how
much the Federal Government will actually provide until the Federal fiscal
year 1995 Budget is completed, which is expected to be by October 1994. The
Legislature took no action on a proposal in the Governor's January Budget to
undertake expansion of the transfer of certain programs to counties, which
would also have transferred to counties 0.5% of the State current sales tax.
The Budget Act projects Special Fund revenues of $12.1 billion, a decrease of
2.4% from 1993-94 estimated levels.
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 aliens,
thereby offsetting a similar General Fund cost. The State will not know how
much of these funds it will receive until the Federal fiscal year 1994
Budget is passed.
2. Reductions of approximately $1.1 billion in health and welfare
programs.
3. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for the California State
University. It is anticipated that student fees for 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 the 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 Act clarifies laws passed in 1992
and 1993 requiring counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented programs providing less moneys to schools if there were
redevelopment agencies projects. The legislation bans this method of
transfers.
6. The 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 sentences for certain third-time felony offenders.
18
<PAGE>169
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 1993 and
1994. A ballot proposition to permanently restore the renters' credit after
this year failed at the June 1994 election. The Legislature enacted a further
one-year suspension of the renters' tax credit, 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
warrants. Issuance of the warrants allows the State to defer repayment of
approximately $1 billion of its accumulated budget deficit into the 1995-96
fiscal year.
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"), and is
prohibited from spending "appropriations subject to limitation" in excess of
the Appropriations Limit. Article XIIIB, originally adopted in 1979, was
modified substantially by Propositions 98 and 111 in 1988 and 1990,
respectively. "Appropriations subject to limitation" are authorizations to
spend "proceeds of taxes", which consist of tax revenues and certain other
funds, including proceeds from regulatory licenses, user charges or other fees
to the extent that such proceeds exceed the reasonable cost of providing the
regulation, product or service. The Appropriations Limit is based on the limit
for the prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period above the combined Appropriation Limits for
those two years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax
revenues dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in cases of
emergency arising from civil disturbance or natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so declared and
approved, the Appropriations Limit for the next three years must be reduced by
the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-92 revenues
were smaller than expected, thus reducing the payment owed to schools in 1991-
92 under alternate "test" provisions. In response to the changing revenue
situation, and to fully fund the Proposition 98 guarantee in the 1991-92 and
1992-93 fiscal years without exceeding it, the Legislature enacted legislation
to reduce 1991-92 appropriations. The amount budgeted to schools but which
exceeded the reduced appropriation was treated as a non-Proposition 98 short-
term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion of the
amount budgeted to K-14 schools was designated to "repay" the prior year loan,
thereby reducing cash outlays in 1992-93 by that amount. To maintain per-
average daily attendance ("ADA") funding, the 1992-93 Budget included loans of
$732 million to K-12 schools and $241 million to community colleges, to be
repaid from future Proposition 98 entitlements. The 1993-94 Budget
19
<PAGE>170
also provided new loans of $609 million to K-12 schools and $178 million to
community colleges to maintain ADA funding. These loans have been combined
with the 1992-93 fiscal year loans into one loan of $1.760 billion, to be
repaid from future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools. A Sacramento
County Superior Court in California Teachers' Association, et al. v. Gould, et
al., has ruled that the 1992-93 loans to K-12 schools and community colleges
violate Proposition 98. The impact of the court's ruling on the State budget
and funding for schools is unclear and will remain unclear until the Court's
written ruling, which is currently being prepared, is issued.
The 1994-95 Budget Act has appropriated $14.4 billion of Proposition 98
funds for K-14 schools, exceeding the minimum Proposition 98 guaranty by $8
million to maintain K-12 funds per pupil at $4,217. Based upon State revenues,
growth rates and inflation factors, the 1994-95 Budget Act appropriations an
additional $286 million within Proposition 98 for the 1993-94 fiscal year to
reflect a need in appropriations for school district and county officers of
education, as well as an anticipated deficiency in special education funding.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsor cannot predict the impact of this or related legislation on the Bonds
in the California Trust portfolio. Other Constitutional amendments affecting
state and local taxes and appropriations have been proposed from time to time.
If any such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate revenues
as mandated by such initiatives. Propositions such as Proposition 98 and
others that may be adopted in the future, may place increasing pressure on the
State's budget over future years, potentially reducing resources available for
other State programs, especially to the extent the Article XIIIB spending
limit would restrain the State's ability to fund such other programs by
raising taxes.
As of July 1, 1994, the State had over $18.34 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond
authorizations in the aggregate amount of approximately $5.16 billion remained
unissued as of July 1, 1994. The State also builds and acquires capital
facilities through the use of lease purchase borrowing. As of June 30, 1994,
the State had approximately $5.09 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $21.87 billion aggregate principal amount of revenue bonds
and notes outstanding as of March 31, 1993. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not payable from the General Fund, and conduit obligations payable
only from revenues paid by private users of facilities financed by such
revenue bonds. Such enterprises and projects include transportation projects,
various public works and exposition projects, education facilities (including
the California State University and University of California systems), housing
health facilities and pollution control facilities.
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. In addition, the State is involved in
certain other legal proceedings that, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources. Examples of such cases include challenges to the State's
method of taxation of certain businesses, challenges
20
<PAGE>171
to certain vehicle license fees, and challenges to the State's use of Public
Employee Retirement System funds to offset future State and local pension
contributions. Other cases which could significantly impact revenue or
expenditures involve reimbursement to school districts for voluntary school
desegregation and state mandated costs, challenges to Medi-Cal eligibility,
recovery for flood damages, and liability for toxic waste cleanup. Because of
the prospective nature of these proceedings, it is not presently possible to
predict the outcome of such litigation or estimate the potential impact on the
ability of the State to pay debt service on its obligations.
On June 20, 1994, the United States Supreme Court, in two companion cases,
upheld the validity of California's prior method of taxing multinational
corporations under a "unitary" method of accounting for their worldwide
earnings, thus avoiding tax refunds of approximately $1.55 billion by the
State, and enabling the State to collect $620 million in previous assessments.
Barclays Bank PLC v. Franchise Tax Board concerning foreign corporations, and
Colgate-Palmolive v. Franchise Tax Board concerned domestic corporations.
RATINGS
On July 15, 1994, S&P, Moody's, and Fitch Investors Service, Inc. ("Fitch")
all downgraded their ratings of California's general obligation bonds. These
bonds are usually sold in 20- to 30-year increments and used to finance the
construction of schools, prisons, water systems and other projects. The
ratings were reduced by S&P from "A+" to "A," by Moody's from "Aa" to "A1,"
and by Fitch from "AA" to "A." Since 1991, when it had a "AAA" rating, the
State's rating has been downgraded three times by all three ratings agencies.
All three agencies cite the 1994-95 Budget Act's dependence on a
"questionable" federal bailout to pay for the cost of illegal immigrants, the
Proposition 98 guaranty of a minimum portion of State revenues for
kindergarten through community college, and the persistent deficit requiring
more borrowing as reasons for the reduced rating. Another concern was the
State's reliance on a standby mechanism which could trigger across-the-board
reductions in all State programs, and which could disrupt State operations,
particularly in fiscal year 1995-96. However, an S&P spokesman stated that,
although the lowered ratings means California is a riskier borrower, S&P
anticipates that the State will pay off its debts and not default. There can
be no assurance that such ratings will continue for any given period of time
or that they will not in the future be further revised.
As a result of Orange County's Chapter 9 bankruptcy filing on December 6,
1994, Moody's has suspended the County's bond ratings, and S&P has cut its
rating of all Orange County debt from "AA-" to "CCC," a level below investment
grade and an indication of high risk and uncertainty. Fitch does not rate
Orange County bonds. It is anticipated that as Orange County's credit and bond
ratings fall, it will have difficulty in getting loans or selling its bonds to
raise money. Additionally, the County's bankruptcy filing could affect about
180 municipalities, school districts and other municipal entities which
entrusted billions of dollars to Orange County to invest. S&P has informed
such entities that they have been placed on negative credit watch, the usual
step prior to a downgrade of credit rating.
The Fund believes the information summarized above describes some of the
more significant aspects relating to the California economy. The sources of
such information are Preliminary Official Statements and Official Statements
relating to the State's general obligation bonds and the State's revenue
anticipation notes, or obligation of other issuers located in the State of
California, or other publicly available documents.
21
<PAGE>172
Although the Sponsor has not independently verified this information, it has
no reason to believe that such information is not correct in all material
respects.
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 Directors 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 more trust
estates or fiduciary accounts. Purchasers who wish to combine purchase orders
to take advantage of volume discounts should contact a Smith Barney Financial
Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the Prospectus,
apply to any purchase of Class A shares if the aggregate investment in Class A
shares of the Fund and in Class A shares of other funds of the Smith Barney
Mutual Funds that are offered with a sales charge, including the purchase
being made, of any purchaser is $25,000 or more. The reduced sales charge is
subject to confirmation of the shareholder's holdings through a check of
appropriate records. The Fund reserves the right to terminate or amend the
combined right of accumulation at any time after written notice to
shareholders. For further information regarding the right of accumulation,
shareholders should contact a Smith Barney Financial 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
22
<PAGE>173
shares when purchased in amounts equalling or exceeding $500,000. The method
of computation of the public offering price is shown in the Fund's financial
statements, incorporated by reference in their entirety into this Statement of
Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed (a)
for any period during which the New York Stock Exchange, Inc. ("NYSE") is
closed (other than for customary weekend and holiday closings), (b) when
trading in the markets the Fund normally utilizes is restricted, or an
emergency exists, as determined by the SEC, so that disposal of the Fund's
investments or determination of net asset value is not reasonably 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 Board of Directors of the Fund determines that it would be detrimental
to the best interests of the remaining shareholders to make a redemption
payment wholly in cash, the Fund may pay, in accordance with SEC rules, any
portion of a redemption in excess of the lesser of $250,000 or 1.00% of the
Fund's net assets by a distribution in kind of portfolio securities in lieu of
cash. Securities issued as a distribution in kind may incur brokerage
commissions when shareholders subsequently sell those securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares with a value of at least $10,000 and who wish to
receive specific amounts of cash monthly and quarterly. Withdrawals of at
least $50 may be made under the Withdrawal Plan by redeeming as many shares of
the Fund as may be necessary to cover the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts withdrawn by shareholders that
exceed 1.00% per month of the value of a 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 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. All dividends and distributions on shares in the Withdrawal Plan
are reinvested automatically at net asset value in additional shares of the
Fund.
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 other investors should contact
a Smith Barney Financial Consultant. For additional information, shareholders
should contact a Smith Barney Financial Consultant. Withdrawal Plans, as of
November 7, 1994, should be set up with a Smith Barney Financial Consultant. A
shareholder who purchases shares directly through TSSG may continue to do so
and applications for participation in the Withdrawal Plan must be received by
TSSG
23
<PAGE>174
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 fiscal
years ended February 28, 1993, 1994, and 1995, Smith Barney or its predecessor
Shearson Lehman Brothers received $1,713,689, $937,828, and $548,572,
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 fiscal years ended
February 28, 1994 and 1995, the Fund's distributor received $75,150 and
$310,446, respectively, representing CDSC 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 in a Smith Barney
money market fund, the amount of the investment will be included as part of
the average daily net assets of both the Fund and the money market fund, and
affiliates of Smith Barney that serve the funds in an investment advisory or
administrative capacity will benefit from the fact they are receiving fees
from both such investment companies for managing these assets, computed on the
basis of their average daily net assets. The Fund's Board of Directors has
been advised of the benefits to Smith Barney resulting from these settlement
procedures and will take such benefits into consideration when reviewing the
Advisory, Administration and Distribution Agreements for continuance.
For the fiscal year ended February 28, 1995, Smith Barney incurred
distribution expense totalling approximately $1,411,000, consisting of
approximately $7,000 for advertising, $20,000 for printing and mailing of
prospectuses, $480,000 for support services, $784,000 to Smith Barney
Financial Consultants, and $120,000 for accruals for interest on the excess of
Smith Barney expenses incurred in distribution of the Fund's shares over the
sum of the distribution fees and CDSC received by Smith Barney from the Fund.
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, the Fund pays Smith Barney a distribution fee with
respect to the Class B and Class C shares primarily intended to compensate
Smith Barney for its initial expense of paying its Financial Consultants a
commission upon sales of those shares. The Class B distribution fee is
calculated at the annual rate of 0.50% of the value of the Fund's average net
assets 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.
24
<PAGE>175
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 years ended February 28, 1994 and 1995, Class A shares incurred
$641,265 and $590,964, respectively in service fees. For the fiscal years
ended February 28, 1994 and 1995, the Class B shares incurred $115,317 and
$172,009, respectively, in service fees. For the same periods, Class B shares
incurred $384,392 and $573,363, respectively, in distribution fees. For the
period of November 14, 1994 through February 28, 1995, Class C shares incurred
$229 and $838 in service and distribution fees, respectively.
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 with respect to a Class at any time, without
penalty, by vote of a majority of the Independent Directors or by vote of a
majority of the outstanding voting securities of the Class (as defined in the
1940 Act). Pursuant to the Plan, Smith Barney will provide the Board of
Directors 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 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, 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 certain funds 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
25
<PAGE>176
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. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is being considered. Prospectuses may be obtained from a Smith Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and, subject to any applicable CDSC, the proceeds 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 advertising or
marketing the Fund's shares. Such performance information may be included in
the following 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.
26
<PAGE>177
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, 1995 was 5.18% and 4.87%, respectively. The equivalent taxable
yield for the same period was 8.27% and 7.78%, respectively, assuming the
payment of Federal income taxes at a rate of 31% and California income taxes
at a rate of 9.30%.
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>
27
<PAGE>178
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:
(1.64)% for the one-year period beginning on March 1, 1994 through February
28, 1995.
7.23% per annum during the five-year period beginning on March 1, 1990
through February 28, 1995; and
8.92% per annum during the ten-year period beginning March 1, 1985 through
February 28, 1995, including any fee waivers which occurred during the
period. Had fee waivers not been included in the calculation the
Fund's average annual total return for Class A shares during the same
period would be 8.16%.
These Fund's average total return for Class B shares assuming the maximum
applicable CDSC was for the periods indicated:
(2.40)% for the one-year period beginning on March 1, 1994 through February
28, 1995.
5.99% per annum during the period from commencement (November 6, 1992)
through February 28, 1995.
The Fund's average total return for Class B shares without the CDSC was as
follows for the periods indicated:
1.89% for the one-year period beginning March 1, 1994 through February 28,
1995.
7.15% per annum during the period from commencement (November 6, 1992)
through February 28, 1995.
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:
2.46% for the one-year period beginning March 1, 1994 through February 28,
1995;
47.67% for the five-year period beginning March 1, 1990 through February 28,
1995; and
144.89% for the ten-year period beginning March 1, 1985 through February 28,
1995.
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
(1.64)%, 41.77% and 135.10%, respectively. The total return figures have been
restated to show the change in the maximum sales charge.
28
<PAGE>179
The aggregate total return for Class B shares for the periods indicated were
as follows:
1.89% for the period from March 1, 1994 through February 28, 1995.
17.35% for the period from November 6, 1992 (commencement of operations)
through February 28, 1995.
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 (2.40)% and 14.43%, respectively.
The aggregate total return for Class C shares was 11.72% for the period
beginning November 14, 1994 through February 28, 1995. This figure does not
assume that the maximum 1.00% CDSC assessed by the Fund has been deducted from
the investment at the time of the purchase. If the maximum CDSC had been
deducted at the time of the purchase, the Fund's aggregate total return for
the same period would have been 10.72%.
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.
TAXES
The following is a summary of selected Federal income tax considerations that
may affect the Fund and its shareholders. The summary is not intended as a
substitute for individual tax advice and investors are urged to consult their
own tax advisors as to the tax consequences of an investment in the Fund.
As described above and in the Prospectus, the Fund is designed to provide
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 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.
29
<PAGE>180
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 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
30
<PAGE>181
("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 or loss on the original shares
to the extent the subsequent sales charge is reduced. Instead, it will be
added to the tax basis in the newly acquired shares. 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 shares made within 90 days of the second
acquisition. This provision prevents a shareholder from immediately deducting
the sales charge by shifting his or her investment in a family of mutual
funds.
Each shareholder will receive after the close of the calendar year an
annual statement as to the Federal income tax and California state personal
income tax status of his or her dividends and distributions from the Fund for
the prior calendar year. Dividends attributable to California Municipal
Securities and any other obligations which, when held by an individual, the
interest therefrom would be exempt from taxation by California, will be exempt
from California state personal income taxation ("California exempt-interest
dividends"). Any dividends attributable to interest on municipal obligations
that are not California Municipal Securities generally will be taxable as
ordinary dividends for California state personal income tax purposes even if
such dividends are excluded from gross income for Federal income tax purposes.
These statements also will designate the amount of exempt-interest dividends
that is a specific preference item for purposes of the Federal individual and
corporate alternative minimum taxes. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior
taxable year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior
taxable year. Shareholders should consult their tax advisors as to any other
state and local taxes that may apply to these dividends and distributions. The
dollar amount of dividends excluded or exempt from Federal income taxation or
California state personal income taxation and the dollar amount subject to
Federal income taxation or California state personal income taxation, if any,
will vary for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. In the event the Fund earns taxable net
investment income, it intends to designate as taxable dividends the same
percentage of each day's dividend as its actual taxable net investment income
bears to its total net investment income earned for the year.
Investors considering buying shares of the Fund just prior to a record date
for a capital gain distribution should be aware that, regardless of whether
the price of the Fund shares to be purchased reflects the amount of the
forthcoming distribution payment, any such payment will be a taxable
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
31
<PAGE>182
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., Shearson Lehman Brothers California Municipals Fund
Inc., 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, 1995 and semi-annual period ended August 31, 1994 accompany this Statement
of Additional Information and are incorporated herein by reference in their
entirety.
32
<PAGE>183
APPENDIX A
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
<PAGE>184
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
<PAGE>185
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
<PAGE>186
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
<PAGE>187
APPENDIX B
The following is a listing of the bonds held by the Fund on March 31, 1995
which had ratings which were below investment grade (i.e., junk bonds):
<TABLE>
<CAPTION>
PERCENTAGE
RATING SOURCE OF PORTFOLIO
<S> <C> <C> <C>
CA Altntve Engy Srce Fin............................ B Adviser 0.10%
San Pablo Cal Sing Fam Mtg ......................... B1 Adviser 0.08%
</TABLE>
B-1
<PAGE>188
SMITH BARNEY
CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013 Funds 14, 198, 463, 478
Smith Barney
CALIFORNIA MUNICIPALS FUND INC.
STATEMENT OF
ADDITIONAL INFORMATION
APRIL 29, 1995
[LOGO OF SMITH BARNEY APPEARS HERE]
<PAGE>189
ANNUAL REPORT
OF
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995
<PAGE>190
DESCRIPTION OF ART WORK ON REPORT COVER
-----------------------------------
Small box above fund name showing a
palm tree overlooking Hollywood,
Mullholland Drive.
-----------------------------------
SMITH BARNEY
CALIFORNIA
MUNICIPALS
FUND INC.
FEBRUARY 28, 1995
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>191
[GRAPHIC: CALIFORNIA MUNICIPALS FUND]
DEAR SHAREHOLDER:
We are pleased to provide the annual report for Smith Barney California
Municipals Fund Inc. for the fiscal year ended February 28, 1995. Despite the
difficult investment environment of the past year, the Fund performed well,
providing investors in Class A shares with a total return of 2.46% and Class B
shares with a total return of 1.89%. These return numbers resulted in a first
quarter ranking for both Class A (#2 of 83 funds) and Class B (#6 of 83 funds)
shares by Lipper Analytical Services, Inc., an independent mutual fund
performance tracking organization, for the twelve months ended February 28,
1995. Reflecting the improvement in the municipal market that began late in
1994, Class C shares, a newly-available class of shares, earned a total return
of 11.72% for the period between November 14, 1994 and February 28, 1995.
Additional information about the performance of each class of shares during
this and previous fiscal years is available in the performance section of this
report which follows this letter.
MARKET AND ECONOMIC OVERVIEW
The past fiscal year demonstrated that volatility is becoming a permanent
feature of the fixed income landscape. We believe this is largely attributable
to the development of new technologies, the speed of communications, and the
freer movement of capital around the globe. The municipal market has also been
affected by these changes. During most of the past fiscal year the municipal
market experienced a significant rise in interest rates which negatively
impacted performance only to finish the year with one of the most powerful bond
rallies in recent memory.
We believe the volatility of the municipal market over the period was the result
of a marketplace that initially assumed that the superior economic growth in
both the U.S. and overseas would create inflationary problems for all the bond
markets. Anticipation proved much worse than reality, however, as the Federal
Reserve moved both aggressively and early to stave off this threat, thereby
producing an inflation index below 3 percent for 1994. As the market gradually
came to the conclusion that an elusive "soft landing" was economically possible,
its reaction was swift and forceful, producing a powerful bond rally during the
last several months of 1994.
In early December 1994, Orange County, California filed for bankruptcy
protection under Chapter 9 of the Federal bankruptcy code because of losses
sustained by its investment pool. The investment pool consists of deposits from
Orange County itself, agencies within Orange County (such as Orange County
Sanitation District Authority and Orange County Transportation Authority) and
various local communi-
1
<PAGE>192
ties. The pool suffered substantial losses through the use of leverage and
derivative investments.
At the end of this fiscal reporting period, approximately 8% of the portfolio
was invested in securities issued by various agencies located within Orange
County. However, none of these holdings are direct obligations of the county
itself, and more than half are either insured (AMBAC, MBIA, or FGIC) or backed
by guaranteed investment contracts. In addition, another 5% of the portfolio was
invested in a San Joaquin Transportation corridor bond, whose issuer is a
participant in Orange County's investment pool.
Orange County is currently trying to negotiate a settlement with its pool
participants, and the Fund anticipates that one will be reached by early June.
The Fund believes that the bankruptcy proceedings will not have a material
impact on the ability of these issuers to make scheduled interest and principal
payments and therefore will have little, if any, effect on the Fund.
Nevertheless, we are actively monitoring the Orange County proceedings.
INVESTMENT STRATEGY AND PORTFOLIO STRUCTURE
Our long-term investment strategy is to provide investors with a very
competitive yield and then produce the best total return we can, whatever the
market conditions. Our current strategy has been to take advantage of last
autumn's bond decline by extending the average life of the portfolio and
purchasing more discount securities (bonds that are selling below their
redemption value). Discount securities typically have a dual advantage in rising
markets. First, they tend to be one of the best-performing asset classes as
rates decline. Second, they tend to provide much better call protection, which
lowers the risk of having bonds prematurely called away. This strategy greatly
enhanced the performance of the Fund in the recent bond rally, and it will
continue to be our strategy until we see inflation re-emerge (although this does
not appear to be an imminent possibility).
In terms of credit quality, we have focused primarily on increasing the
percentage of the Fund's AA- and AAA-rated holdings, the two highest rating
categories available. At the end of this fiscal year, nearly 70% of the
portfolio was invested in AA- and AAA-rated securities. We believe these
securities offer our shareholders the best value. We concentrated the portfolio
in essential service revenue bonds and debt issued by local communities for
redevelopment projects and various civic improvements. These types of bonds
provide the Fund with competitive yields and a high degree of liquidity, which
makes it easier to navigate the Fund through turbulent market periods.
2
<PAGE>193
As we have since the Fund's inception in 1984, we will continue to strive to
provide you with superior investment management results. We look forward to
reporting to you in the Fund's semiannual report to shareholders.
Sincerely,
<TABLE>
<S> <C>
/s/ Heath B. McLendon /s/ Joseph P. Deane
Heath B. McLendon Joseph P. Deane
Chairman of the Board Vice President and
and Investment Officer Investment Officer
April 7, 1995
</TABLE>
- -------------------------------------------------------------------------------
Joe Deane will be appearing as a special guest on
WALL $TREET WEEK WITH LOUIS RUKEYSER
on May 5th, on the PBS Television Network.
Check your local listings for time and channel.
- -------------------------------------------------------------------------------
3
<PAGE>194
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE - CLASS A (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Dividends Return of Total
February 28 Beginning Ending Gains Paid Paid Capital Return*
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
1986 $ 13.94 $16.16 -- $ 1.21 -- 25.80%
- -------------------------------------------------------------------------------------------
1987 $ 16.16 $16.54 $ 0.33 $ 1.14 -- 12.13%
- -------------------------------------------------------------------------------------------
1988 $ 16.54 $15.49 $ 0.07 $ 1.09 -- 1.09%
- -------------------------------------------------------------------------------------------
1989 $ 15.49 $15.33 $ 0.03 $ 1.12 -- 6.67%
- -------------------------------------------------------------------------------------------
1990 $ 15.33 $15.61 -- $ 1.07 -- 9.02%
- -------------------------------------------------------------------------------------------
1991 $ 15.61 $15.66 $ 0.12 $ 1.07 -- 8.29%
- -------------------------------------------------------------------------------------------
1992 $ 15.66 $15.78 $ 0.27 $ 1.05 -- 9.50%
- -------------------------------------------------------------------------------------------
1993 $ 15.78 $16.70 $ 0.29 $ 0.97 $0.04 14.76%
- -------------------------------------------------------------------------------------------
1994 $ 16.70 $16.15 $ 0.65 $ 0.84 -- 5.92%
- -------------------------------------------------------------------------------------------
1995 $ 16.15 $15.40 $ 0.19 $ 0.89 -- 2.46%
===========================================================================================
Total $ 1.95 $ 10.45 $0.04
===========================================================================================
Cumulative Total Return -- (3/1/85 through 2/28/95) 144.89%
===========================================================================================
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the
sales charge (maximum 4.00%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
<TABLE>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** - CLASS A SHARES
<CAPTION>
Without Sales Charge With Sales Charge***
With Without With Without
Fee Waiver Fee Waiver Fee Waiver Fee Waiver
and Expense and Expense and Expense and Expense
Reimbursement Reimbursement Reimbursement Reimbursement
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Year Ended 2/28/95 N/A 2.46% N/A (1.64)%
- -------------------------------------------------------------------------------------
Five Years Ended 2/28/95 N/A 8.11% N/A 7.23%
- -------------------------------------------------------------------------------------
Ten Years Ended 2/28/95 9.37% 8.56% 8.92% 8.16%
=====================================================================================
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value. The Fund waived investment
advisory and sub-investment advisory and administration fees from April
1984 to February 1986 and reimbursed expenses from April 1984 to February
1985. A shareholder's actual return for the period during which waivers
and reimbursements were in effect would be the higher of the two numbers
shown.
*** Average annual total return figures shown assume the deduction of the
maximum 4.00% sales charge at the
time of investment.
</TABLE>
NOTE: On November 6, 1992, existing shares of the Fund were designated Class A
shares. Class A shares are subject to a maximum 4.00% front-end sales charge and
an annual service fee of 0.15% of the value of the average daily net assets
attributable to that class. The Fund's average annual rates of return would have
been lower had service fees been in effect prior to November 6, 1992.
4
<PAGE>195
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF SMITH BARNEY CALIFORNIA
MUNICIPALS FUND INC. VS. LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE AND
LEHMAN BROTHERS MUNICIPAL BOND INDEX+
- --------------------------------------------------------------------------------
February 28, 1985 - February 28, 1995
<TABLE>
EDGAR DESCRIPTIONS
DESCRIPTION OF MOUNTAIN CHART IN COVERS (CLASS A)(CONTINUED)
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
GROWTH OF $10,000 INVESTED IN THE INVESTMENT IN THE
INVESTED IN CLASS A LIPPER CALIFORNIA LEHMAN BROTHERS
MONTH SHARES OF THE MUNICIPAL FUND MUNICIPAL
ENDED FUND AVERAGE BOND INDEX
<S> <C> <C> <C>
02/85 $ 9,600 $10,000 $10,000
03/85 $ 9,688 $10,066 $10,086
06/85 $10,413 $10,846 $10,932
09/85 $10,331 $10,713 $10,768
12/85 $11,104 $11,497 $11,639
03/86 $12,158 $12,531 $12,817
06/86 $12,022 $12,462 $12,738
09/86 $12,545 $13,056 $13,422
12/86 $13,108 $13,599 $13,886
03/87 $13,464 $13,957 $14,222
06/87 $12,701 $13,145 $13,835
09/87 $12,311 $12,690 $13,492
12/87 $12,973 $13,340 $14,095
03/88 $13,377 $13,731 $14,579
06/88 $13,681 $14,016 $14,861
09/88 $14,088 $14,413 $15,241
12/88 $14,533 $14,806 $15,524
03/89 $14,607 $14,919 $15,627
06/89 $15,431 $15,775 $16,553
09/89 $15,444 $15,729 $16,564
12/89 $15,918 $16,256 $17,201
03/90 $15,950 $16,301 $17,277
06/90 $16,304 $16,672 $17,681
09/90 $16,248 $16,562 $17,691
12/90 $17,007 $17,316 $18,455
03/91 $17,233 $17,620 $18,870
06/91 $17,551 $17,988 $19,274
09/91 $18,311 $18,702 $20,024
12/91 $18,962 $19,256 $20,696
03/92 $18,882 $19,306 $20,758
06/92 $19,699 $20,058 $21,546
09/92 $20,025 $20,485 $22,120
12/92 $20,480 $20,877 $22,523
03/93 $21,258 $21,735 $23,358
06/93 $22,001 $22,468 $24,123
09/93 $22,672 $23,275 $24,938
12/93 $23,066 $23,500 $25,288
03/94 $22,004 $22,113 $23,899
06/94 $22,220 $22,175 $24,164
09/94 $22,346 $22,282 $24,329
12/94 $21,528 $21,735 $23,980
02/95 $23,510 $23,203 $25,384
<FN>
+ Illustration of $10,000 invested in Class A shares on February 28, 1985
assuming deduction of the maximum 4.00% sales charge at the time of
investment and reinvestment of dividends and capital gains at net asset
value through February 28, 1995.
LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE -- The Lipper California
Municipal Fund Average is composed of an average of the Fund's peer group
of mutual funds (83 as of February 28, 1995) investing in California
municipal bonds.
LEHMAN BROTHERS MUNICIPAL BOND INDEX -- The Lehman Brothers Municipal
Bond Index is a weighted composite which is comprised of more than 15,000
bonds issued within the last 5 years, having a minimum credit rating of
at least Baa and a maturity of at least 2 years, excluding all bonds
subject to the Alternative Minimum Tax and bonds with floating or zero
coupons.
Index information is available at month-end only; therefore the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
</TABLE>
5
<PAGE>196
Smith Barney
California Municipals Fund Inc.
<TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE - CLASS B (UNAUDITED)
<CAPTION>
Year Ended Net Asset Value Capital Dividends Return of Total
February 28 Beginning Ending Gains Paid Paid Capital Return*
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
11/6/92 -
2/28/93 $ 15.84 $16.70 $ 0.29 $0.28 $0.01 9.27%
- -------------------------------------------------------------------------------------------
1994 $ 16.70 $16.15 $ 0.65 $0.76 -- 5.40%
- -------------------------------------------------------------------------------------------
1995 $ 16.15 $15.40 $ 0.19 $0.80 -- 1.89%
===========================================================================================
Total $ 1.13 $1.84 $0.01
===========================================================================================
Cumulative Total Return -- (11/6/92 through 2/28/95) 17.35%
===========================================================================================
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the
contingent deferred sales charge ("CDSC").
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** - CLASS B SHARES
<CAPTION>
Without CDSC With CDSC***
<S> <C> <C>
- ---------------------------------------------------------------------------------
Year Ended 2/28/95 1.89% (2.40)%
- ---------------------------------------------------------------------------------
Inception 11/6/92 through 2/28/95 7.15% 5.99%
- ---------------------------------------------------------------------------------
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains distributions at net asset value.
*** Average annual total return figures shown assume the deduction of the
maximum applicable CDSC which is described in the prospectus.
</TABLE>
NOTE: The Fund began offering Class B shares on November 6, 1992. Class B
shares are subject to a maximum 4.50% CDSC and annual service and
distribution fees of 0.15% and 0.50%, respectively, of the value of the
average daily net assets attributable to that class.
6
<PAGE>197
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF SMITH BARNEY CALIFORNIA
MUNICIPALS FUND INC. VS. LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE AND LEHMAN
BROTHERS MUNICIPAL BOND INDEX+
- --------------------------------------------------------------------------------
November 6, 1992 - February 28, 1995
<TABLE>
EDGAR DESCRIPTIONS
DESCRIPTION OF MOUNTAIN CHART IN SHEARSON COVERS (CLASS B)
A line graph depicting the total growth (including reinvestment of dividends
and capital gains) of a hypothetical investment of $10,000 in California
Municipals Fund's Class B shares on November 6, 1992 through February 28, 1995
as compared with the growth of a $10,000 investment in the Lipper California
Municipal Fund Average and the Lehman Brothers Municipal Bond Index. The plot
points used to draw the line graph were as follows:
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
GROWTH OF $10,000 INVESTED IN THE INVESTMENT IN THE
INVESTED IN CLASS B LIPPER CALIFORNIA LEHMAN BROTHERS
MONTH SHARES OF THE MUNICIPAL FUND MUNICIPAL
ENDED FUND AVERAGE BOND INDEX
<S> <C> <C> <C>
10/31/92 - $10,000 $10,000
11/06/92 $10,000 - -
11/92 $10,174 $10,270 $10,179
12/92 $10,338 $10,406 $10,283
03/93 $10,718 $10,833 $10,664
06/93 $11,080 $11,199 $11,013
09/93 $11,403 $11,601 $11,385
12/93 $11,588 $11,713 $11,545
03/94 $11,039 $11,022 $10,911
06/94 $11,133 $11,053 $11,032
09/94 $11,181 $11,106 $11,108
12/94 $10,757 $10,834 $10,948
02/95 $11,735 $11,565 $11,589
<FN>
+ Illustration of $10,000 invested in Class B shares on November 6, 1992
assuming deduction of the maximum applicable CDSC at the time of
redemption and reinvestment of dividends and capital gains at net asset
value through February 28, 1995.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming deduction on
February 28, 1995).
LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE -- The Lipper California
Municipal Fund Average is composed of an average of the Fund's peer
group of mutual funds (83 as of February 28, 1995) investing in
California municipal bonds.
LEHMAN BROTHERS MUNICIPAL BOND INDEX -- The Lehman Brothers Municipal
Bond Index is a weighted composite which is comprised of more than
15,000 bonds issued within the last 5 years, having a minimum credit
rating of at least Baa and a maturity of at least 2 years, excluding all
bonds subject to the Alternative Minimum Tax and bonds with floating or
zero coupons.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results of Class B shares.
</TABLE>
7
<PAGE>198
Smith Barney
California Municipals Fund Inc.
<TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE - CLASS C SHARES (UNAUDITED)
<CAPTION>
Year Ended Net Asset Value Capital Dividends Total
February 28 Beginning Ending Gains Paid Paid Return*
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
11/14/94 -
2/28/95 $ 14.19 $15.40 $0.19 $0.23 11.72%
==============================================================================
Total $0.19 $0.23
==============================================================================
Cumulative Total Return -- (11/14/94 through 2/28/95) 11.72%
==============================================================================
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the CDSC.
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
AGGREGATE TOTAL RETURN** - CLASS C SHARES
<CAPTION>
Without CDSC With CDSC
Actual Actual***
<S> <C> <C>
- ---------------------------------------------------------------------------------
Inception 11/14/94 through 2/28/95 11.72% 10.72%
- ---------------------------------------------------------------------------------
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains distributions at net asset value.
*** Average annual total return figures shown assume the deduction of the
maximum applicable CDSC which is described in the prospectus.
</TABLE>
NOTE: The Fund began offering Class C shares on November 14, 1994.
Class C shares are subject to a maximum 1.00% CDSC and annual service and
distribution fees of 0.15% and 0.55%, respectively, of the value of the
average daily net assets attributable to that class.
8
<PAGE>199
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) FEBRUARY 28, 1995
INDUSTRY BREAKDOWN
EDGAR DESCRIPTIONS
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Industry Breakdown
Pie chart depicting the allocation of the California Municipals Fund Inc.
securities held at February 28, 1995 by industry classification. The pie is
broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Hospital 9.4%
Transportation 7.5%
Utility 17.5%
Housing 5.0%
Education 5.5%
Other Municipal Bonds and Notes and
Net Other Assets and Liabilities 33.0%
Pollution Control 8.8%
General Obligations 13.3%
</TABLE>
SUMMARY OF MUNICIPAL BONDS AND SHORT-TERM
TAX-EXEMPT INVESTMENTS BY COMBINED RATINGS
<TABLE>
<CAPTION>
Standard & Percentage of
Moody's Poor's Market Value
<S> <C> <C>
- ---------------------------------------------
Aaa AAA 60.6%
Aa AA 9.2
A A 16.2
Baa BBB 5.3
B B 0.1
VMIG1/P-1 A1 1.6
NR NR 7.0
------
100.0%
------
</TABLE>
AVERAGE MATURITY: 22 years
9
<PAGE>200
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
KEY TO INSURANCE ABBREVIATIONS
- --------------------------------------------------------------------------------
AMBAC -- American Municipal Bond Assurance Corporation
BIGI -- Bond Investors Guaranty Insurance
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
MBIA -- Municipal Bond Investors Assurance
STINS -- State Insurance
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES - 98.8%
CALIFORNIA - 97.4%
$ 3,000,000 Adelanto, California, Improvement Agency,
Tax Allocation, (Adelanto Improvement
Project),
Series B, (FGIC Insured),
5.500% due 12/1/23 Aaa AAA $ 2,741,250
2,500,000 Alhambra Arcadia Azush County, California,
Independent Cities Authority, Risk
Management, Certificates of Participation,
7.250% due 3/1/07 NR NR 2,559,375
4,500,000 Alhambra, California, Redevelopment Agency,
Tax Allocation, (AMBAC Insured),
5.850% due 5/1/23 Aaa AAA 4,325,625
200,000 Anaheim, California, Certificates of
Participation, (Convention Center,
Refunding Project),
(MBIA Insured),
5.700% due 8/1/02++ Aaa AAA 205,000
Association of Bay Area Governments (ABAG),
Financing for Nonprofit Corporations,
California, Certificates of Participation,
(Stanford University Hospital):
2,100,000 5.250% due 11/1/06 A1 AA- 1,911,000
3,305,000 5.250% due 11/1/07 A1 AA- 2,974,500
5,120,000 5.250% due 11/1/08 A1 AA- 4,563,200
8,955,000 5.500% due 11/1/13 A1 AA- 8,025,919
5,935,000 5.250% due 11/1/20 A1 AA- 4,940,888
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>201
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
Banning, California, Certificates of
Participation, (Banning Wastewater
Facilities Corporation),
(Pre-refunded):
$ 115,000 11.500% due 11/1/03 NR AAA $ 135,412
125,000 11.500% due 11/1/04 NR AAA 147,500
140,000 11.600% due 11/1/05 NR AAA 165,900
155,000 11.650% due 11/1/06 NR AAA 184,256
175,000 11.700% due 11/1/07 NR AAA 208,469
195,000 11.750% due 11/1/08 NR AAA 233,025
220,000 11.750% due 11/1/09 NR AAA 263,450
2,695,000 Bay Area Government Association, California,
Water Revenue Bond, Napa Water Systems
Project,
(MBIA Insured),
5.375% due 5/1/10 Aaa AAA 2,546,775
3,000,000 Brea, California, Redevelopment Agency
Refunding Revenue, (Project AB),
Tax Allocation Bonds, (MBIA Insured),
5.750% due 8/1/23++ Aaa AAA 2,823,750
3,510,000 Brea, California, Redevelopment Agency
Revenue, (Project AB), Tax Allocation
Revenue Bonds,
(MBIA Insured),
5.500% due 8/1/08++ Aaa AAA 3,404,700
Brisbane, California, Brisbane Redevelopment
Agency, Tax Allocation for Brisbane Community
Redevelopment, General Obligations:
200,000 9.400% due 5/1/05 NR A+ 206,000
220,000 9.400% due 5/1/06 NR A+ 226,600
1,000,000 California Alternative Energy Source,
Financing Authority Revenue, (SRI
International Project), Cogeneration Revenue,
9.750% due 12/1/05 (in default) NR NR 500,000
California Educational Facilities,
Revenue Bonds:
5,450,000 (Pepperdine University), Series A, (MBIA
Insured),
5.500% due 6/1/19 Aaa AAA 5,000,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>202
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
California Educational Facilities, Revenue Bonds
(continued):
(Southwestern University Project):
$ 1,000,000 6.600% due 11/1/14 A NR $ 1,021,250
4,505,000 6.700% due 11/1/24 A NR 4,600,731
2,500,000 (University of San Diego),
6.500% due 10/1/22 A NR 2,518,750
California Health Facilities Financing
Authority Revenue Bonds:
5,000,000 (Kaiser Permanente),
5.550% due 8/15/25 Aa2 AA 4,387,500
1,000,000 (Adventist Health-West), Series A, (MBIA
Insured),
10.000% due 3/1/14 Aaa AAA 1,020,160
250,000 (St. Joseph's Health System), Series 1,
9.750% due 7/1/99 Aa AAA 257,085
250,000 (Victory Valley Community Hospital),
Series 1984A, (STINS Insured),
9.875% due 7/1/12 NR A+ 256,563
California Housing Finance Agency,
(Home Ownership Mortgage),
Series A:
15,000 9.200% due 8/1/15 Aa AA 15,450
4,750,000 (MBIA Insured),
5.500% due 2/1/14 Aaa AAA 4,340,312
10,000 Series 1984,
10.250% due 2/1/14 Aa AA- 10,200
310,000 Series 1984B,
Zero Coupon due 8/1/16 Aa AA- 29,063
605,000 California Public Capital Improvement
Finance Authority, Pooled Project, Series B,
(BIGI Insured),
8.100% due 3/1/18 Aaa AAA 641,300
2,000,000 California Special Districts Finance
Authority, Certificates of Participation,
Series A,
8.500% due 7/1/18 Baa NR 2,165,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>203
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
California State, General Obligation Bonds,
Veteran Series:
$ 455,000 Series AL,
9.700% due 4/1/02 A1 A+ $ 569,319
725,000 Series AM,
9.000% due 10/1/02 A1 A+ 876,344
Series AT:
4,000,000 9.700% due 2/1/01 A1 A+ 4,885,000
1,000,000 9.500% due 2/1/10 A1 A+ 1,368,750
2,000,000 Series AU,
8.400% due 10/1/06 A1 A+ 2,440,000
California Statewide Communities Development
Authority, Lease Revenue, Certificates of
Participation:
2,680,000 5.000% due 10/1/14 Aaa AAA 2,334,950
(St. Joseph's Health Facilities):
4,825,000 5.500% due 7/1/14 Aa AA 4,366,625
5,000,000 6.625% due 7/1/21 Aa AA 5,081,250
(Sutter Health Facilities), (MBIA Insured):
3,145,000 5.400% due 8/15/07 Aaa AAA 3,038,856
3,500,000 5.500% due 8/15/09 Aaa AAA 3,333,750
12,100,000 5.500% due 8/15/23 Aaa AAA 10,920,250
(Unihealth Facilities Corporation), Series A,
(AMBAC Insured),
4,515,000 5.500% due 10/1/07 Aaa AAA 4,424,700
2,000,000 Calleguas - Las Virgines, California, Water
Revenue, (Calleguas Municipal Water District
Project), (FGIC Insured),
5.125% due 7/1/21 Aaa AAA 1,725,000
6,000,000 Concord, California, Redevelopment Agency,
Tax Allocation, Central Concord Redevelopment
Project, (AMBAC Insured),
5.250% due 7/1/19 Aaa AAA 5,310,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>204
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 6,000,000 Corona, California, Redevelopment Agency,
Tax Allocation, (Redevelopment Project
Area A), Series A, (FGIC Insured),
5.500% due 9/1/24 Aaa AAA $ 5,460,000
11,135,000 Culver City, California, Redevelopment
Finance Authority Revenue,
Tax Allocation, (AMBAC Insured),
5.000% due 11/1/23 Aaa AAA 9,395,156
Dublin, California, Certificates of
Participation, (Civic Center Project),
(AMBAC Insured):
1,305,000 5.600% due 2/1/06 Aaa AAA 1,301,738
1,380,000 5.625% due 2/1/07 Aaa AAA 1,367,925
4,615,000 5.625% due 2/1/10 Aaa AAA 4,499,625
2,000,000 East Bay, California, Municipal Utility
Distribution, Water System Revenue,
(MBIA Insured),
5.000% due 6/1/21 Aaa AAA 1,697,500
1,400,000 Eastside, California, Unified High School,
Santa Clara County District Revenue,
Series B, (FGIC Insured),
5.000% due 9/1/18 Aaa AAA 1,198,750
Eastern Municipal Water District, California,
Water and Sewer Revenue, Series A,
(FGIC Insured):
1,000,000 5.375% due 7/1/13 Aaa AAA 918,750
1,000,000 5.250% due 7/1/23 Aaa AAA 880,000
2,150,000 Fairfield, California, Public Finance
Authority, Revenue, (MBIA Insured),
5.800% due 4/1/23 Aaa AAA 2,050,562
2,250,000 Fontana, California, Public Financing
Authority, Tax Allocation Revenue Bonds,
Series A, (MBIA Insured),
5.000% due 9/1/20 Aaa AAA 1,912,500
455,000 Fresno, California, Airport Revenue Bonds,
10.900% due 7/1/14 A NR 472,631
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>205
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
Fresno, California, Health Facilities
Revenue,
(Holy Cross Health System):
$ 2,200,000 5.200% due 12/1/04 A1 AA- $ 2,095,500
2,435,000 5.375% due 12/1/06 A1 AA- 2,307,163
Fresno, California, Joint Powers Financing
Authority, Lease Revenue,
(Street Light Acquisition Project),
Series A:
200,000 5.375% due 8/1/03 A A+ 191,000
3,860,000 5.500% due 8/1/12 A A+ 3,411,275
Fresno, California, Joint Powers Financing
Authority, Local Agency Revenue, Series A:
2,000,000 6.000% due 9/2/01 NR BBB 1,980,000
1,000,000 6.200% due 9/2/03 NR BBB 988,750
1,500,000 6.550% due 9/2/12 NR BBB 1,436,250
15,000 Fresno County, California, Housing Finance
Revenue, Series A, (FHA Insured),
12.500% due 9/15/12 NR NR 15,225
Garden Grove, California, Community Agency,
Tax Allocation Revenue:
500,000 5.375% due 10/1/03++ NR A 473,125
3,275,000 5.700% due 10/1/08++ NR A 3,013,000
2,550,000 Garden Grove, California, Public Financing
Authority, Revenue, (Water Services Capital
Improvement Project), (FGIC Insured),
5.500% due 12/15/23++ Aaa AAA 2,323,687
2,000,000 Hawthorne, California, Community
Redevelopment, Tax Allocation,
(Project Area 2),
6.625% due 9/1/14 Baa NR 1,895,000
1,740,000 Hayward, California, Housing Authority
Revenue, FNMA, Multifamily Revenue,
(Cypress Garden Project),
Revenue Bonds, Series C,
9.375% due 12/1/18 NR NR 1,844,400
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>206
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 1,500,000 Intercommunity Hospital, California,
Financing Authority, Certificates of
Participation, (North Bay Health Care),
9.750% due 8/1/15 NR AAA $ 1,576,875
Irvine Ranch, California, Water District,
Joint Powers Agency,
Local Pool Revenue, Issue II:
9,000,000 7.800% due 2/15/08++ NR A+ 9,393,750
8,500,000 8.250% due 8/15/23++ NR A+ 9,041,875
100,000 Kern, California, High School District,
Series C, (MBIA Insured),
8.750% due 8/1/03 Aaa AAA 120,875
500,000 Kings County, California, Waste Management
Authority, Solid Waste Revenue,
7.200% due 10/1/14 NR BBB+ 514,375
1,500,000 Kings River Conservation District,
California, Pine Flat Power Revenue,
Series D,
5.500% due 1/1/20 Aa AA 1,368,750
Lancaster, California, Redevelopment Agency,
Tax Allocation Bond:
2,000,000 Multifamily Housing Revenue, (High Valley
Apartment Project), (FHA Insured),
9.125% due 11/1/13 NR A- 2,060,000
7,000,000 Sheriffs Combined Redevelopment Project
Areas, (MBIA Insured),
5.700% due 8/1/23 Aaa AAA 6,545,000
465,000 Local Government Finance, Joint Powers
Authority, California Revenue,
(Anaheim Redevelopment Agency),
Series A, (Pre-refunded),
8.200% due 9/1/15++ NR NR 520,219
2,000,000 Loma Linda, California, Hospital Revenue
Bonds, (Loma Linda University Medical Center
Project), Series B,
9.000% due 12/1/12 NR BBB 2,105,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>207
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 3,000,000 Long Beach, California, Financing Authority
Revenue, (AMBAC Insured),
5.500% due 11/1/22 Aaa AAA $ 2,756,250
200,000 Los Angeles, California, Certificates of
Participation, Revenue Bonds,
Waste Water Revenue,
6.600% due 11/1/99 A1 AA 209,000
1,000,000 Los Angeles, California, Community
Redevelopment Agency, Tax Allocation Bond,
(Central Business District), Series F,
(Pre-refunded),
8.500% due 7/1/02 NR A- 1,031,250
Los Angeles, California, Convention and
Exhibition Center Authority,
Lease Revenue,
Series A,
(MBIA Insured):
6,000,000 5.375% due 8/15/18 Aaa AAA 5,430,000
12,000,000 5.125% due 8/15/21 Aaa AAA 10,380,000
1,375,000 Los Angeles, California, Home Mortgage
Revenue Bonds, GNMA, Second Mortgage Program,
8.100% due 5/1/17 Aaa NR 1,498,750
Los Angeles, California, Wastewater Systems
Revenue, Series A, (MBIA Insured):
2,930,000 5.700% due 6/1/09 Aaa AAA 2,864,075
7,960,000 5.750% due 6/1/11 Aaa AAA 7,731,150
1,000,000 5.700% due 6/1/20 Aaa AAA 945,000
2,500,000 5.875% due 6/1/24 Aaa AAA 2,418,750
1,000,000 Series D, (FGIC Insured),
5.200% due 11/1/21 Aaa AAA 873,750
1,500,000 Los Angeles County, California, Certificates
of Participation, (Van Nuys Courthouse
Project), (Pre-refunded),
9.000% due 6/1/15 NR AAA 1,608,750
2,000,000 Los Angeles County, California, Financing
Authority Revenue, Capital Projects,
Series A,
5.250% due 10/1/19 Aa AA 1,757,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>208
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$15,075,000 Los Angeles County, California,
Transportation Authority Sales Tax Revenue,
(Project A), Series A, (FGIC Insured),
5.000% due 7/1/21 Aaa AAA $12,794,906
125,000 Martinez, California, Home Mortgage, Housing
Revenue, (Escrowed to Maturity),
10.750% due 2/1/16 Aaa AAA 131,250
375,000 Marysville, California, Hospital Revenue,
(Freemont Rideout Health Group), Series A,
(AMBAC Insured),
6.000% due 1/1/04 Aaa AAA 388,594
4,890,000 Metropolitan Water District of Southern
California, Series G,
5.750% due 3/1/14 Aaa AAA 4,706,625
1,070,000 Modesto, California, Certificates of
Participation,
(Golf Course Refining Project), Series B,
(FGIC Insured),
5.000% due 11/1/23 Aaa AAA 902,813
Mojave, California, Water Agency, Improvement
District, Series M, (Morongo Basin):
1,500,000 6.600% due 9/1/13 Baa BBB+ 1,503,750
5,510,000 6.600% due 9/1/22 Baa BBB+ 5,461,787
3,000,000 New Haven, California, Unified School
District, School Building Corporation,
Certificates of Participation,
Refunding Bonds, (Pre-refunded),
9.600% due 7/1/01 NR NR 3,112,590
45,000 Northern California Power Agency, Public
Power Revenue Bonds, (Geothermal Project
No. 3), Series 1984A, (Pre-refunded),
11.500% due 7/1/10 Aaa AAA 46,350
4,750,000 Oceanside, California, Certificates of
Participation, (Water Systems Refunding
Project), (AMBAC Insured),
5.800% due 8/1/21 Aaa AAA 4,554,063
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>209
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 6,025,000 Orange County, California, Housing Finance
Agency, Single Family Residential Mortgage,
Revenue Bonds, Tax-Exempt Interest
Accumulator,
Zero Coupon due 7/1/17++ NR BBB+ $ 707,938
2,000,000 Orange County, California, Redevelopment
Agency, Tax Allocation Revenue,
(Southwest Redevelopment Project),
Series A, (AMBAC Insured),
5.700% due 10/1/23++ Aaa AAA 1,867,500
2,800,000 Orange County, California, Sanitation
Districts No. 1, 2 & 3,
Certificates of Participation,
(Joint Facility Report), (Escrowed to
Maturity),
12.000% due 8/1/96++ Aaa A 3,083,500
2,330,000 Oxnard, California, Public Facilities
Corporation, Certificates of Participation,
(Oxnard Public Facility Corporation),
Wastewater Treatment Plant Project,
(AMBAC Insured), (Pre-refunded),
7.500% due 9/1/06 Aaa AAA 2,565,912
180,000 Palm Springs, California, Financing
Authority, (Palm Springs Regional Airport
Revenue), (MBIA Insured),
5.400% due 1/1/03 Aaa AAA 179,100
2,250,000 Palmdale, California, Certificates of
Participation, Water District Revenue,
(Littlerock Dam Project),
Series A, (MBIA Insured),
5.750% due 10/1/23 Aaa AAA 2,123,437
4,390,000 Pasadena, California, Certificates of
Participation, Refunding and Capital
Projects, (AMBAC Insured),
5.000% due 2/1/16 Aaa AAA 3,791,863
4,560,000 Pittsburg, California, Public Financing
Authority, Wastewater Revenue, Series A,
(FGIC Insured),
5.375% due 6/1/22 Aaa AAA 4,086,900
Pittsburg, California, Redevelopment Agency,
Tax Allocation:
6,750,000 (Los Medenos Community Development Project),
(FGIC Insured),
5.500% due 8/1/15 Aaa AAA 6,269,062
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>210
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
Pittsburg, California, Redevelopment Agency,
Tax Allocation (continued):
$ 1,240,000 Series A, (AMBAC Insured),
5.000% due 8/1/17 Aaa AAA $ 1,061,750
2,985,000 Placer County, California, Certificates of
Participation, Water Agency Revenue,
(MBIA Insured),
5.600% due 7/1/21 Aaa AAA 2,761,125
2,000,000 Port Oakland, California, Special Facilities
Revenue, Series A,
6.750% due 1/1/12 Aa3 A+ 2,060,000
6,000,000 Poway, California, Redevelopment Agency,
(Paraguay Redevelopment Project),
(FGIC Insured),
5.500% due 12/15/23 Aaa AAA 5,467,500
15,750,000 Rancho Cucamonga, California, (Rancho
Redevelopment Project), (MBIA Insured),
5.500% due 9/1/23 Aaa AAA 14,352,188
Redding, California, Joint Powers Finance
Authority, (Solid Waste and Corporate Yard),
Series A:
2,000,000 5.500% due 1/1/13 A BBB+ 1,740,000
3,200,000 (FGIC Insured),
5.500% due 12/1/18 Aaa AAA 2,944,000
Rialto, California, Certificates of
Participation, Wastewater Systems Revenue,
(MBIA Insured):
1,005,000 5.400% due 11/1/06 Aaa AAA 984,900
1,000,000 5.500% due 11/1/07 Aaa AAA 980,000
1,000,000 5.500% due 11/1/08 Aaa AAA 968,750
1,500,000 Riverside, California, Redevelopment Agency,
Tax Allocation, Merged Redevelopment Project,
Series A, (MBIA Insured),
5.625% due 8/1/23 Aaa AAA 1,393,125
955,000 Riverside, California, Unified School
District, Certificates of Participation, (Air
Conditioning Equipment Facilities Project),
9.000% due 7/15/00 NR A- 975,294
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>211
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 1,470,000 Riverside County, California, Housing
Authority Revenue Bonds, Series A,
7.900% due 10/1/18 Baa NR $ 1,537,987
15,000 Riverside County, California, Single Family
Revenue Bonds,
10.500% due 9/1/14 NR BBB+ 15,788
500,000 Sacramento, California, Municipal Utility
District, Electric Revenue, Series P,
(Pre-refunded),
8.625% due 7/1/10 NR AAA 517,160
Sacramento, California, Municipal Utilities
District, Electric Revenue:
4,000,000 Series D, (FGIC Insured),
5.250% due 11/15/12 Aaa AAA 3,675,000
4,500,000 Series D, (MBIA Insured),
5.250% due 11/15/20 Aaa AAA 3,971,250
3,000,000 Series E,
5.700% due 5/15/12 A A- 2,775,000
Sacramento, California, Regional
Transportation District, Certificates of
Participation, Series A:
200,000 6.375% due 3/1/02 A1 NR 209,250
400,000 6.400% due 3/1/03 A1 NR 418,500
1,325,000 San Bernardino County, California,
Certificates
of Participation, Refunding Bonds, (Capital
Improvement Project), (Pre-refunded),
7.800% due 7/1/16 NR NR 1,386,281
1,000,000 San Diego, California, Industrial Development
Authority, Revenue Bonds, San Diego
Gas & Electric Company, Series A,
9.250% due 9/1/20 A1 A+ 1,036,250
2,000,000 San Diego, California, Redevelopment Agency
Refunding, (Marina Redevelopment Project),
(Pre-refunded),
8.750% due 12/1/08 Aaa AAA 2,227,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>212
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 650,000 San Diego, California, Sewer Revenue, Series
A, (AMBAC Insured),
5.250% due 5/15/20 Aaa AAA $ 573,625
San Francisco, California, City & County
Redevelopment Financing Agency:
5,000,000 Multi-Family Housing, GNMA, (South Beach
Project),
5.700% due 3/1/29 Aaa NR 4,593,750
Sewer Revenue, (FGIC Insured),
17,000,000 5.375% due 10/1/22 Aaa AAA 15,193,750
1,500,000 (Tax Allocation Redevelopment Project),
Series C,
5.400% due 8/1/21 A A 1,290,000
San Francisco, California, Downtown Parking,
Corporate Parking Revenue:
135,000 6.250% due 4/1/04 A NR 134,325
1,800,000 6.550% due 4/1/12 A NR 1,775,250
750,000 6.650% due 4/1/18 A NR 742,500
San Joaquin Hills, California, Transportation
Authority, Sr. Lien, Toll Revenue:
5,000,000 Zero Coupon due 1/1/14++ NR NR 1,318,750
60,000,000 Zero Coupon due 1/1/16++ NR NR 13,650,000
17,500,000 Zero Coupon due 1/1/17++ NR NR 3,696,875
25,000,000 Zero Coupon due 1/1/18++ NR NR 4,937,500
20,000,000 Zero Coupon due 1/1/19++ NR NR 3,675,000
San Jose, California, Airport Revenue Bonds,
Series 93, (FGIC Insured):
200,000 5.400% due 3/1/04 Aaa AAA 196,000
1,735,000 5.500% due 3/1/05 Aaa AAA 1,698,131
1,945,000 5.500% due 3/1/07 Aaa AAA 1,874,494
2,150,000 5.625% due 3/1/13 Aaa AAA 2,010,250
10,325,000 San Jose, California, Financing Authority
Revenue, Series D,
5.250% due 10/15/23 A1 A+ 8,556,844
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>213
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
$ 6,250,000 San Jose, California, Redevelopment Agency,
Merged Area Redevelopment Project,
(MBIA Insured),
5.000% due 8/1/20 Aaa AAA $ 5,320,312
530,000 San Luis Obispo, California, Multifamily
Housing Authority Revenue, FNMA, (Parkwood
Apartments Project), Series A,
5.700% due 8/1/08 NR AAA 505,488
415,000 San Pablo, California, Redevelopment Agency
Revenue, Single Family Mortgage,
10.125% due 12/1/14 B NR 444,050
5,000,000 Santa Margarita, Dana Point Authority,
California, Water Revenue Bonds, (MBIA
Insured),
5.750% due 8/1/20++ Aaa AAA 4,762,500
1,320,000 Santa Rosa, California, Mortgage Revenue,
(Village Square Apartments Project), Series
A,
(FHA Insured),
6.875% due 9/1/27 NR AAA 1,349,700
3,000,000 Signal Hill, California, Redevelopment Agency
Revenue, Tax Allocation, (Signal Hill
Redevelopment
Project), Series 1-B, (MBIA Insured),
5.250% due 10/1/23 Aaa AAA 2,632,500
Sonoma County, California, Certificates of
Participation, (Honor Farm Detention
Facilities Project):
4,200,000 (Pre-refunded),
5.000% due 11/15/13 A1 A+ 3,486,000
3,000,000 (Pre-refunded),
5.000% due 11/15/17 A1 A+ 2,426,250
290,000 9.100% due 6/1/01 NR A+ 308,125
320,000 9.100% due 6/1/02 NR A+ 340,000
345,000 9.100% due 6/1/03 NR A+ 366,562
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>214
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
Southern California Public Power Authority,
Power Project Reserve:
$ 5,455,000 (Mead Phoenix Project), Series A,
(AMBAC Insured), (Pre-refunded),
5.000% due 7/1/17 Aaa AAA $ 4,691,300
1,500,000 (Palo Verde Project), Series C,
(Prerefunded),
(AMBAC Insured),
5.750% due 7/1/17 Aaa AAA 1,554,375
11,740,000 (San Juan Project), Series A, (MBIA Insured),
5.000% due 1/1/20 Aaa AAA 10,008,350
(Southern Transmission Project):
3,000,000 5.500% due 7/1/20 Aa AA- 2,711,250
2,750,000 Subseries A, (MBIA Insured),
5.000% due 7/1/22 Aaa AAA 2,327,188
4,135,000 South Napa, California, Waste Management
Authority Revenue, Solid Waste Transfer
Facility,
6.500% due 2/15/14 Baa1 NR 3,979,937
9,195,000 South Orange County, California, (Foothill
Area Project), Financing Authority Special
Tax Revenue, Series C, (FGIC Insured),
5.750% due 8/15/18++ Aaa AAA 8,758,237
Standard, California, School District,
Certificates of Participation, Capital
Improvement Project, Series A:
320,000 6.200% due 3/1/10 NR A- 309,600
340,000 6.250% due 3/1/11 NR A- 328,525
1,500,000 Suisun City, California, Redevelopment
Agency,
Tax Allocation, (MBIA Insured),
5.500% due 10/1/23 Aaa AAA 1,368,750
3,080,000 Torrance, California, Hospital Revenue Bonds,
(Mary Greeley Hospital),
6.875% due 7/1/15 NR A 3,149,300
4,500,000 Ukiah, California, Unified School District,
Certificates of Participation,
(Measure A Capital Projects),
6.000% due 9/1/10 Baa1 BBB 4,106,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>215
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
CALIFORNIA (CONTINUED)
University Of California, Revenue Bonds:
$ 4,750,000 Multiple Purpose Projects, Series C,
(AMBAC Insured),
5.200% due 9/1/10 Aaa AAA $ 4,364,062
Series A:
1,070,000 5.500% due 9/1/06 NR A- 1,025,863
1,125,000 5.600% due 9/1/07 NR A- 1,081,406
1,195,000 5.600% due 9/1/08 NR A- 1,141,225
1,255,000 5.700% due 9/1/09 NR A- 1,176,562
1,330,000 5.700% due 9/1/10 NR A- 1,236,900
1,700,000 Upland, California, Hospital Revenue,
Certificates
of Participation, (San Antonio Community
Hospital), (Pre-refunded),
7.800% due 1/1/18 NR A 1,891,250
West & Central Basin Finance Authority,
California, Central Basin Project,
4,490,000 (FGIC Insured),
5.000% due 8/1/16 Aaa AAA 3,872,625
12,625,000 West Basin Project, Series A, (AMBAC
Insured),
5.000% due 8/1/16 Aaa AAA 10,889,062
1,000,000 Woodland, California, Hospital Revenue,
Certificates
of Participation, (Woodland Memorial
Hospital),
8.200% due 8/1/15 NR A 1,070,000
COLORADO - 1.4%
50,000,000 Dawson Ridge, Colorado, Metropolitan District
Commission, No. 1, Series B,
Zero Coupon due 10/1/22 Aaa NR 7,625,000
- ------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $515,994,336) 524,373,669
==========================================================================================
SHORT-TERM TAX-EXEMPT INVESTMENTS - 1.5%
CALIFORNIA - 1.5%
300,000 California Health Facilities Financing
Authority
Revenue Bonds, (Sutter), Series A,
3.700% due 3/1/20+ VMIG1 A1+ 300,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>216
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) FEBRUARY 28, 1995
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
SHORT-TERM TAX-EXEMPT INVESTMENTS (CONTINUED)
CALIFORNIA - (CONTINUED)
California Pollution Control Financing
Authority, Pollution Control Revenue:
$ 400,000 (Atlantic Richfield Company Project), Series
A,
4.000% due 12/1/24+ VMIG1 A1 $ 400,000
2,600,000 (Burney Forest Project), Series A,
3.750% due 9/1/20+ P1 NR 2,600,000
100,000 (Delano Project),
3.900% due 8/1/19+ P1 NR 100,000
200,000 (Exxon Oil Project),
3.800% due 12/1/12+ P1 A+ 200,000
Los Angeles, California, Regional Airports,
Flexible American Airlines, Lease Revenue:
2,000,000 Series A,
3.650% due 12/1/24+ VMIG1 NR 2,000,000
1,000,000 Series G,
3.650% due 12/1/24+ VMIG1 NR 1,000,000
1,300,000 Los Angeles County, California, Metropolitan
Transportation Authority, Sales Tax Revenue,
Series A, (MBIA Insured),
3.900% due 7/1/20+ VMIG1 NR 1,300,000
- ------------------------------------------------------------------------------------------
TOTAL SHORT-TERM TAX-EXEMPT INVESTMENTS
(Cost $7,900,000) 7,900,000
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $523,894,336*) 100.3% 532,273,669
==========================================================================================
OTHER ASSETS AND LIABILITIES (NET) (0.3) (1,879,842)
==========================================================================================
NET ASSETS 100.0% $530,393,827
==========================================================================================
<FN>
* Aggregate cost for Federal tax purposes.
+ Variable rate demand notes are payable upon not more than one day's notice.
++ See Note 9.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>217
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES FEBRUARY 28, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $523,894,336) (Note 1)
See accompanying schedule $532,273,669
Interest receivable 7,651,867
Receivable for investment securities sold 4,139,877
Receivable for Fund shares sold 1,226,037
- -----------------------------------------------------------------------------------------
TOTAL ASSETS 545,291,450
=========================================================================================
LIABILITIES:
Payable for investment securities purchased $14,147,973
Dividends payable 283,943
Investment advisory fee payable (Note 2) 138,549
Administration fee payable (Note 2) 79,133
Service fee payable (Note 3) 59,551
Distribution fee payable (Note 3) 48,055
Payable for Fund shares redeemed 21,935
Custodian fees payable (Note 2) 14,400
Transfer agent fees payable (Note 2) 12,935
Due to custodian 5,713
Accrued expenses and other payables 85,436
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES 14,897,623
=========================================================================================
NET ASSETS $530,393,827
=========================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>218
Smith Barney
California Municipals Fund Inc.
<TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (continued) FEBRUARY 28, 1995
<S> <C>
NET ASSETS CONSIST OF:
Distributions in excess of net investment income $ (283,943)
Accumulated net realized loss on investments sold (9,797,114)
Unrealized appreciation of investments 8,379,333
Par value 344,453
Paid-in capital in excess of par value 531,751,098
- ----------------------------------------------------------------------------------------
TOTAL NET ASSETS $530,393,827
========================================================================================
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($401,743,321 / 26,089,810 shares of common stock
outstanding) $15.40
========================================================================================
MAXIMUM OFFERING PRICE per share ($15.40 / 0.960)
(based on maximum sales charge of 4.00% of the offering price on
February 28, 1995) $16.04
========================================================================================
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($127,888,263 / 8,305,989 shares of common stock
outstanding) $15.40
========================================================================================
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($762,243 / 49,505 shares of common stock outstanding) $15.40
========================================================================================
<FN>
+ Redemption price per share is equal to net asset value less any applicable
CDSC.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>219
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 33,395,101
EXPENSES:
Investment advisory fee (Note 2) $1,776,849
Administration fee (Note 2) 1,014,965
Service fee (Note 3) 763,202
Distribution fee (Note 3) 574,201
Transfer agent fees (Notes 2 and 4) 138,544
Custodian fees (Note 2) 87,143
Legal and audit fees 65,936
Directors' fees and expenses (Note 2) 44,641
Other 194,300
- -----------------------------------------------------------------------------------------
TOTAL EXPENSES 4,659,781
- -----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 28,735,320
=========================================================================================
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities (15,903,746)
Futures contracts 8,387,881
- -----------------------------------------------------------------------------------------
Net realized loss on investments during the year (7,515,865)
- -----------------------------------------------------------------------------------------
Net change in unrealized appreciation/(depreciation) of:
Securities (8,483,171)
Futures contracts (2,281,250)
- -----------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (10,764,421)
=========================================================================================
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (18,280,286)
=========================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 10,455,034
=========================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>220
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
2/28/95 2/28/94
<S> <C> <C>
Net investment income $ 28,735,320 $ 25,809,861
Net realized gain/(loss) on securities and futures
contracts during the year (7,515,865) 18,390,272
Net unrealized depreciation on securities and futures
contracts during the year (10,764,421) (15,730,247)
- ------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 10,455,034 28,469,886
Distributions to shareholders from net investment
income:
Class A (22,538,852) (21,453,692)
Class B (5,932,951) (3,407,803)
Class C (7,813) --
Distributions to shareholders in excess of net
investment income:
Class A (527,007) (220,654)
Class B (138,895) (35,050)
Class C (187) --
Distributions to shareholders from capital gains:
Class A (4,752,153) (16,828,789)
Class B (1,481,373) (3,683,752)
Class C (8,107) --
Net increase/(decrease) in net assets from Fund share
transactions
(Note 6):
Class A (3,266,292) 15,790,654
Class B 24,960,081 72,861,938
Class C 711,787 --
- ------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (2,526,728) 71,492,738
NET ASSETS:
Beginning of year 532,920,555 461,427,817
- ------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $283,943 and $255,704,
respectively) $530,393,827 $532,920,555
==========================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>221
Smith Barney
California Municipals Fund Inc.
<TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
2/28/95 2/28/94# 2/28/93* 2/28/92 2/28/91
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of year $16.15 $16.70 $15.78 $15.66 $15.61
- --------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.89 0.86 0.97 1.04 1.07
Net realized and unrealized gain/(loss)
on investments (0.56) 0.08 1.25 0.40 0.17
- --------------------------------------------------------------------------------------------------------
Total from investment operations 0.33 0.94 2.22 1.44 1.24
- --------------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.87) (0.83) (0.97) (1.05) (1.07)
Distributions in excess of net investment
income (0.02) (0.01) -- -- --
Distributions from net realized gains (0.19) (0.65) (0.29) (0.27) (0.12)
Return of capital -- -- (0.04) -- --
- --------------------------------------------------------------------------------------------------------
Total distributions (1.08) (1.49) (1.30) (1.32) (1.19)
========================================================================================================
Net asset value, end of year $15.40 $16.15 $16.70 $15.78 $15.66
========================================================================================================
Total return++ 2.46% 5.92% 14.76% 9.50% 8.29%
========================================================================================================
Ratios/supplemental data:
Net assets, end of year (in 000's) $401,743 $425,181 $423,504 $364,809 $334,599
Ratio of operating expenses to average net
assets 0.80% 0.80% 0.70% 0.65% 0.65%
Ratio of net investment income to average
net assets 5.76% 5.20% 6.04% 6.54% 6.85%
Portfolio turnover rate 59% 76% 72% 86% 53%
========================================================================================================
<FN>
* The Fund commenced operations on April 9, 1984. 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 expense ratio before waiver of fees and voluntary reimbursement of
expenses by investment adviser and sub-investment adviser and administrator
was 0.82% for the fiscal year ended February 28, 1986.
+ 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 for the fiscal year ended February 28, 1986.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with the results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>222
Smith Barney
California Municipals Fund Inc.
<TABLE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
2/28/90 2/28/89 2/28/88 2/28/87 2/28/86
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of year $15.33 $15.49 $16.54 $16.16 $13.94
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.09 1.12 1.09 1.14 1.21+
Net realized and unrealized
gain/(loss) on investments 0.26 (0.13) (0.98) 0.71 2.22
- -----------------------------------------------------------------------------------------------------
Total from investment operations 1.35 0.99 0.11 1.85 3.43
- -----------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (1.07) (1.12) (1.09) (1.14) (1.21)
Distributions in excess of net
investment income -- -- -- -- --
Distributions from net realized gains -- (0.03) (0.07) (0.33) --
Return of capital -- -- -- -- --
- -----------------------------------------------------------------------------------------------------
Total distributions (1.07) (1.15) (1.16) (1.47) (1.21)
=====================================================================================================
Net asset value, end of year $15.61 $15.33 $15.49 $16.54 $16.16
=====================================================================================================
Total return++ 9.02% 6.67% 1.09% 12.13% 25.80%
=====================================================================================================
Ratios/supplemental data:
Net assets, end of year (in 000's) $328,938 $313,059 $156,464 $207,872 $111,705
Ratio of operating expenses to average
net assets 0.72% 0.67% 0.64% 0.67% 0.73%**
Ratio of net investment income to
average net assets 6.95% 7.19% 7.26% 6.99% 8.08%
Portfolio turnover rate 35% 27% 22% 16% 14%
=====================================================================================================
<FN>
* The Fund commenced operations on April 9, 1984. 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 expense ratio before waiver of fees and voluntary reimbursement of
expenses by investment adviser and sub-investment adviser and administrator
was 0.82% for the fiscal year ended February 28, 1986.
+ 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 for the fiscal year ended February 28, 1986.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with the results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>223
Smith Barney
California Municipals Fund Inc.
<TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
2/28/95 2/28/94# 2/28/93*
<S> <C> <C> <C>
Operating performance:
Net asset value, beginning of year $16.15 $16.70 $15.84
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.81 0.77 0.29
Net realized and unrealized gain/(loss) on investments (0.57) 0.09 1.15
- ------------------------------------------------------------------------------------------------
Total from investment operations 0.24 0.86 1.44
- ------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.78) (0.75) (0.28)
Distributions in excess of net investment income (0.02) (0.01) --
Distributions from net realized gains (0.19) (0.65) (0.29)
Return of capital -- -- (0.01)
- ------------------------------------------------------------------------------------------------
Total distributions (0.99) (1.41) (0.58)
================================================================================================
Net asset value, end of year $15.40 $16.15 $16.70
================================================================================================
Total return+ 1.89% 5.40% 9.27%
================================================================================================
Ratios/supplemental data:
Net assets, end of year (in 000's) $127,888 $107,740 $37,924
Ratio of operating expenses to average net assets 1.32% 1.33% 1.30%**
Ratio of net investment income to average net assets 5.25% 4.67% 5.44%**
Portfolio turnover rate 59% 76% 72%
================================================================================================
<FN>
* The Fund commenced selling Class B shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with the results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>224
Smith Barney Shearson
California Municipals Fund Inc.
<TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<CAPTION>
PERIOD
ENDED
2/28/95*
<S> <C>
Operating performance:
Net asset value, beginning of period $14.19
- --------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.24
Net realized and unrealized gain on investments 1.39#
- --------------------------------------------------------------------------------------------
Total from investment operations 1.63
- --------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.23)
Distributions in excess of net investment income (0.00)++
Distributions from net realized gains (0.19)
- --------------------------------------------------------------------------------------------
Total distributions (0.42)
============================================================================================
Net asset value, end of period $15.40
============================================================================================
Total return+ 11.72%
============================================================================================
Ratios/supplemental data:
Net assets, end of period (in 000's) $ 762
Ratio of operating expenses to average net assets 1.37%**
Ratio of net investment income to average net assets 5.19%**
Portfolio turnover rate 59%
============================================================================================
<FN>
* The Fund commenced selling Class C shares on November 14, 1994.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
++ Amount represents less than $0.01.
# The amount shown may not accord with the change in aggregate gains and losses
of portfolio securities due to the timing of sales and the redemptions of
Fund shares.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>225
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney California Municipals Fund Inc. (formerly Smith Barney Shearson
California Municipals Fund Inc.) (the "Fund") was incorporated under the laws of
the State of Maryland on February 17, 1984. The Fund is a non-diversified, open-
end management investment company registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). Effective November 7, 1994, the Fund began offering Class C and Class Y
shares and continued to offer Class A and Class B shares. As of February 28,
1995, no Class Y shares had been sold. Class A shares are sold with a front-end
sales charge. Class B and Class C shares may be subject to a contingent deferred
sales charge ("CDSC") upon redemption. Class B shares will convert automatically
to Class A shares eight years after the date of original purchase. Class Y
shares are available to investors making an initial investment of at least $5
million and are not subject to any sales charges, service or distribution fees.
All classes of shares have identical rights and privileges except with respect
to the effect of the respective sales charges to each class, the distribution
and/or service fees borne by each class, expenses allocable exclusively to each
class, voting rights on matters affecting a single class, the exchange privilege
of each class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
Portfolio valuation: Securities are valued by The Boston Company Advisors, Inc.
("Boston Advisors") after consultation with an independent pricing service (the
"Service") approved by the Board of Directors. When, in the judgment of the
Service, quoted bid prices for securities are readily available and are
representative of the bid side of the market, these investments are valued at
the mean between the quoted bid prices and asked prices (as obtained by the
Service from dealers in such securities). Securities for which, in the judgment
of the Service, there are no readily obtainable market quotations (which may
constitute a majority of the portfolio securities) are carried at fair value as
determined by the Service, based on methods which include consideration of:
yields or prices of municipal securities of comparable quality, coupon, maturity
and type; indications as to values from dealers; and general market conditions.
Short-term investments that mature in 60 days or less are valued at amortized
cost.
Futures contracts: The Fund may enter into futures contracts. The Fund's
futures transactions will be entered into for hedging purposes to protect
against a decline in
35
<PAGE>226
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
the price of securities that the Fund owns, or to protect the Fund against an
increase in the price of securities it is committed to purchase.
Upon entering into a futures contract, the Fund is required to deposit with the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin." Subsequent payments
("variation margin") are made or received by the Fund each day, depending on the
daily fluctuation of the value of the contract.
For financial statement purposes, an amount equal to the settlement amount of
the contract is included in its Statement of Assets and Liabilities as an asset
and as an equivalent liability. For long futures positions, the asset is
marked-to-market daily; for short futures positions, the liability is
marked-to-market daily. The daily changes in the contract are recorded as
unrealized gains or losses. The Fund recognizes a realized gain or loss when the
contract is closed.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk the
Fund may not be able to enter into a closing transaction because of an illiquid
secondary market.
Repurchase Agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation 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. The value of the collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counter-party default, the Fund has the
right to use the collateral to offset losses incurred. There is potential loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities, including the risk of a possible
decline in the value of the underlying securities during the period while the
Fund seeks to assert its rights. The Fund's investment adviser, administrator or
sub-administrator, acting under the supervision of the Board of Directors,
reviews the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
Securities purchased
36
<PAGE>227
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
or sold on a when-issued or delayed delivery basis may be settled a month or
more after the trade date. Interest income on these securities is not accrued
until settlement date. When required, the Fund instructs the custodian to
segregate assets in a separate account with a current value at least equal to
the amount of its when-issued purchase commitments. Realized gains and losses
from securities sold are recorded on the identified cost basis. Investment
income and realized and unrealized gains and losses are allocated based upon the
relative net assets of each class of shares.
Dividends and distributions to shareholders: Dividends from net investment
income are determined on a class level, declared on each day that the Fund is
open for business and paid on the last day of the Smith Barney Inc. ("Smith
Barney") statement month. Distributions from net realized capital gains are
declared and paid annually, after the end of the fiscal year in which earned. In
addition, in order to avoid the application of a 4.00% nondeductible excise tax
on certain undistributed amounts of ordinary income and capital gains, the Fund
may make an additional distribution shortly before December 31 in each year of
any undistributed ordinary income or capital gains and expects to make any other
distributions as are necessary to avoid this tax. Income distributions and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund as a whole.
Permanent differences incurred during the Fund's fiscal year resulting from
distributions in excess of net investment income have been reclassified to
paid-in capital at year end.
Federal taxes: It is the policy of the Fund to qualify as a regulated
investment company, which distributes tax-exempt interest dividends, by
complying with the requirements of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies and by distributing
substantially all of its earnings to its shareholders. Therefore, no Federal
income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, formerly a division of Mutual
Management Corp., which was transferred effective November 7, 1994 to Smith
Barney Mutual Funds Management Inc. ("SBMFM"). Mutual Management Corp. and SBMFM
are both wholly owned subsidiaries of Smith Barney Holdings Inc.
37
<PAGE>228
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
("Holdings"). Holdings is a wholly-owned subsidiary of The Travelers Inc. Under
the Advisory Agreement, the Fund pays a monthly fee at the following annual
rates: 0.35% of the value of its average daily net assets up to $500 million and
0.32% of the value of its average daily net assets in excess of $500 million.
Prior to April 20, 1994, the Fund was party to an administration agreement (the
"Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Administration
Agreement, the Fund paid a monthly fee at the annual rate of 0.20% of the value
of its average daily net assets up to $500 million and 0.18% of the value of its
daily net assets in excess of $500 million.
As of the close of business on April 20, 1994, SBMFM (formerly known as Smith,
Barney Advisers, Inc.) succeeded Boston Advisors as the Fund's administrator.
The new agreement contains substantially the same terms and conditions,
including the same level of fees, as the predecessor agreement.
As of the close of business on April 20, 1994, the Fund and SBMFM entered into a
sub-administration agreement (the "Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, SBMFM pays Boston Advisors a
portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors.
For the year ended February 28, 1995, Smith Barney received $548,572 from
investors representing commissions (sales charges) on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of certain Class A, Class B and Class C shares. In circumstances in which the
CDSC is imposed, the amount of the charge will vary depending on the number of
years since the date of purchase. For the year ended February 28, 1995, Smith
Barney received from shareholders $310,446 in CDSC on the redemption of Class B
shares.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Fund for serving as a Director or officer of
the Fund. The Fund pays each Director who is not an officer, director, or
employee of Smith Barney or any of its affiliates $2,000 per annum plus $500 per
meeting attended and each Director emeritus who is not an officer, director or
employee of Smith Barney or any of its affiliates $1,000 per annum plus $250 per
meeting attended. The Fund reimburses all Directors for travel and out-of-pocket
expenses incurred to attend such meetings.
38
<PAGE>229
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a distribution
agreement with the Fund, and sells shares of the Fund through Smith Barney or
its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class C
shareholders and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C shares of the Fund at the annual rate of 0.15% of the value
of the average daily net assets of each respective class of shares. Smith Barney
is also paid an annual distribution fee with respect to Class B and Class C
shares at the annual rate of 0.50% and 0.55%, respectively, of the value of the
average daily net assets of each class. For the year ended February 28, 1995,
the Fund incurred service fees of $590,964, $172,009 and $229 for Class A, Class
B and Class C shares, respectively. For the year ended February 28, 1995, the
Fund incurred distribution fees of $573,363 and $838 for Class B and Class C
shares, respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class of
shares are prorated among the classes based upon the relative net assets of each
class. Operating expenses directly attributable to a class of shares are charged
to that class' operations. In addition to the above service and distribution
fees, class specific operating expenses include transfer agent fees. For the
year ended February 28, 1995, transfer agent fees for Class A, Class B and Class
C shares were $90,929, $47,547 and $68, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments for the year ended February 28, 1995 amounted to
$331,252,802 and $287,861,869, respectively.
At February 28, 1995, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost amounted to $16,329,544, and
39
<PAGE>230
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
aggregate gross unrealized depreciation for all securities in which there was an
excess of tax cost over value amounted to $7,950,211.
<TABLE>
6. COMMON STOCK
As of February 28, 1995, the Fund had authorized capital of 500 million shares
of $.01 par value common stock divided into four classes: Class A, Class B,
Class C and Class Y. Changes in common stock outstanding were as follows:
<CAPTION>
YEAR ENDED YEAR ENDED
2/28/95 2/28/94
Class A Shares: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Sold 3,394,819 $ 50,600,349 2,686,986 $ 44,513,803
Issued as reinvestment of
dividends 1,123,282 16,819,570 1,519,575 25,027,145
Redeemed (4,747,129) (70,686,211) (3,246,672) (53,750,294)
- -----------------------------------------------------------------------------------------------
Net increase/(decrease) (229,028) $ (3,266,292) 959,889 $ 15,790,654
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
2/28/95 2/28/94
Class B Shares: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Sold 2,727,908 $ 41,326,937 4,488,473 $74,380,170
Issued as reinvestment of
dividends 294,122 4,382,356 278,568 4,584,260
Redeemed (1,386,281) (20,749,212) (367,733) (6,102,492)
- -----------------------------------------------------------------------------------------------
Net increase 1,635,749 $ 24,960,081 4,399,308 $72,861,938
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
2/28/95*
Class C Shares: Shares Amount
<S> <C> <C>
- ----------------------------------------------------------------
Sold 49,120 $706,212
Issued as reinvestment of dividends 385 5,575
- ----------------------------------------------------------------
Net increase 49,505 $711,787
================================================================
<FN>
* The Fund commenced selling Class C shares on November 14, 1994.
</TABLE>
As of February 28, 1995, no Class Y shares had been sold.
40
<PAGE>231
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America (formerly known as Continental Bank N.A.)
under an Amended and Restated Line of Credit Agreement (the "Agreement") dated
April 30, 1992 and renewed effective May 31, 1994, primarily for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. Under this Agreement the
Fund may borrow up to the lesser of $25 million or 25% of its net assets.
However, pursuant to the Fund's prospectus, the Fund may only borrow up to 10%
of its total assets. Under the terms of the Agreement, as amended, the Fund and
the other affiliated entities are charged an annual aggregate commitment fee of
$100,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to the aggregate amount of indebtedness pursuant to the Agreement of no less
than 5 to 1. During the year ended February 28, 1995, the Fund had an average
outstanding daily balance of $73,717 with interest rates ranging from 4.63% to
6.13%. Interest expense totaled $4,386 for the year ended February 28, 1995. As
of February 28, 1995, the Fund had no outstanding borrowings under this
Agreement.
8. CONCENTRATION OF CREDIT
The Fund primarily invests in debt obligations issued by the State of California
and local governments in the State of California, its political subdivisions,
agencies and public authorities to obtain funds for various public purposes. The
Fund is more susceptible to factors adversely affecting issuers of California
municipal securities than is a municipal bond fund that is not concentrated in
these issuers to the same extent.
9. ORANGE COUNTY HOLDINGS
Approximately 8% of the portfolio was invested in securities issued by various
agencies located within Orange County. However, none of these holdings are
direct obligations of the county itself, and more than half are either insured
(AMBAC, MBIA, or FGIC) or backed by guaranteed investment contracts. In
addition, another 5% of the portfolio was invested in a San Joaquin
Transportation corridor bond, whose issuer is a participant in Orange County's
investment pool.
Orange County is currently trying to negotiate a settlement with its pool
participants, and Management anticipates that one will be reached by early June.
Management believes that the bankruptcy proceedings will not have a material
impact on the ability of these issuers to make scheduled interest and principal
payments and therefore will have little, if any, effect on the Fund.
41
<PAGE>232
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
10. CAPITAL LOSS CARRYFORWARD
At February 28, 1995, the Fund had capital loss carryforwards of $3,512,188
available to offset future capital gains expiring in 2003.
Under current tax law, losses arising after October 31 may be deferred and
treated as occurring on the first day of the following fiscal year. In the
fiscal year ended February 28, 1995, the Fund elected to defer capital losses
occurring between November 1, 1994 and February 28, 1995, as follows:
<TABLE>
<S> <C>
Short-Term.................... $3,046,426
Long-Term..................... $3,238,501
</TABLE>
42
<PAGE>233
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.:
We have audited the accompanying statement of assets and liabilities of
Smith Barney California Municipals Fund Inc. (formerly Smith Barney Shearson
California Municipals Fund Inc.), including the schedule of portfolio
investments, as of February 28, 1995, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
ten years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
February 28, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney California Municipals Fund Inc. as of February 28, 1995, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the ten years in the period then ended, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 10, 1995
43
<PAGE>234
Smith Barney
California Municipals Fund Inc.
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED) YEAR ENDED FEBRUARY 28, 1995
Of the dividends paid by the Fund attributable to net investment income for the
year ended February 28, 1995, 98.69% is tax-exempt for regular Federal income
taxes and California income taxes.
The capital gains dividend distribution paid to shareholders for fiscal year
ended February 28, 1995, whether taken in additional shares or in cash, is as
follows:
<TABLE>
<S> <C>
Long-Term Capital Gains....... $3,793,641
</TABLE>
The above figure may differ from that cited elsewhere in this report due to
differences in the calculations of income and capital gains for Securities and
Exchange Commission (book) purposes and Internal Revenue Service (tax) purposes.
44
<PAGE>235
CALIFORNIA MUNICIPALS FUND INC.
DIRECTORS
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliott S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon
Cornelius Rose
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Jessica M. Bibliowicz
President
Joseph P. Deane
Vice President and
Investment Officer
David Fare
Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Christina T. Sydor
Secretary
[LOGO] RECYCLED
RECYCLABLE
SMITH BARNEY
A MEMBER OF TRAVELERS GROUP[LOGO]
This report is submitted for the general information of the shareholders of
Smith Barney California Municipals Fund Inc. It is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus for the Fund, which contains information concerning the
Fund's investment policies, fees and expenses as well as other pertinent
information.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 14, 198, 463, 478
FD 2209 D5
1995
ANNUAL
REPORT
<PAGE>236
ANNUAL REPORT
OF
SMITH BARNEY MUNI FUNDS -- CALIFORNIA PORTFOLIO
FOR THE FISCAL YEAR ENDED MARCH 31, 1995
<PAGE>237
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
1995
1995
1995 [ARTWORK APPEARS HERE]
1995
1995
Smith Barney
Muni Funds
California Money
Market Portfolio
California Limited
Term Portfolio
California Portfolio
--------------------------------------------------------
March 31,1995
[LOGO APPEARS HERE] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>238
- --------------------------------------
California, California Limited Term
and California Money Market Portfolios
- --------------------------------------
Dear Shareholder:
We are pleased to present the annual report and audited financial statements for
Smith Barney Muni Funds California Portfolio, California Limited Term Portfolio
and California Money Market Portfolio for the fiscal year ended March 31, 1995.
Market and Economic Overview
Since our last report to you in November, the fixed-income markets, and
municipal bonds in particular, have enjoyed a powerful rally. Municipal bond
yields have declined more than a full percentage point, as evidenced by the drop
in the average yield on The Bond Buyer's weekly 25-Bond Revenue Index of 30-year
municipal bonds from a high of 7.37% on November 17, 1994 to 6.29% on March 31,
1995. This was substantially better than the performance of the benchmark 30-
year Treasury bond, which experienced a decline in yield of 70 basis points from
8.13% to 7.43% during the same time frame.
The vastly improved bond markets reflect a growing consensus that inflation will
remain under control, and the Federal Reserve Board will be successful in
engineering a "soft landing" by slowing the economy down to a more sustainable,
non-inflationary rate of growth. The seven increases in the federal funds rate
(the rate banks charge each other for overnight loans), orchestrated by the Fed
since February 1994, appear to be slowing the pace of economic growth. Recent
economic reports show a slower rate of increase in employment, producer prices,
and retail sales. Industrial production and capacity utilization were also lower
than expected, signalling a possible slowdown in the country's strong
manufacturing sector. These generally favorable economic fundamentals are more
than offsetting concerns about the substantial decline in the value of the
dollar relative to the Japanese yen and German mark on the foreign exchange
markets.
Late in April, several tax-reform proposals which recommend a flat Federal
income tax rate began to receive increased attention in the national financial
press and from municipal bond market participants. Adoption of a flat tax would
diminish the advantages of tax exemption for municipal bonds. Although the
various plans being circulated are only proposals, the publicity surrounding
them has recently caused some investors to back away from the municipal bond
market. In our opinion it is much too early in the process to predict what
changes in the tax laws, if any, will actually take place, but tax reform will
certainly be a major topic of political debate over the next few years. Many
observers believe that the more radical proposals for changes in the way taxes
are collected have little chance for enactment.
1
<PAGE>239
Absent these tax-reform concerns, municipals would probably continue to be
strong performers relative to Treasuries and other taxable investments due to
the low supply of new issues. Not only did last year's spike in interest rates
sharply reduce refinancing activity in the municipal market, but voter pressure
on states and municipalities to rein in spending and cut taxes, or at least
avoid tax increases, has also resulted in a roughly 30% decline in new-money
financing. In addition, the universe of existing municipal bonds is shrinking.
In 1995, an estimated $230 billion of older, high-coupon issues will mature or
be called as they reach their first optional call dates. With estimates of new-
issue volume at less than $150 billion, the net reduction in municipal debt
outstanding could approach $100 billion this year, contracting the market by
about eight percent. Ordinarily, a reduction in supply of this magnitude would
be expected to provide a powerful boost for municipal bond values as it did
earlier this year. Uncertainties about various tax proposals, however, will
probably keep municipals from trading any better than their normal relationship
to taxable investment alternatives.
We would also like to briefly discuss the Orange County, California financial
crisis that forced both the county and its investment pool to declare bankruptcy
late in 1994. The seeds of this situation were sown in the declining interest-
rate environment of prior years. As short-term interest rates plummeted through
late 1993, some market participants, such as Orange County's investment pool
manager, turned to leverage or derivatives as a way of boosting yields. Leverage
is simply the process of borrowing in the short-term market and investing in
longer-term bonds in order to take advantage of the difference in yield between
the two sectors. Derivatives are securities that have a rate of return that is
derived from an underlying asset or market index. In many cases, the use of
derivatives had the same effect as leverage by allowing investors to magnify
returns, but without actually borrowing money. When short-term rates rebounded,
many of these portfolios suffered serious damage, with Orange County the most
prominent example due to its size and the severity of its losses. Leverage,
rather than the use of derivatives, caused the bulk of the harm that occurred in
this situation.
Fortunately, the extent of the problems facing the county and other participants
in its investment pool appear to be virtually unique. While certain other
municipalities experienced losses as a result of higher interest rates, none of
these losses appear to be of sufficient magnitude to create the risk of default
or bankruptcy. However, should Orange County default on upcoming repayments of
short-term notes--and its disclosed plans for dealing with this crisis have so
far demonstrated a less than forthright willingness to pay--there could be
serious repercussions for other California local government issuers and possibly
the entire municipal market. In any case, neither the California Portfolio nor
the California Limited Term Portfolio held bonds issued by Orange County, and
only one issue held by the California Portfolio (that was not insured or
otherwise credit enhanced) was identified as a pool
2
<PAGE>240
participant. This solid-waste system issue represents less than one percent of
the Portfolio's assets and is secured by a separate, ongoing revenue stream that
should not be encumbered because revenue bond payments are not subject to the
automatic stay of a bankruptcy.
The California Economy
Economic conditions in California are stronger than they have been in four
years. Nevertheless, California was the only state to experience a rating
reduction from the two major rating agencies in 1994. Moody's lowered its rating
from Aa to A1 and Standard & Poor's reduced its rating from A+ to A. Rating
agencies look at both a state's economy and its budget; and expenditures for
social services, although more realistic than in previous years, are still high
in California's current budget proposal.
California Portfolio
The California Portfolio had a total return of 6.47% (Class A shares) for the
fiscal year. That was well above the 5.94% average total return for all
California municipal bond funds over the same period, as reported by Lipper
Analytical Services.
Long-term performance of the Portfolio is also excellent relative to its peers.
The Portfolio's five-year cumulative total return (excluding sales charge) of
48.62% (Class A shares) substantially outperformed the average cumulative total
return of 44.09% for all California municipal bond funds in the Lipper survey
for the period ended March 31, 1995. (Please see Average Annual Total Return
chart on page 10 of this report for additional performance information.) It is
also noteworthy that this strong performance over the last five years has been
achieved with the need for only minimal capital gains distributions, an
important consideration for investors interested in after-tax income.
While we have a generally positive outlook for the fixed-income markets, the
size of the rally we have experienced so far would seem to leave little room for
disappointment, and any sign of a rebound in economic activity is likely to
result in a return to higher interest rates. We also believe that the unique
supply and demand characteristics of the municipal market and tax-reform
uncertainties will tend to exaggerate price swings relative to taxable
investments.
In light of this viewpoint, we are maintaining a balanced approach to
structuring the interest-rate sensitivity of the Portfolio by investing in a
combination of both long and short effective maturities. Most long-term
municipal bonds are callable prior to their stated maturity date. When a bond
has a coupon higher than prevailing market yields, its maturity is effectively
shortened to the call date for trading purposes because of the possibility that
the issuer will exercise its option to replace the bond with lower-cost debt.
3
<PAGE>241
We are retaining high-coupon bonds that trade well above their face value for
the defensiveness of their shorter effective maturities and the above-market
level of income they provide. However, we are also focusing on eliminating bonds
with shorter call dates when they are trading near their face value. Such bonds
have unfavorable performance characteristics because they retain the downside
risk of their longer maturity if rates should rise, but their appreciation
potential is limited by the shorter call date if interest rates decline. We are
replacing such issues with bonds that have similar stated maturities but greater
call protection.
Although this strategy sacrifices some of the current income being generated by
the Portfolio, it enhances long term performance potential if interest rates
continue to decline without adding to downside risk if interest rates rise. We
believe that positioning the Portfolio in this manner is the best way to achieve
our objective of the highest tax-free income consistent with prudent investment
risk.
California Limited Term Portfolio
The California Limited Term Portfolio had a total return of 5.89% (Class A
shares) for the fiscal year. This return compared favorably with the 5.21%
average total return for all California intermediate municipal bond funds over
the same period, as reported by Lipper Analytical Services.
As discussed above in our commentary on the California Portfolio, any rebound in
economic activity is likely to result in a return to higher interest rates.
Accordingly, we are taking a more cautious approach to structuring the interest-
rate sensitivity of the Portfolio. Relative stability of principal is an
important consideration for this fund, which is positioned in the five- to 10-
year intermediate maturity range. In this regard, we are placing emphasis on
higher coupon issues trading at a premium to their face value. Such bonds will
decline less in price than current coupon or market discount bonds should the
economy rebound and cause a rise in interest rates. In addition, the maturities
of these holdings are effectively shorter than their stated maturity date, which
serves to further reduce the Portfolio's interest-rate sensitivity. Examples of
such issues are bonds priced to a call date earlier than maturity, bonds with
sinking funds designed to retire a portion of the issue prior to maturity, and
housing bonds that are subject to early call from prepayments on mortgages.
California Money Market Portfolio
As of March 31, 1995, the California Money Market Portfolio's 7-day current
yield was 3.39%, and its 7-day effective yield, which reflects compounding, was
3.45%. For the same period, the Portfolio's tax-equivalent yield, the yield you
would have to earn on a similar taxable investment to match the
4
<PAGE>242
tax-free yield, was 5.71% assuming you are in the 39.6% tax bracket. During the
12 months ended March 31, 1995, the Portfolio's monthly tax-exempt dividend
distributions resulted in a tax-exempt annualized yield of 2.66%.
As mentioned earlier in this letter, Orange County, California and its
investment fund were pushed into bankruptcy late in 1994. The California Money
Market Portfolio did hold a small amount of securities issued by Orange County
which were backed by commercial bank letters of credit which guarantee payment
to the security holder in case of default.
The California Money Market Portfolio invests only in short-term securities
which carry minimal credit risk. All of the Portfolio's holdings are rated
within the top two short-term rating categories or are of comparable quality.
The Portfolio's average maturity, which has not changed during the past year, is
in the 30- to 50-day range. This relatively short maturity range allows us to
readjust the Portfolio's holdings sooner should interest rates rise, as we
believe they might sometime later this year.
An investment in the California Money Market Portfolio is neither insured nor
guaranteed by the U.S. Government and there can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $1.00 per share.
We thank you for your investment in the Portfolios and your continued confidence
in our investment management.
Sincerely,
/s/ Heath B. McLendon /s/ Peter M. Coffey
Heath B. McLendon Peter M. Coffey
Chairman and Chief Vice President and Investment Officer
Executive Officer
/s/ Karen Mahoney-Malcomson
Karen Mahoney-Malcomson
Vice President and Investment Officer
April 28, 1995
5
<PAGE>243
Smith Barney Muni Funds
California Limited Term Portfolio
- --------------------------------------------------------------------------------
Historical Performance - Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
========================================================================================
<S> <C> <C> <C> <C> <C>
3/31/95 $6.41 $6.44 $0.32 $0.01 5.89%
- ----------------------------------------------------------------------------------------
Inception* - 3/31/94 6.50 6.41 0.24 0.00 2.29
========================================================================================
Total $0.56 $0.01
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance - Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
========================================================================================
<S> <C> <C> <C> <C> <C>
3/31/95 $6.41 $6.44 $0.31 $0.01 5.56%
- ----------------------------------------------------------------------------------------
Inception* - 3/31/94 6.51 6.41 0.23 0.00 1.87
========================================================================================
Total $0.54 $0.01
========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance - Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
========================================================================================
<S> <C> <C> <C> <C> <C>
3/31/95 $6.41 $6.44 $0.32 $0.01 5.87%
- ----------------------------------------------------------------------------------------
Inception* - 3/31/94 6.57 6.41 0.16 0.00 N/A
========================================================================================
Total $0.48 $0.01
========================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
6
<PAGE>244
Smith Barney Muni Funds
California Limited Term Portfolio
- --------------------------------------------------------------------------------
Annual Average Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge/(1)/
--------------------------------------------
Class A Class C Class Y
================================================================================
<S> <C> <C> <C>
Year Ended 3/31/95 5.89% 5.56% 5.87%
- --------------------------------------------------------------------------------
Inception* through 3/31/95 4.23 3.97 3.22
- --------------------------------------------------------------------------------
<CAPTION>
With Sales Charge/(2)/
--------------------------------------------
Class A Class C Class Y
================================================================================
<S> <C> <C> <C>
Year Ended 3/31/95 3.79% 4.56% N/A
- --------------------------------------------------------------------------------
Inception* through 3/31/95 3.17 3.97 N/A
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge/(1)/
================================================================================
<S> <C>
Class A (Inception* through 3/31/95) 8.32%
- --------------------------------------------------------------------------------
Class C (Inception* through 3/31/95) 7.54
- --------------------------------------------------------------------------------
Class Y (Inception* through 3/31/95) 5.76
- --------------------------------------------------------------------------------
<FN>
(1) Assumes reinvestment of all dividends and capital gain distributions at net
asset value and does not reflect deduction of the applicable sales charge
with respect to Class A shares or the applicable contingent deferred sales
charges ("CDSC") with respect to Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at net
asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 2.00% and Class C shares reflect the
deduction of a 1.00% CDSC which applies if shares are redeemed less than one
year from initital purchase.
* Inception dates for Class A, C and Y shares are April 27, 1993, May 18,
1993 and June 23, 1993, respectively.
</TABLE>
7
<PAGE>245
Smith Barney Muni Funds
California Limited Term Portfolio
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of the California
Limited Term Portfolio vs. Lehman Ten Year General Obligation Index/+/
(unaudited)
- --------------------------------------------------------------------------------
April 1993 - March 1995
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
54990 S/B Calif. Money Mkt. pg. 7
California Limited Term Lehman 10 Year\General Obligation Index
<S> <C> <C>
4/27/93 9800 10000
Apr-93 9800 10101
May-93 9800 10143.42
Jun-93 9939.7 10322.96
Jul-93 9964.8 10357.03
Aug-93 10156.5 10571.42
Sep-93 10257.8 10703.56
Oct-93 10267.7 10717.48
Nov-93 10201.4 10640.31
Dec-93 10411.5 10864.82
Jan-94 10530.1 11002.8
Feb-94 10276.2 10657.32
Mar-94 10021.2 10265.13
Apr-94 10391.39
May-94 10474.52
Jun-94 10416.91
Jul-94 10583.58
Aug-94 10635.44
Sep-94 10240.5 10484.42
Mar-95 10,605.00 11,000.12
<FN>
+ Hypothetical illustration of $10,000 invested in Class A shares at inception
on April 27, 1993, assuming deduction of the maximum 2.00% sales charge at the
time of investment and reinvestment of dividends (after deduction of sales
charges, if any) and capital gains (at net asset value) through March 31,
1995. The Index is unmanaged and is not subject to the same management and
trading expenses of a mutual fund. The performance of the Portfolio's other
classes may be greater or less than the Class A shares' performance indicated
on this chart, depending on whether greater or lesser sales charges and fees
were incurred by shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
</TABLE>
8
<PAGE>246
Smith Barney Muni Funds
California Portfolio
- --------------------------------------------------------------------------------
Historical Performance - Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns/(1)/
==============================================================================================
<S> <C> <C> <C> <C> <C>
3/31/95 $12.27 $12.28 $0.75 $0.00 6.47%
- ----------------------------------------------------------------------------------------------
3/31/94 12.78 12.27 0.77 0.03 2.15
- ----------------------------------------------------------------------------------------------
3/31/93 12.05 12.78 0.78 0.00 12.93
- ----------------------------------------------------------------------------------------------
3/31/92 11.62 12.05 0.80 0.00 11.11
- ----------------------------------------------------------------------------------------------
3/31/91 11.47 11.62 0.84 0.00 8.90
- ----------------------------------------------------------------------------------------------
3/31/90 11.17 11.47 0.85 0.00 10.44
- ----------------------------------------------------------------------------------------------
3/31/89 10.96 11.17 0.86 0.00 10.07
- ----------------------------------------------------------------------------------------------
Inception* - 3/31/88 12.50 10.96 0.88 0.00 (5.79)
==============================================================================================
Total $6.53 $0.03
==============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance - Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns/(1)/
==============================================================================================
<S> <C> <C> <C> <C> <C>
Inception* - 3/31/95 $11.52 $12.29 $0.28 $0.00 9.18%
==============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance - Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns/(1)/
==============================================================================================
<S> <C> <C> <C> <C> <C>
3/31/95 $12.26 $12.28 $0.66 $0.00 5.80%
- ----------------------------------------------------------------------------------------------
3/31/94 12.77 12.26 0.68 0.03 1.45
- ----------------------------------------------------------------------------------------------
Inception* - 3/31/93 12.46 12.77 0.18 0.00 3.95
==============================================================================================
Total $1.52 $0.03
==============================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
9
<PAGE>247
Smith Barney Muni Funds
California Portfolio
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge/(1)/
---------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 3/31/95 6.47% N/A 5.80%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/95 8.24 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 3/31/95 6.88 9.18 5.02
- --------------------------------------------------------------------------------
<CAPTION>
With Sales Charge/(2)/
---------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Year Ended 3/31/95 2.22% N/A 4.80%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/95 7.36 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 3/31/95 6.33 4.68 5.02
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge/(1)/
================================================================================
<S> <C>
Class A (Inception* through 3/31/95) 70.16%
- --------------------------------------------------------------------------------
Class B (Inception* through 3/31/95) 9.18
- --------------------------------------------------------------------------------
Class C (Inception* through 3/31/95) 11.57
- --------------------------------------------------------------------------------
<FN>
(1) Assumes reinvestment of all dividends and capital gain distributions at net
asset value and does not reflect deduction of the applicable sales charge
with respect to Class A shares or the applicable contingent deferred sales
charges ("CDSC") with respect to Class B and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at net
asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 4.00%; Class B shares reflect the deduction
of a 4.50% CDSC, which applies if shares are redeemed less than one year
from initital purchase. This CDSC declines by 0.50% the first year after
purchase and by 1.00% per year thereafter until no CDSC is incurred. Class C
shares reflect the deduction of a 1.00% CDSC which applies if shares are
redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are April 3, 1987, November 11,
1994 and January 5, 1993, respectively.
</TABLE>
10
<PAGE>248
Smith Barney Muni Funds
California Portfolio
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of the California
Portfolio vs. Lehman Long Bond Index/+/
(unaudited)
- --------------------------------------------------------------------------------
April 1987 - March 1995
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
54990 S/B Calif. Money Mkt. pg. 10
California Lehman Long Bond Index
<S> <C> <C>
4/3/87 9600.61 10000
Mar-88 9394.4 10165.6
Mar-89 10307 11126.44
Mar-90 11350.4 12337.77
Mar-91 12324.8 13298.21
Mar-92 13657 14805.68
Mar-93 15383.5 16967.65
Mar-94 15677.1 17156.89
Mar-95 16666.7 18706.04
<FN>
+ Hypothetical illustration of $10,000 invested in Class A shares at inception
on April 3, 1987, assuming deduction of the maximum 4.00% sales charge at the
time of investment and reinvestment of dividends (after deduction of
applicable sales charges, if any) and capital gains (at net asset value)
through March 31, 1995. The Index is unmanaged and is not subject to the same
management and trading expenses of a mutual fund. The performance of the
Portfolio's other classes may be greater or less than the Class A shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
values may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
</TABLE>
11
<PAGE>249
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
========================================================================================================
<C> <C> <S> <C>
$ 2,000,000 VMIG 1 ABAG Finance Authority for Nonprofit Corporations
COP (Lucile Salter Packard Project) 3.90%(b) $ 2,000,000
12,350,000 VMIG 1 Anaheim COP (Police Facility Refinancing
Project) 4.00%(b) 12,350,000
4,000,000 A-1 Anaheim Housing Authority Multi-Family Housing
(Park Vista Apartments-A) 4.20%(a)(b) 4,000,000
1,100,000 A-1+ Burbank Redevelopment Agency Multi-Family
Revenue 4.05%(b) 1,100,000
6,000,000 SP-1 Butte County Office of Education BAN 5.00%
due 10/27/95 6,022,366
California Alternative Energy Source Finance Authority:
Cogeneration Revenue Refunding Arroyo Energy:
27,100,000 A-1+ Series A 4.10%(a)(b) 27,100,000
8,000,000 A-1+ Series B 4.10%(a)(b) 8,000,000
3,800,000 VMIG 1 Hydroelectric Rock Creek Limited 3.95%(a)(b) 3,800,000
2,300,000 A-1 Modesto Energy Project Series A 4.25%(b) 2,300,000
California Health Facility Authority Revenue
Daughters of Charity:
26,983,466 MIG 1 O' Connor Hospital Series A 4.15%(b) 26,983,466
6,340,000 MIG 1 O' Connor Hospital Series B 4.15%(b) 6,340,000
20,245,000 MIG 1 Seton Medical Center Series B 4.15%(b) 20,245,000
34,500,000 VMIG 1 St. Francis Medical Center 4.15%(b) 34,500,000
25,810,109 MIG 1 Tri-Provincial Health Care System
Sister Mary's Health Hospital 3.95%(b) 25,810,109
California Housing Finance Agency Revenue:
12,120,000 VMIG 1 P-Floats (PT - 40A) 4.35%(a)(b) 12,120,000
900,000 VMIG 1 Multi-Family Housing Series A 4.20%(a)(b) 900,000
California Health Facility Financing Authority Revenue:
5,000,000 P-1 Adventist Health System Series B 4.00%(b) 5,000,000
1,700,000 VMIG 1 Granada Hills Community Hospital 4.35%(b) 1,700,000
9,000,000 VMIG 1 Kaiser Permanente Series 93A 4.00%(b) 9,000,000
1,500,000 MIG 1 Orange County Children's Hospital 3.95%(b) 1,500,000
2,200,000 VMIG 1 Pool Program Series 90A 4.20%(b) 2,200,000
California Pollution Control Finance Authority:
4,000,000 AA PCR (Chevron USA Inc. Project) 3.10%
due 5/15/95(f) 3,993,932
300,000 A-1+ PCR (Southdown Inc. Project) 3.60%(b) 300,000
4,900,000 A-1+ PCR (Southdown Inc. Project) 3.60%(b) 4,900,000
1,100,000 A-1+ PCR (Southdown Inc. Project) Series B 3.60%(b) 1,100,000
1,500,000 A-1 PCR (San Diego Gas & Electric) 4.25% due 9/1/95(f) 1,500,000
</TABLE>
See Notes to Financial Statements.
12
<PAGE>250
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
========================================================================================================
<C> <C> <S> <C>
$ 2,000,000 A-1 PCR (San Diego Gas & Electric) Series A 4.25%
due 8/1/95(f) $ 2,000,000
7,000,000 P-1 PCR Refunding (Sierra Pacific Project) 4.05%(b) 7,000,000
5,300,000 A-1 Resource Recovery (Wadham Energy Project)
Series A 4.15%(a)(b) 5,300,000
1,900,000 A-1 Resource Recovery (Wadham Energy Project)
Series C 4.15%(a)(b) 1,900,000
4,250,000 Aa2 Resource Recovery (Sanger Project) Series A
4.05%(a)(b) 4,250,000
Solid Waste Disposal Revenue:
17,900,000 VMIG 1 Colmac Energy Project Series A 4.05%(a)(b) 17,900,000
18,400,000 VMIG 1 Colmac Energy Project Series B 4.05%(a)(b) 18,400,000
7,000,000 VMIG 1 Colmac Energy Project Series C 4.05%(a)(b) 7,000,000
2,075,000 P-1 Sierra Pacific Project 4.15%(a)(b) 2,075,000
7,000,000 MIG 1 California School Cash Reserve Program Authority
Pool Series A 4.50% due 7/5/95 7,013,154
1,200,000 Aa2 California State Community Development Authority
Solid Waste Facility Revenue (Chevron U.S.A. Inc
Project) 4.45% (a)(b) 1,200,000
9,500,000 MIG 1 California State RAN Series A 5.00% due 6/28/95 9,515,526
80,800,000 MIG 1 California State RAN Series B 4.07% due 6/28/95 80,795,087
22,780,000 VMIG 1 California State TOB (BTP-93 A) 4.35%(b) 22,780,000
8,500,000 VMIG 1 California State TOB (BTP-94 A) 4.35%(b) 8,500,000
27,420,000 VMIG 1 California State TOB (BTP-106 A) 4.35%(b) 27,420,000
17,500,000 VMIG 1 California State GO Custody Receipt Series 1992A
4.10% due 5/1/95(f) 17,500,000
6,255,000 A-1+ California State Trust Receipts Series 95 (SGA-7)
4.40%(b) 6,255,000
5,000,000 MIG 1 California Statewide Community Development Authority
TRAN Series A 4.50% due 7/17/95 5,010,586
2,600,000 SP-1+ Castro Valley Union School District TRAN 4.50%
due 7/5/95 2,604,234
845,000 SP-1+ Chula Vista IDR (Sutherland/Palumbo Project)
4.15%(a)(b) 845,000
26,500,000 P-1 Chula Vista IDR (San Diego Gas & Electric Co.)
4.20%(a)(b) 26,500,000
12,570,000 VMIG 1 Clipper California Series 94-2 4.22%(b) 12,570,000
23,100,000 MIG 2 Clovis Union School District TRAN 4.50% due 7/31/95 23,141,749
3,500,000 A-1+ Concord Multi-Family Mortgage Revenue (Crossroads
Apartments) Series 88B 4.00%(b) 3,500,000
12,000,000 VMIG 1 Contra Costa County Multi-Family Housing Revenue
(Park Regency) Series 92A 4.20% (a)(b) 12,000,000
</TABLE>
See Notes to Financial Statements.
13
<PAGE>251
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
========================================================================================================
<C> <C> <S> <C>
$ 3,500,000 A-1 Contra Costa County Multi-Family Housing Revenue
Refunding (Del Norte Apartments) Series 94A
4.30%(a)(b) $ 3,500,000
2,000,000 VMIG 1 Fairfield IDA (R. Dakin & Company Project) 3.65%(b) 2,000,000
100,000 VMIG 1 Fontana Multi-Family Housing Revenue Bonds
(Citrus Avenue Apartments Project) Series A 4.05%(b) 100,000
500,000 A-1+ Fontana Multi-Family Housing Revenue Bonds
(Springtime Apartments Project) Series A 4.05%(a)(b) 500,000
5,500,000 A-1 Fremont Multi-Family Housing Revenue (Mission
Wells Project) 4.10%(b) 5,500,000
1,000,000 VMIG 1 Garden Grove Multi-Family Housing (Valley View
Senior Villas) 4.35%(b) 1,000,000
2,800,000 A-1+ Glendale Public Parking (Reliance Development
Company) 1984A 3.60%(b) 2,800,000
1,140,000 VMIG 1 Grand Terrace Community Redevelopment Agency
Multi-Family Revenue (Mt Vernon Villas) 4.20%(b) 1,140,000
2,900,000 A-1 Hayward Housing Authority Multi-Family Revenue
Refunding Mortgage (Huntwood Terrace
Apartments) 4.15%(b) 2,900,000
1,230,000 A-1 Healdsburg Community Redevelopment Agency
Revenue Refunding (Vineyard Plaza Project- A
Shopping Center) 4.20%(b) 1,230,000
4,000,000 SP-1 Humbolt County Office of Education TRAN 4.25%
due 7/5/95 4,005,512
1,225,000 VMIG 1 Indigo Housing Authority Revenue (Smoketree
Apartments) 4.20%(b) 1,225,000
6,550,000 SP-1+ Irvine TRAN 4.50% due 7/28/95 6,560,138
27,400,000 A-1 Irvine Multi-Family Housing Revenue Series 1993A
4.20%(b) 27,400,000
Kern County COP (Kern Public Facility Project):
1,900,000 VMIG 1 Series A 3.95%(b) 1,900,000
4,000,000 VMIG 1 Series C 3.95%(b) 4,000,000
1,900,000 VMIG 1 Series D 3.95%(b) 1,900,000
2,600,000 A-1+ Kern County Union School District COP Financing
Project 4.10%(b) 2,600,000
1,675,000 VMIG 1 Livermore COP Water Reclamation Plant Project
4.05%(b) 1,675,000
8,000,000 P-1 Lodi IDR (Dart Container) 4.13%(b) 8,000,000
9,500,000 VMIG 1 Long Beach Health Facility Revenue (Memorial
Health Services) 1991 4.05%(b) 9,500,000
</TABLE>
See Notes to Financial Statements.
14
<PAGE>252
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
========================================================================================================
<C> <C> <S> <C>
$ 1,500,000 VMIG 1 Los Angeles COP (Simon Wiesenthal Center Project)
3.95%(b) $ 1,500,000
Los Angeles Community Redevelopment Agency COP:
100,000 VMIG 1 Broadway Spring Center Project 4.10%(a)(b) 100,000
2,770,000 VMIG 1 Multi-Family Housing Revenue Skyline at Southpark
Apartments Series 85 4.10%(b) 2,770,000
Los Angeles Convention & Exhibition Center
Authority COP:
2,800,000 A-1+ Series 89B 4.10%(b) 2,800,000
25,740,000 A-1+ Series 95B 4.35%(b) 25,740,000
4,005,000 A-1+ Los Angeles Department of Water & Power Electric
4.40%(b) 4,005,000
Los Angeles Multi-Family Housing Revenue:
2,700,000 NR++ Beverly Park Apartments 4.00%(a)(b) 2,700,000
2,000,000 VMIG 1 Masselin Manor 4.05%(b) 2,000,000
18,100,000 A-1+ Series K 3.70%(b) 18,100,000
1,500,000 MIG 1 Los Angeles County TRAN 4.50% due 6/30/95 1,502,315
Los Angeles County Housing Authority Multi-Family
Housing Revenue:
13,000,000 A-1 Diamond Apartments Project Series A 4.00%(a)(b) 13,000,000
5,000,000 A-1 Malibu Meadows II Project Series B 4.00%(b) 5,000,000
15,300,000 VMIG 1 Riverpark Apartments Project Series D 4.10%(a)(b) 15,300,000
14,700,000 A-1+ Los Angeles County Metropolitan Transportation Authority
Sales Tax Revenue Refunding Series A 4.00%(b) 14,700,000
21,100,000 VMIG 1 Los Angeles County Metropolitan Transportation Authority
(General Union Station Gateway) Series A 4.10%(b) 21,100,000
1,100,000 A-1 Los Angeles County Housing Multi-Family Mortgage
Revenue (Valencia Village Project) Series C 3.90%(b) 1,100,000
8,750,000 A-1+ Los Angeles County Sanitation District 93A 4.35%(b) 8,750,000
2,100,000 SP-1 Milpitas Union School District TRAN 4.50% due 7/5/95 2,103,683
4,875,000 A-1+ Modesto Multi-Family Housing Revenue Refunding
(Live Oak Apartments Project) 4.10%(a)(b) 4,875,000
13,500,000 VMIG 1 Mountain View Multi-Family Housing Revenue
(Villa Mariposa Project) 4.00%(b) 13,500,000
2,000,000 SP-1+ Newark Union School District TRAN 4.50% due 7/5/95 2,003,508
9,600,000 VMIG 1 Newport News Redevelopment & Housing Authority
Multi-Family Housing Revenue (Newport Oxford
Project) 4.20%(b) 9,600,000
3,650,000 MIG 1 North Monterey County Union School District TRAN
4.25% due 7/5/95 3,655,030
</TABLE>
See Notes to Financial Statements.
15
<PAGE>253
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
========================================================================================================
<C> <C> <S> <C>
$ 3,000,000 A-1+ Oakland Revenue (Children's Hospital Medical
Center) 4.00%(b) $ 3,000,000
260,000 VMIG 1 Ontario Multi-Family Revenue (Vineyard
Village Project) 4.10%(b) 260,000
Orange County Apartment Development Revenue:
1,725,000 VMIG 1 Latern Pines Project 4.25%(b) 1,725,000
15,800,000 A-1+ Monarch Bay Apartments 4.50%(b) 15,800,000
2,700,000 A-1 The Lakes Project Series A 4.20%(b) 2,700,000
1,700,000 VMIG 1 Wood Canyon Villas 4.40%(a)(b) 1,700,000
1,070,000 SP-1 Petaluma City Union School District TRAN 4.50%
due 7/5/95 1,071,606
8,160,000 A-1+ Pleasanton Multi-Family Mortgage Revenue
(Valley Plaza) 4.00%(b) 8,160,000
400,000 VMIG 1 Puerto Rico Commonwealth Government Development
Bank 4.10%(b) 400,000
500,000 P-1 Rancho Mirage Redevelopment Agency COP 4.15%(a)(b) 500,000
3,940,000 A-1+ Riverside County Housing Authority Multi-Family
Mortgage Revenue (Woodcreek Village)
Series D 4.00%(b) 3,940,000
1,000,000 A-1+ Roseville Finance Authority Hospital Lease Revenue
(Roseville Hospital) Series A 4.05%(b) 1,000,000
500,000 VMIG 1 Sacramento County Housing Authority Multi-Family
Housing Revenue Refunding (Grouse Run
Apartments) 4.05%(b) 500,000
Sacramento County Multi-Family Housing Revenue:
2,200,000 VMIG 1 Series 1985A 4.20%(b) 2,200,000
200,000 VMIG 1 Series 1985B 4.20%(b) 200,000
1,200,000 VMIG 1 Series 1985C 4.20%(b) 1,200,000
5,000,000 VMIG 1 Saint Charles County IDA Revenue (Sun River Village
Apartments Project) 4.10%(b) 5,000,000
510,000 VMIG 1 San Bernardino IDR (Gate City Beverage
Distributor Inc.) 4.10%(b) 510,000
950,000 A-1 San Bernardino Multi-Family Housing Revenue
(Castle Park Apartments Project) 4.45%(b) 950,000
2,550,000 A-1+ San Bernardino County Multi-Family Housing
Revenue (Quail Apartments) 4.00%(b) 2,550,000
San Bernardino County IDA:
2,100,000 P-1 Master Halco Series 1986II 4.20%(a)(b) 2,100,000
190,000 P-1 Ring Can Co. Series 1986II 4.20%(a)(b) 190,000
1,045,000 P-1 Tower Industries Series IV 4.20%(a)(b) 1,045,000
</TABLE>
See Notes to Financial Statements.
16
<PAGE>254
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
$ 3,000,000 MIG 1 San Diego (City of) TAN 4.25% due 6/30/95 $ 3,004,636
1,500,000 A-1+ San Diego Multi-Family Mortgage Revenue (La Hoya
Point) 3.90%(b) 1,500,000
100,000 VMIG 1 San Diego Multi-Family Housing Revenue Refunding
(University Town Center Apartments) 4.05%(b) 100,000
16,000,000 VMIG 1 San Diego County Regional Transportation Community
Sales Tax Revenue 3.90%(b) 16,000,000
3,000,000 A-1 San Dimas Redevelopment Agency (San Dimas
Community Center) 3.85%(b) 3,000,000
San Francisco (City & County of) Multi-Family Housing
2,400,000 A-1 Winterland Project Series 1985C 3.95%(b) 2,400,000
8,500,000 A-1 San Francisco (City & County of) Redevelopment
Agency Multi-Family Housing (Fillmore Center) 3.95%(b) 8,500,000
100,000 VMIG 1 San Joaquin County Transportation Authority Sales
Tax Revenue 4.15%(b) 100,000
300,000 VMIG 1 San Jose Mortgage Revenue Multi-Family (Somerset
Park) Series A 4.25%(a)(b) 300,000
3,300,000 VMIG 1 San Jose Multi-Family Housing Revenue (Fairway Glen)
Series A 4.00%(b) 3,300,000
6,000,000 SP-1+ San Jose Union School District Santa Clara County
TRAN 4.25% due 7/5/95 6,008,268
1,125,000 A-1+ San Leandro Multi-Family Revenue (Parkside
Commons) Series A 4.00%(b) 1,125,000
2,750,000 SP-1+ San Mateo Union High School District TRAN
4.50% due 7/10/95 2,754,344
2,000,000 VMIG 1 Santa Ana IDR (Fiesta Market Place) 4.20%(b) 2,000,000
2,100,000 A-1 Santa Clara County Multi-Family Housing Revenue
Refunding (Garden Grove Apartments) 3.95%(b) 2,100,000
5,000,000 MIG 1 Temecula Union School District TRAN
4.25% due 7/5/95 5,006,890
1,200,000 VMIG 1 Visilia IDR (Akers West Association) 4.25%(a)(b) 1,200,000
3,490,000 Aa2 West Covina Lease Revenue Refunding (The Lake
Public Parking Project) 4.15%(b) 3,490,000
1,000,000 AAA Whittier Health Facility Revenue (Presbyterian
Intercommunity Hospital) 9.50% due 6/1/95(f) 1,029,335
3,320,000 A-1+ Woodland Multi-Family Mortgage Revenue
(Crossroads Village) Series A 4.00%(b) 3,320,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost - $946,020,474)(g) $946,020,474
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See page 30 for full footnote disclosures.
See Notes to Financial Statements.
17
<PAGE>255
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA LIMITED TERM PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Education - 8.7%
$ 375,000 A* Fresno Unified School District COP Refunding,
Measure A Capital Project, Series A, 5.40% due 4/1/03 $ 363,750
300,000 A- New Haven Unified School District, Alameida County
1993 Refunding COP, 5.30% due 7/1/01 296,250
- ---------------------------------------------------------------------------------------------------------
660,000
- ---------------------------------------------------------------------------------------------------------
Escrowed to Maturity (e) - 15.0%
440,000 AAA Arlington Community Hospital Corporation, Parkview
Community Hospital First Mortgage Revenue,
(Escrowed to Maturity with U.S. Government
Securities), 8.00% due 6/1/04 486,200
135,000 AAA Montclair Redevelopment Agency, Residential
Mortgage Revenue, (Escrowed to Maturity with U.S.
Government Securities), 7.75% due 10/1/11 155,250
220,000 AAA San Francisco Airport Improvement Corp., Lease
Revenue, (Escrowed to Maturity with U.S.
Government Securities), 8.00% due 7/1/13 257,125
215,000 AAA Virgin Islands Territory GO, (Escrowed to Maturity
with U.S. Government Securities), 8.00% due 3/1/98 234,350
- ---------------------------------------------------------------------------------------------------------
1,132,925
- ---------------------------------------------------------------------------------------------------------
Hospital - 13.0%
345,000 AAA City of Marysville Hospital Revenue Refunding Bonds,
(The Fremont-Rideout Health Group), 1993 Series A,
AMBAC-Insured, 5.10% due 1/1/03(d) 336,806
250,000 A+ Riverside County Asset Leasing Corp., Leasehold
Revenue, Riverside County Hospital Project-A,
6.00% due 6/1/04 248,750
400,000 NR Valley Health Systems COP Refunding Project, 6.25%
due 5/15/99 396,500
- ---------------------------------------------------------------------------------------------------------
982,056
- ---------------------------------------------------------------------------------------------------------
Housing: Multi-Family - 10.7%
300,000 AAA San Luis Obispo HFA Multi-Family Housing Revenue,
Parkwood Apartments Project, Series A, FNMA-
Collateralized, 5.50% due 8/1/03 297,000
525,000 AAA City of Santa Rosa Mortgage Revenue Refunding,
Marlow Apartments Project, FHA-Insured,
5.60% due 9/1/05 511,219
- ---------------------------------------------------------------------------------------------------------
808,219
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>256
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA LIMITED TERM PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Housing: Single-Family - 4.0%
$ 300,000 Aa* California HFA Home Mortgage Series B-1, 5.90%
due 8/1/04(a) $ 300,375
- ---------------------------------------------------------------------------------------------------------
Industrial Development - 3.6%
270,000 AA- Simi Valley Community Development Agency COP,
Simi Valley Business Center, Guaranty Agreement with
New England Mutual Life, 6.05% mandatory put 10/1/99 273,713
- ---------------------------------------------------------------------------------------------------------
Public Facilities - 17.9%
300,000 AA- Berkeley Revenue, Berkeley YMCA, LOC Banque
Nationale De Paris, 4.80% mandatory put 6/1/98 294,000
500,000 A- Foster City Public Financing Authority Revenue,
Foster City Community Development, Project Loan,
Series A, 5.20% due 9/1/00 489,375
345,000 A Mendocino County Public Facilities Authority
Corporation COP 1993, 5.50% due 8/15/03 329,906
250,000 A San Francisco City & County COP, San Francisco
Permit Center, 5.00% due 3/1/03 235,625
- ---------------------------------------------------------------------------------------------------------
1,348,906
- ---------------------------------------------------------------------------------------------------------
Short-Term (b) - 4.0%
300,000 P-1* California Pollution Control Financing Authority,
Resource Recovery Revenue, Delano Project, LOC
ABN Amro Bank, 4.35% due 8/1/19(a) 300,000
- ---------------------------------------------------------------------------------------------------------
Tax Allocation - 18.9%
690,000 AAA Lynwood Redevelopment Agency Tax Allocation,
Project Area, Series A, AMBAC-Insured, 5.125%
due 7/1/03(d) 676,200
750,000 A- Paramount Redevelopment Agency Tax Allocation
Refunding, Redevelopment Project Area No. 1, 5.80%
due 8/1/03 748,125
- ---------------------------------------------------------------------------------------------------------
1,424,325
- ---------------------------------------------------------------------------------------------------------
Utility - 4.2%
325,000 BBB- Trinity County Public Utilities District COP, Electric
District Facilities, 5.60% due 4/1/00 (a) 315,656
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost - $7,581,187)(g) $7,546,175
=========================================================================================================
</TABLE>
See page 30 for full footnote disclosures.
See Notes to Financial Statements.
19
<PAGE>257
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Education - 6.8%
$ 2,000,000 AAA Adelanto School District Series-B, FGIC-Insured,
zero coupon due 9/1/18 $ 452,500
1,000,000 Baa* California Educational Facilities Authority Revenue,
Pooled College & University Financing Series B,
Refunding, 6.125% due 6/1/09 975,000
1,000,000 A- California State Public Works Board High Technology
Facility Revenue, San Jose Facility Series-A, 7.75%
due 8/1/06 1,121,250
1,000,000 AAA Gilroy Unified School District, COP Refunding, FSA-
Insured, 6.25%, due 9/1/12 1,018,750
1,020,000 AAA Pomona Unified School District, Series B, FGIC-Insured,
6.25% due 8/1/14 1,049,323
4,000,000 AAA San Dieguito Union High School District COP, FSA-
Insured, stepped zero coupon to 4/1/00 then 5.95% to
maturity, due 4/1/23 2,800,000
1,530,000 AAA Santa Rosa High School, FGIC-Insured, 5.90% due 5/1/14 1,512,787
2,500,000 Baa1* Yuba City Unified School District COP, Andors
Karperos School Construction Project, 6.70%
due 2/1/13 2,462,500
- ---------------------------------------------------------------------------------------------------------
11,392,110
- ---------------------------------------------------------------------------------------------------------
Escrowed to Maturity (e) - 7.8%
270,000 AAA Contra Costa County Home Mortgage, GNMA-Collateralized
(Escrowed to Maturity with U.S. Government
Securities), 7.75% due 5/1/22(a) 324,337
3,325,000 AAA Perris County Single Family Mortgage Revenue, GNMA-
Backed Security Series A (Escrowed to Maturity with
U.S. Government Securities), 8.30% due 6/1/13(a) 4,085,593
400,000 AAA Pleasanton Capital Projects 1 & 2, (Escrowed to Maturity
with U.S. Government Securities), 8.75% due 10/1/08 444,500
6,000,000 AAA Pleasanton-Suisun City Home Finance Authority
Home Mortgage Revenue, MBIA-Insured (Escrowed
to Maturity with U.S. Government Securities),
zero coupon due 10/1/16 1,455,000
2,620,000 AAA Riverside County Single-Family Mortgage Revenue
Series-A (Escrowed to Maturity with U.S. Government
Securities), 8.30% due 11/1/12(a) 3,245,525
1,500,000 AAA Sacramento County Single-Family Mortgage Revenue,
GNMA-Collateralized, Issue A, (Escrowed to Maturity with
U.S. Government Securities), 8.125% due 7/1/16(a) 1,805,625
</TABLE>
See Notes to Financial Statements.
20
<PAGE>258
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Escrowed to Maturity (e) - 7.8% (continued)
$4,310,000 AAA San Marcos Public Facilities Authority, Public Facilities
Revenue (Escrowed to Maturity with U.S. Government
Securities), zero coupon due 1/1/19 $ 894,325
700,000 AAA Santa Rosa Hospital Revenue, Santa Rosa Memorial
Hospital Project, (Escrowed to Maturity with U.S.
Government Securities), 10.30% due 3/1/01 936,250
- ---------------------------------------------------------------------------------------------------------
13,191,155
- ---------------------------------------------------------------------------------------------------------
Finance - 1.9%
Association of Bay Area Governments:
1,000,000 A Finance Corp. California COP, ABAG XXVI-Series A,
6.25% due 6/1/11 968,750
765,000 A* Municipal Financing Pool, 8.05% due 9/1/10 816,637
150,000 A- Concord Santa Cruz South Gate COP, 7.625%
due 6/1/11 150,187
750,000 Baa* Public Capital Improvements Financing Authority,
SunLife GIC, 8.50% due 3/1/18 805,313
500,000 Baa* Special District Financing Authority, COP, SunLife GIC,
8.50% due 7/1/18 540,000
- ---------------------------------------------------------------------------------------------------------
3,280,887
- ---------------------------------------------------------------------------------------------------------
Government Facilities - 1.9%
2,000,000 A- State Public Works Board Lease Revenue, Various
California State University Projects, Series A,
6.70% due 10/1/17 2,052,500
1,300,000 BBB Murrieta Financing Authority Police & Civic Center
Lease Revenue, Series A, 6.375% due 8/1/18 1,212,250
- ---------------------------------------------------------------------------------------------------------
3,264,750
- ---------------------------------------------------------------------------------------------------------
General Obligation - 1.7%
1,000,000 AAA San Diego Public Safety Communication Project,
6.65% due 7/15/11 1,091,250
1,500,000 AAA Santa Margarita/Dana Point Authority Revenue Bond,
MBIA-Insured, 7.25% due 8/1/14 1,717,500
- ---------------------------------------------------------------------------------------------------------
2,808,750
- ---------------------------------------------------------------------------------------------------------
Hospital - 15.7%
1,500,000 A Association of Bay Area Governments Finance
Authority Nonprofit Corps, California-Insured
COP, Rehabilitation Mental Health Services Inc.
Project, 6.55% due 6/1/22 1,492,500
</TABLE>
See Notes to Financial Statements.
21
<PAGE>259
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Hospital - 15.7% (continued)
$1,500,000 A Bakersfield Hospital Revenue, Bakersfield Memorial
Hospital, Series A, 6.50% due 1/1/22 $1,468,125
465,000 A+ California Health Facilities Financing Authority Revenue:
Community Provider Pooled Loan Program Series
1990A, LOC Swiss Bank Corporation,
7.35% due 6/1/20 489,994
1,150,000 A Episcopal Homes Foundation Project, CHFCLI-
Insured, 7.70% due 7/1/18 1,208,938
2,015,000 Aa* Hospital Revenue Bonds (Daughters of Charity
National Health System), Series 1994A,
5.65% due 10/1/14 1,858,838
1,450,000 A+ St. Elizabeth Hospital Project, 6.20% due 11/15/09 1,431,875
1,250,000 A South Coast Medical Center, CHFCLI-Insured,
7.25% due 7/1/15 1,300,000
1,200,000 AAA California Statewide Community Development
Corporation, COP (Villaview Hospital), CHFCLI-
Insured, 7.00% due 9/1/09 1,249,500
1,000,000 AA California Statewide Community Development Authority
Revenue, (St. Joseph Health System),
6.625% due 7/1/21 1,021,250
1,405,000 A+ Contra Costa County, California COP, Merrithew Memorial
Hospital, 6.50% due 11/1/06 1,429,588
2,000,000 A+ County of Riverside Asset Leasing Corp. Leasehold
Revenue Bonds 1993A, Riverside Hospital Project,
6.375% due 6/1/09 1,995,000
1,000,000 Aa* Fresno Health Facilities Revenue (Holy Cross System-
St. Agnes), 6.625% due 6/1/21 1,016,250
250,000 BB+ Glendale Hospital Revenue Refunding (Glendale
Memorial Hospital), 9.00% due 11/1/17 262,500
1,000,000 A+ Inglewood Insured Hospital Revenue Bonds
(Daniel Freeman Hospital Inc.), Series 1991,
CHFCLI-Insured, 6.75% due 5/1/13 1,012,500
1,000,000 A Rancho Mirage Joint Powers Financing Authority
(Eisenhower Memorial Hospital), 7.00% due 3/1/22 1,013,750
2,000,000 A San Bernardino Capital Facilities Project, COP
Series B, 6.875% due 8/1/24 2,237,500
2,620,000 A- San Bernardino County Medical Center
Financing Project, 6.00% due 8/1/09 2,390,750
</TABLE>
See Notes to Financial Statements.
22
<PAGE>260
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Hospital - 15.7% (continued)
$2,750,000 A* San Joaquin County COP, General Hospital Poject
1993, 6.25% due 9/1/13 $ 2,653,750
910,000 A Torrance Hospital Revenue (Little Co. of Mary Hospital),
6.875% due 7/1/15 933,888
- ---------------------------------------------------------------------------------------------------------
26,466,496
- ---------------------------------------------------------------------------------------------------------
Housing: Multi-Family - 4.0%
California HFA Revenue:
245,000 AAA Multi-Family Housing Revenue, MBIA-Insured,
8.75% due 8/1/10(d) 259,394
1,630,000 A+ Multi-Unit Rental Housing Series A, 6.625%
due 2/1/24 1,615,738
1,100,000 A California Statewide Communities Development
Corporation (Solheim Lutheran Home),
6.50% due 11/1/17 1,038,124
2,400,000 Aaa* San Francisco City & County Redevelopment Agency
Multi-Family Revenue Refunding South Beach
Project, GNMA-Collateralized, 5.70% due 3/1/29 2,211,000
1,500,000 A1* San Jose Multi-Family Housing Senior Revenue
(Timberwood Apartments), Series A, LOC Wells Fargo
Bank, 7.50% due 2/1/20 1,550,625
- ---------------------------------------------------------------------------------------------------------
6,674,881
- ---------------------------------------------------------------------------------------------------------
Housing: Single-Family - 3.2%
California HFA Home Mortgage Revenue:
40,000 AA 9.125% due 2/1/07 41,200
615,000 Aa* 8.25% due 8/1/08(a) 639,600
235,000 Aa* 8.60% due 8/1/19(a) 247,338
770,000 Aa* 8.30% due 8/1/19(a) 809,462
1,000,000 AA- 7.00% due 8/1/26 1,010,000
350,000 Aa* Zero coupon due 8/1/15 45,062
520,000 Aa* Series E, 8.35% due 8/1/19(a) 544,700
480,000 AAA California Housing Finance Agency Revenue Housing
Series C, MBIA-Insured, 7.00% due 8/1/23(a) 495,600
800,000 AAA Los Angeles Single-Family Home Mortgage Revenue,
GNMA-Collateralized Mortgage Backed Securities
Program, Issue A, 7.55% due 12/1/23(a) 833,000
295,000 Baa* Riverside County Housing Authority, 7.90% due 10/1/18 308,643
115,000 AAA San Francisco City & County Single-Family Mortgage
Revenue GNMA & FNMA Mortgage Backed Securities
Program, Series 1990, 7.45% due 1/1/24(a) 120,463
</TABLE>
See Notes to Financial Statements.
23
<PAGE>261
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Housing: Single-Family - 3.2% (continued)
$ 25,000 BBB+ Sonoma County Home Mortgage Revenue, 9.125%
due 6/1/15(d) $ 25,938
195,000 AAA Southern California Home Financing Authority Single-
Family Mortgage Revenue, GNMA & FNMA Mortgage
Backed Securities Program, 1990 Issue B, 7.75%
due 3/1/24(a) 207,188
- --------------------------------------------------------------------------------------------------------
5,328,194
- --------------------------------------------------------------------------------------------------------
Industrial Development - 2.1%
1,000,000 A1* Los Angeles County, IDA Revenue (Altshule Properties
Project) LOC Security Pacific, 7.20% due 10/1/11(a) 1,022,500
2,470,000 AA- Simi Valley Community Development Agency COP, Simi
Valley Business Center, Guaranty Agreement with New
England Mutual Life, 6.05% mandatory put 10/1/99 2,503,963
- --------------------------------------------------------------------------------------------------------
3,526,463
- --------------------------------------------------------------------------------------------------------
Miscellaneous - 4.1%
1,000,000 A- COP County of Los Angeles, 1991 Master Refunding
Project-RIBS, 8.772% due 5/1/15(c) 1,011,250
1,000,000 A COP County of Los Angeles, For Multiple Capital
Facilities Projects III SYCC, 7.34% due 11/1/11 1,022,500
Orange County Community Facilities District Special Tax:
1,000,000 A- #87-5A Rancho Santa Margarita, 7.80% due 8/15/13 1,108,750
1,500,000 AAA Rancho Santa Margarita, CGIC-Insured, 7.125%
due 8/15/17 1,580,625
1,000,000 A* Orange County (Mission Viejo) Series A 1990, Special
Tax Bonds Community Facilities District (Mello Roos),
7.80% due 8/15/15 1,142,500
1,000,000 AAA San Diego County Building Authority, Registered Fixed
Option Certificates, 6.363% due 11/18/19 1,018,750
- --------------------------------------------------------------------------------------------------------
6,884,375
- --------------------------------------------------------------------------------------------------------
Pollution Control - 5.2%
California Pollution Control Financing Authority:
2,500,000 A1* PCR (Pacific Gas & Electric Co.), 6.35%
due 6/1/09(a) 2,550,000
800,000 A1* PCR (Pacific Gas & Electric Co.), 8.20% due 12/1/18 863,000
500,000 AA- Resource Recovery Revenue Bonds (Waste
Management Inc.), 1991 Corporate Series A,
7.15% due 2/1/11(a) 530,000
</TABLE>
See Notes to Financial Statements.
24
<PAGE>262
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- ---------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Pollution Control - 5.2% (continued)
$1,500,000 Aa3* San Diego Gas & Electric Co. Series A, 6.80% due
6/1/15(a) $1,618,125
1,000,000 A2* Southern California (Edison), 4.25% due 2/28/08 1,000,000
2,125,000 AAA Southern California, 6.40% due 12/1/24(a) 2,143,594
- ---------------------------------------------------------------------------------------------------------
8,704,719
- ---------------------------------------------------------------------------------------------------------
Power -- 2.6%
1,110,000 A* Northern California Power Agency (Geothermal Project),
5.00% due 7/1/09 978,188
2,000,000 AAA Northern California Power Agency (Hydroelectric Project),
5.50% due 7/1/16 1,865,000
1,000,000 AAA Redding COP Electric System Revenue, 8.345% due
7/1/22(c) 1,073,750
600,000 A Southern California Public Power Authority, Multiple
Project Revenue 1989 Series, 5.50% due 7/1/20 537,000
- ---------------------------------------------------------------------------------------------------------
4,453,938
- ---------------------------------------------------------------------------------------------------------
Pre-Refunded (e) - 16.1%
1,500,000 AAA California COP Lease Finance Authority, CSAC-Nevada
County, (Escrowed with U.S. Government Securities to
10/1/98 Call @ 101), 7.60% due 10/1/19 1,629,375
1,245,000 AAA Concord Redevelopment Agency Tax Allocation Bonds
(Central Concord Redevelopment Project) BIG-Insured,
(Escrowed with U.S. Government Securities to 7/1/98
Call @ 102), 8.00% due 7/1/18 1,386,619
1,500,000 AAA Desert Hospital Corporation Project, COP Series 1990,
(Escrowed with U.S. Government Securities to 7/1/00
Call @ 102), 8.10% due 7/1/20 1,736,250
320,000 AAA Dublin COP, Public Facilities Project No. 1, (Escrowed with
U.S. Government Securities to 2/1/96 Call @ par),
9.25% due 2/1/10 332,800
750,000 AAA El Camino Hospital Revenue COP, (Escrowed with U.S.
Government Securities to 9/1/97 Call @ 102), 8.50%
due 9/1/17 822,188
550,000 AAA Grossmont Hospital District, MBIA-Insured, (Escrowed with
U.S. Government Securities to 11/15/97 Call @ 102),
8.00% due 11/15/17 605,000
1,200,000 AAA Huntington Beach COP, Civic Center Project, (Escrowed with
U.S. Government Securities to 8/1/95 Call @ 102),
7.90% due 8/1/16 1,237,500
</TABLE>
See Notes to Financial Statements.
25
<PAGE>263
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Pre-Refunded (e) - 16.1% (continued)
$1,500,000 AAA Kings River Conservation District, Pine Flat Power
Revenue Series C, (Escrowed with U.S. Government
Securities to 1/1/97 Call @ 102), 7.90% due 1/1/20(d) $1,612,500
640,000 AAA Loma Linda Water Revenue, (Escrowed with U.S.
Government Securities to 12/1/95 Call @ 102),
9.25% due 12/1/10 672,800
500,000 AAA Los Angeles County Transportation Commission
Sales Tax Revenue Series A, (Escrowed with U.S.
Government Securities to 7/1/98 Call @ 102),
8.00% due 7/1/18 556,875
450,000 AAA Los Angeles Convention and Exhibition Center
Authority COP, (Escrowed with U.S. Government
Securities to 12/1/05 Call @ 100), 9.00% due 12/1/20 587,250
Los Angeles Department of Water and Power:
1,550,000 AAA Water Works Revenue, (Escrowed with U..S. Government
Securities to 2/15/99 Call @ 102), 7.20% due 2/15/19 1,699,188
1,000,000 AAA Electric Revenue, (Escrowed with U.S. Government
Securities to 5/1/98 Call @ 102), 7.90% due 5/1/28 1,105,000
1,950,000 AAA Electric Revenue, (Escrowed with U.S. Government
Securities to 1/15/01 Call @ 102), 7.10% due 1/15/31 2,164,500
1,200,000 AAA Los Angeles Waste Water System Revenue, (Escrowed
with U.S. Government Securities to 11/1/97 Call @ 102),
8.125% due 11/1/17 1,321,500
425,000 AAA Norwalk Redevelopment Agency (Norwalk Redevelopment
Area 1), (Escrowed with U.S. Government Securities to
12/1/95 Call @ 102), 9.10% due 12/1/15 444,656
500,000 AAA Oceanside County COP, AMBAC-Insured, (Escrowed with
U.S. Government Securities to 8/1/02 Call @ 102),
7.30% due 8/1/21 575,000
1,000,000 AAA Rancho Water District Finance Authority Revenue Bonds,
Series 1991, RITES, AMBAC-Insured, (Escrowed with
U.S. Government Securities to 8/17/01 Call @ 104),
9.574% due 8/15/21(c) 1,180,000
2,500,000 AAA Riverside County Asset Leasing Corp. Leasehold
Revenue (Riverside County Hospital Project)
(Escrowed with U.S. Government Securities to 6/1/99
Call @ 102), 7.40% due 6/1/14 2,768,750
1,000,000 AAA Sacramento Municipal Utilities District Electric Revenue,
Series P, (Escrowed with U.S. Government Securities to
7/1/95 Call @ 102), 8.625% due 7/1/10 1,030,500
</TABLE>
See Notes to Financial Statements.
26
<PAGE>264
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Pre-Refunded (e) - 16.1% (continued)
$1,000,000 AAA San Bernardino County COP (West Valley Detention
Center Project), (Escrowed with U.S. Government
Securities to 11/1/98 Call @ 102), 7.70% due 11/1/18 $ 1,112,500
250,000 AAA San Diego Redevelopment Agency (Marina
Redevelopment Project), (Escrowed with U.S.
Government Securities to 12/1/97 Call @ 101.5),
8.75% due 12/1/08 278,750
500,000 AAA Santa Clara County 1986 COP Capital Project I
(Courthouse and Detention Center), (Escrowed with
U.S. Government Securities to 10/1/96 Call @ 102),
8.00% due 10/1/16 535,000
1,000,000 AAA State Public Works Board Lease Revenue, Department
of Corrections (State Prison-Madera County),
(Escrowed with U.S. Government Securities to
9/1/00 Call @ 102), 7.00% due 9/1/09 1,111,250
500,000 AAA Upland COP (Police Building Construction Project),
(Escrowed with U.S. Government Securities to 8/1/98
Call @ 102), 8.20% due 8/1/16 533,125
- ---------------------------------------------------------------------------------------------------------
27,038,876
- ---------------------------------------------------------------------------------------------------------
Public Facilities - 9.7%
2,000,000 AAA Anaheim COP Convention Center RITES, MBIA-
Insured, 6.20% due 7/16/23(c) 2,035,000
2,000,000 AAA Anaheim Public Financing Authority Tax Allocation
Revenue, 6.45% due 12/28/18 2,077,500
500,000 A3* Association of Bay Area Governments Penninsula Family
YMCA, LOC Daiwa Bank, 6.80% due 10/1/11 504,375
1,025,000 Baa* Azusa COP Refunding Capital Improvement Refining
Project, 6.625% due 8/1/13 1,010,906
2,000,000 A- Burbank Redevelopment Agency Tax Allocation Series
A, 6.00% due 12/1/23 1,802,500
2,000,000 AAA California Public School District Financing Authority
Convertible Capital Appreciation Bonds, Palmdale School
District, FSA-Insured, Series 1993B, stepped zero coupon
to 9/30/99 then 6.20% to maturity, due 10/1/23 1,322,500
1,500,000 Baa* Corona Public Finance Authority 1993 Public
Improvement Refunding Revenue Bonds, 6.00%
due 7/1/14 1,365,000
2,000,000 A Mendocino County Public Facilities Authority
Corporation COP, Series 1993, 6.00% due 8/15/23 1,832,500
</TABLE>
See Notes to Financial Statements.
27
<PAGE>265
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
Public Facilities - 9.7% (continued)
$2,875,000 AAA Santa Ana Financing Authority Lease Revenue-Police
Administration and Holding Facility, 6.25%
due 7/1/24 $ 2,925,313
1,500,000 NR Valley Health System COP Refunding Project, 6.875%
due 5/15/23 1,393,125
- ---------------------------------------------------------------------------------------------------------
16,268,719
- ---------------------------------------------------------------------------------------------------------
Short-Term (b) - 0.1%
100,000 A-1+ California Health Facilities Financing Authority Revenue,
St. Joseph Health System, 4.40% due 7/1/13 100,000
100,000 P-1* California Pollution Control Financing Authority, Shell
Oil Company Project, 4.40% due 10/1/11 100,000
- ---------------------------------------------------------------------------------------------------------
200,000
- ---------------------------------------------------------------------------------------------------------
Solid Waste - 1.8%
1,300,000 CAA Orange County COP, Orange County Public Facilities
Corp. (Solid Waste Management), 7.875%
due 12/1/07 1,314,625
750,000 A- Southeast Resource Recovery Facilities Authority,
Lease Revenue, 9.00% due 12/1/08 780,000
1,000,000 A- West Nevada County COP Solid Waste, 7.50%
due 6/1/21 990,000
- ---------------------------------------------------------------------------------------------------------
3,084,625
- ---------------------------------------------------------------------------------------------------------
Tax Allocation - 3.2%
1,000,000 Baa* Azusa Redevelopment Agency Tax Allocation Refunding
Merged Project Area, Series A, 6.75% due 8/1/23 993,750
295,000 AAA Brea Public Finance Authority Tax Allocation, MBIA-
Insured, 7.00% due 8/1/15 315,281
1,000,000 BBB Carson Redevelopment Agency Redevelopment Project
Area No. 2, 6.00% due 10/1/13 922,500
30,000 AAA Concord Redevelopment Agency Tax Allocation Bonds
(Central Concord Redevelopment Project), BIG-Insured,
8.00% due 7/1/18 33,075
1,000,000 Baa* Pomona Public Finance Authority Revenue Refunding
Southwest Pomona Redevelopment, 5.50% due 2/1/08 921,250
2,000,000 AAA South Orange County Public Financing Authority
Special Tax Revenue-Series A, 7.00% due 9/1/10 2,227,500
- ---------------------------------------------------------------------------------------------------------
5,413,356
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
28
<PAGE>266
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
CALIFORNIA PORTFOLIO
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=========================================================================================================
<C> <C> <S> <C>
Transportation - 4.0%
$2,500,000 AAA Sacramento County Airport System Revenue, Series A,
FGIC-Insured, 6.00% due 7/1/12(a) $ 2,468,750
3,000,000 AAA San Francisco City & County Airports Second Series
Issue 5, FGIC-Insured, 6.50% due 5/1/19(a) 3,052,500
1,250,000 A* Santa Barbara COP Harbor Refunding Project, 6.75%
due 10/1/27 1,262,500
- ---------------------------------------------------------------------------------------------------------
6,783,750
- ---------------------------------------------------------------------------------------------------------
Utilities - 1.0%
1,760,000 BBB- Trinity County Public Utilities District COP, Electric
District Facilities, 6.75% due 4/1/23(a) 1,713,800
- ---------------------------------------------------------------------------------------------------------
Water & Sewer - 7.1%
1,200,000 A1* Bakersfield, COP (Waste Water Treatment Plant 3
Projects), 8.00% due 1/1/10 1,291,500
1,000,000 AAA Eastern Municipal Water District, Water & Sewer
Revenue COP, FGIC-Insured, 6.75% due 7/1/12 1,088,750
Irvine Ranch Water District Joint Powers Agency,
Local Agency Pool Revenue Bonds:
1,750,000 A+ 7.875% due 2/15/23(d) 1,820,000
1,000,000 A+ 8.25% due 8/15/23(d) 1,057,500
3,000,000 AAA Los Angeles Department of Water & Power,
Electric Plant Revenue, 5.375% due 9/1/23 2,700,000
1,425,000 AAA Los Angeles Wastewater Systems Revenue,
5.60% due 6/1/20 1,330,594
1,000,000 AAA San Buenaventura COP (1990 Water Enterprise
Financing), AMBAC-Insured, 7.50% due 10/1/20 1,136,250
1,300,000 AAA Yolo County Flood Control & Water Conservation
District COP, FGIC-Insured, 7.125% due 7/15/15 1,475,500
- ---------------------------------------------------------------------------------------------------------
11,900,094
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost - $163,257,338)(g) $168,379,938
=========================================================================================================
<FN>
See Notes to Financial Statements.
29
<PAGE>267
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Schedules of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
(a) Income from these issues is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Variable rate obligations payable at par on demand at any time on no more
than seven days notice.
(c) Residual interest bonds-coupon varies inversely with level of short-term
tax-exempt interest rates.
(d) Securities segregated by Custodian for open purchase commitment.
(e) Pre-refunded bonds escrowed by U.S. Government Securities and bonds escrowed
to maturity by U.S. Government Securities are considered by manager to be
triple-A rated even if issuer has not applied for new ratings.
(f) Variable rate obligations payable at par on demand on the date indicated.
(g) The cost for Federal income tax purposes is substantially the same.
++ Security has not been rated by either Moody's Investors Services or
Standard & Poors, however, the portfolio manager has determined the
equivalent rating to be A-1+.
See pages 31 and 32 for definition of ratings and certan security
descriptions.
See Notes to Financial Statements.
</TABLE>
30
<PAGE>268
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Corporation, except those identified by an
asterisk (*) are rated by Moody's Investors Services. The definitions of the
applicable rating symbols are set forth below:
Standard & Poor's -- Rating from "AA" to "BB" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standings within the major rating
categories.
AAA -- Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issue only in a small
degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "Aa" to "Baa", where 1 is the highest and 3 the lowest ranking
within its generic category.
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt 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, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large 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 that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa -- Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
NR -- Indicates that the bond is not rated by Standard & Poor's
Corporation or Moody's Investors Services.
31
<PAGE>269
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Short-Term Security Ratings
- --------------------------------------------------------------------------------
SP-1 -- Standard & Poor's highest rate rating indicating very strong
or strong capacity to pay principal and interest; those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of
safety regarding timely payment is either overwhelming or very
strong; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having a demand feature --
(VRDO)
P-1 -- Moody's highest rating for commercial paper and for VRDO
prior to the advent of the VMIG 1 rating.
MIG 1 -- Moody's highest rating for short-term municipal obligations.
MIG 2 -- Moody's second highest rating for short-term municipal
obligations.
- --------------------------------------------------------------------------------
Security Descriptions
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governors
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance Company
CHFCLI -- California Health Facility Construction Loan Insurance
COP -- Certificate of Participation
EDA -- Economic Development Authority
ETM -- Escrowed To Maturity
FAIRS -- Floating Adjustable Interest Rate Securities
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Savings Association
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PCR -- Pollution Control Revenue
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
TAN -- Tax Anticipation Notes
TECP -- Tax Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
SYCC -- Structured Yield Curve Certificate
VA -- Veterans Administration
VRWE -- Variable Rate Wednesday Demand
32
<PAGE>270
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
California California
Money Market Limited Term California
Portfolio Portfolio Portfolio
==================================================================================================
<S> <C> <C> <C>
ASSETS:
Investments, at value (Cost--$946,020,474,
$7,581,187 and $163,257,338, respectively) $946,020,474 $7,546,175 $168,379,938
Cash 41,743 39,508 11,412
Receivable for Fund shares sold -- -- 96,033
Interest receivable 9,264,118 108,201 2,820,179
Receivable from manager (Note 4) -- 8,087 --
Other receivables 27,419 -- 558
- --------------------------------------------------------------------------------------------------
Total Assets 955,353,754 7,701,971 171,308,120
- --------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased -- -- 72,052
Payable for securities purchased -- -- 1,574,775
Management fees payable 315,080 -- 64,719
Distribution costs payable 30,069 4,270 84,032
Dividends payable 1,640,278 -- --
Accrued expenses and other liabilities 48,493 11,722 24,650
- --------------------------------------------------------------------------------------------------
Total Liabilities 2,033,920 15,992 1,820,228
- --------------------------------------------------------------------------------------------------
Total Net Assets $953,319,834 $7,685,979 $169,487,892
==================================================================================================
NET ASSETS:
Par value of capital shares $ 953,647 $ 1,193 $ 13,800
Capital paid in excess of par value 952,693,160 7,876,194 164,073,039
Undistributed net investment income -- 31,762 197,611
Accumulated net realized gain (loss) on
security transactions (326,973) (188,158) 80,842
Net unrealized appreciation (depreciation) of
investments -- (35,012) 5,122,600
- --------------------------------------------------------------------------------------------------
Total Net Assets $953,319,834 $7,685,979 $169,487,892
==================================================================================================
Shares Outstanding:
Class A 953,646,807 834,901 13,189,538
----------------------------------------------------------------------------------------------
Class B -- -- 49,404
----------------------------------------------------------------------------------------------
Class C -- 277,285 560,918
----------------------------------------------------------------------------------------------
Class Y -- 81,185 --
----------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $1.00 $6.44 $12.28
----------------------------------------------------------------------------------------------
Class B * -- -- $12.29
----------------------------------------------------------------------------------------------
Class C ** -- $6.44 $12.28
----------------------------------------------------------------------------------------------
Class Y (and redemption price) -- $6.44 --
----------------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
($6.44 plus 2.04% and $12.28 plus 4.17% of net
asset value per share, respectively) -- $6.57 $12.79
==================================================================================================
<FN>
* Redemption price is NAV of Class B shares reduced by 4.50% if shares are
redeemed less than one year from initial purchase, declines by 0.50% the
first year after purchase and by 1.00% per year thereafter until no CDSC is
incurred.
** Redemption price is NAV of Class C shares reduced by 1.00% which applies
if shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
</TABLE>
33
<PAGE>271
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Statements of Operations For the Year Ended March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
California California
Money Market Limited Term California
Portfolio Portfolio Portfolio
========================================================================================================
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $16,977,373 $469,595 $11,647,965
- --------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 4) 2,339,712 39,849 773,229
Distribution costs (Note 4) 467,929 11,585 172,390
Shareholder servicing agent fees 99,166 2,200 28,634
Shareholder communication fees 36,629 6,500 26,003
Audit and legal fees 5,767 8,000 9,902
Registration fees 5,154 4,000 12,001
Trustees' fees 3,188 4,796 9,001
Pricing service fees 1,200 3,600 23,002
Other 5,748 9,200 18,002
- --------------------------------------------------------------------------------------------------------
Total Expenses 2,964,493 89,730 1,072,164
Less: Expense reimbursement and
management fee waiver 100,000 47,936 --
- --------------------------------------------------------------------------------------------------------
Net Expenses 2,864,493 41,794 1,072,164
- --------------------------------------------------------------------------------------------------------
Net Investment Income 14,112,880 427,801 10,575,801
- --------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Realized Gain (Loss) From Security Transactions
(excluding short-term securities*):
Proceeds from sales 9,600,191 3,602,130 55,858,979
Cost of securities sold 9,601,626 3,790,197 55,689,937
- --------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) (1,435) (188,067) 169,042
- --------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments:
Beginning of year -- (256,768) 5,567,001
End of year -- (35,012) 5,122,600
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Unrealized
Appreciation -- 221,756 (444,401)
- --------------------------------------------------------------------------------------------------------
Net Gain (Loss) on Investments (1,435) 33,689 (275,359)
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets
From Operations $14,111,445 $461,490 $10,300,442
========================================================================================================
<FN>
* Represents only short-term securities for the California Money Market
----
Portfolio.
See Notes to Financial Statements.
</TABLE>
34
<PAGE>272
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Years Ended March 31,
<TABLE>
<CAPTION>
California California
Money Market Portfolio Limited Term Portfolio
------------------------------ --------------------------
1995 1994 1995 1994(a)
==================================================================================================
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 14,112,880 $ 3,268,439 $ 427,801 $ 457,146
Net realized gain (loss)
from security transactions (1,435) 4,258 (188,067) 11,343
Increase (decrease) in net
unrealized appreciation
of investments -- -- 221,756 (256,768)
- --------------------------------------------------------------------------------------------------
Increase In Net Assets
From Operations 14,111,445 3,272,697 461,490 211,721
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS
FROM (Note 3):
Net investment income (14,075,680) (3,268,439) (443,189) (409,996)
Net realized gain from
security transactions -- -- (11,434) --
- --------------------------------------------------------------------------------------------------
Decrease In Net Assets From
Distributions To Shareholders (14,075,680) (3,268,439) (454,623) (409,996)
- --------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Net proceeds from sale
of shares 2,335,326,000 1,043,269,466 1,026,856 15,494,663
Net value of shares issued in
connection with the transfer of
the Smith Barney Shearson
California Municipal Money
Market Fund net assets 830,711,463 -- -- --
Net asset value of shares issued
for reinvestment of dividends 12,583,409 3,127,064 309,019 283,108
Cost of shares reacquired (2,415,119,839) (1,016,298,261) (4,531,777) (4,704,482)
- --------------------------------------------------------------------------------------------------
Increase (Decrease) In Net
Assets From Fund Share
Transactions 763,501,033 30,098,269 (3,195,902) 11,073,289
- --------------------------------------------------------------------------------------------------
Increase (Decrease) In Net Assets 763,536,798 30,102,527 (3,189,035) 10,875,014
NET ASSETS:
Beginning of year 189,783,036 159,680,509 10,875,014 --
- --------------------------------------------------------------------------------------------------
End of year* $ 953,319,834 $ 189,783,036 $ 7,685,979 $ 10,875,014
==================================================================================================
*Includes undistributed net
investment income of: -- -- $ 31,762 $ 47,150
==================================================================================================
<FN>
(a) For the period from April 27, 1993 (commencement of operations) to March 31,
1994.
See Notes to Financial Statements.
</TABLE>
35
<PAGE>273
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets (continued)
- --------------------------------------------------------------------------------
For the Years Ended March 31,
<TABLE>
<CAPTION>
California Portfolio
----------------------------
1995 1994
====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,575,801 $ 10,731,905
Net realized gain from security transactions 169,042 483,893
Decrease in net unrealized appreciation
of investments (444,401) (7,814,856)
- ------------------------------------------------------------------------------------
Increase In Net Assets From Operations 10,300,442 3,400,942
- ------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 3):
Net investment income (10,612,295) (10,789,706)
Net realized gain from security transactions (16,954) (545,063)
- ------------------------------------------------------------------------------------
Decrease In Net Assets From Distributions
To Shareholders (10,629,249) (11,334,769)
- ------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Net proceeds from sale of shares 30,935,315 53,466,294
Net value of shares issued in connection with the
transfer of the Smith Barney Shearson California
Municipal Money Market Fund net assets -- --
Net asset value of shares issued for reinvestment
of dividends 3,672,477 4,422,622
Cost of shares reacquired (41,508,956) (38,954,545)
- ------------------------------------------------------------------------------------
Increase (Decrease) In Net Assets From
Fund Share Transactions (6,901,164) 18,934,371
- ------------------------------------------------------------------------------------
Increase (Decrease) In Net Assets (7,229,971) 11,000,544
NET ASSETS:
Beginning of year 176,717,863 165,717,319
- ------------------------------------------------------------------------------------
End of year* $169,487,892 $176,717,863
====================================================================================
*Includes undistributed net investment income of: $197,611 $234,105
====================================================================================
</TABLE>
See Notes to Financial Statements.
36
<PAGE>274
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The California Money Market, California Limited Term and California
Portfolios ("Portfolios") are separate investment portfolios of the Smith Barney
Muni Funds ("Fund"). The Fund, a Massachusetts business trust, is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
open-end management investment company and consists of these Portfolios and ten
other separate investment portfolios: Florida, Georgia, New Jersey, New York,
National, Ohio, Pennsylvania, Limited Term, Florida Limited Term and New York
Money Market Portfolios. The financial statements and financial highlights for
the other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on the trade date; (b)
securities are valued at bid prices provided by an independent pricing service
that are based on transactions in municipal obligations, quotations from
municipal bond dealers, market transactions in comparable securities and various
relationships between securities; short-term securities and securities maturing
within 60 days are valued at cost plus (minus) accreted discount (amortized
premium), which approximates value; (c) gains or losses on the sale of
securities are calculated by using the specific identification method; (d)
interest income, adjusted for amortization of premiums and accretion of original
issue discount, is recorded on the accrual basis; market discount is recognized
upon the disposition of the security; (e) direct expenses are charged to each
Portfolio and each class; management fees and general fund expenses are
allocated on the basis of relative net assets; and (f) the Portfolios intend to
comply with the requirements of the Internal Revenue Code pertaining to
regulated investment companies and to make the required distributions to
shareholders; therefore, no provision for Federal income taxes has been made.
2. Portfolio Concentration
Since each Portfolio invests primarily in obligations of issuers within
California, it is subject to possible concentration risks associated with
economic, political, or legal developments or industrial or regional matters
specifically affecting California.
37
<PAGE>275
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Exempt-Interest Dividends and Other Distributions
The California Money Market Portfolio declares and records a dividend of
substantially all its net investment income on each business day. Such dividends
are paid or reinvested monthly in fund shares on the payable date. Furthermore,
all Portfolios intend to satisfy conditions that will enable interest from
municipal securities, which is exempt from Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Portfolio.
Capital gain distributions, if any, are taxable to shareholders, and are
declared and paid at least annually. At March 31, 1995 the California Money
Market and California Limited Term Portfolios had net capital loss carryovers of
$326,973 and $188,158, respectively, available to offset future capital gains.
To the extent that this carryover loss is used to offset capital gains it is
probable that any gains so offset will not be distributed. The amount and
expiration of the carryovers are indicated below. Expiration occurs on March 31
of the year indicated.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 2002 2003
======================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
California Money Market Portfolio $93,180 $58,601 $7,368 $74,192 $10,769 $81,428 $ 1,435
California Limited Term Portfolio -- -- -- -- -- -- 188,158
======================================================================================================
</TABLE>
4. Management Agreements and Transactions with Affiliated Persons
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager to the Fund. The
California Money Market Portfolio pays SBMFM a management fee calculated at an
annual rate of 0.50% of average daily net assets. The California Limited Term
and California Portfolios pay SBMFM a management fee calculated at an annual
rate of 0.45% of their average daily net assets. Such fees are calculated daily
and paid monthly. SBMFM waived $39,849 and $100,000 of its management fees for
the California Limited Term and California Money Market Portfolios,
respectively, for the year ended March 31, 1995. SBMFM also reimbursed expenses
of $8,087 for the California Limited Term Portfolio.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. SB received sales charges of approximately $255,000 (paid by
purchasers of the Portfolios' Class A shares) for the year ended March 31, 1995.
All officers and two Trustees of the Fund are employees of SB.
38
<PAGE>276
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Effective November 7, 1994, the Fund adopted a new class structure,
renaming Class B shares as Class C shares for the California Limited Term and
California Portfolios. In addition, in the California Limited Term Portfolio the
former Class C shares were renamed as Class Y shares and in the California
Portfolio the former Class C shares were exchanged into Class A shares. Under
the new class structure, for the California Portfolio, a contingent deferred
sales charge ("CDSC") of 4.50% is imposed on Class B shares if redemption occurs
less than one year from initial purchase. This CDSC declines by 0.50% the first
year after purchase and by 1.00% per year thereafter until no CDSC is incurred.
For the California Limited Term and California Portfolios a CDSC of 1.00% is
also imposed on Class C shares if redemption occurs less than one year from
initial purchase. Any CDSC imposed on redemptions is paid to SB. For the year
ended March 31, 1995, there were approximately $7,000 in such charges.
On September 16, 1994, a new Distribution Plan was approved by the Fund's
shareholders. Pursuant to this Distribution Plan, the California Portfolio pays
a service fee of 0.15% of average net asssets on an annual basis with respect to
its Class A, B and C shares; the California Limited Term Portfolio pays a
service fee of 0.15% of average net assets on an annual basis with respect to
its Class A and C shares. In addition, the California Portfolio pays a
distribution fee of 0.50% and 0.55% of average net assets on an annual basis
with respect to its Class B and C shares, respectively; the California Limited
Term Portfolio pays a distribution fee of 0.55% of average net assets on an
annual basis with respect to its Class C shares. The California Money Market
Portfolio pays for distribution related services calculated at annual rate of
0.10% of average net assets.
5. Investments
During the year ended March 31, 1995, the aggregate cost of purchases and
proceeds from sales (including maturities, but excluding short-term securities)
of investments were as follows:
<TABLE>
<CAPTION>
California California
Money Market Limited Term California
Portfolio Portfolio Portfolio
==============================================================================
<S> <C> <C> <C>
Purchases -- $2,332,226 $53,053,788
- ------------------------------------------------------------------------------
Sales -- 3,602,130 55,858,979
==============================================================================
</TABLE>
39
<PAGE>277
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At March 31, 1995, the gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
California California
Money Market Limited Term California
Portfolio Portfolio Portfolio
================================================================================
<S> <C> <C> <C>
Gross unrealized appreciation -- $ 56,614 $ 6,843,249
Gross unrealized depreciation -- (91,626) (1,720,649)
- --------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) -- $ (35,012) $ 5,122,600
================================================================================
</TABLE>
6. Transfer of Assets
On November 18, 1994 the net assets of the Smith Barney Shearson California
Municipal Money Market Fund were merged into Smith Barney California Money
Market Portfolio pursuant to an Agreement and Plan of Reorganization dated
August 2, 1994.
The transaction was structured for tax purposes to qualify as a tax-free
reorganization under the Internal Revenue Code. The Smith Barney Shearson
California Municipal Money Market Fund net assets at that date were
$830,711,463. Directly after the merger the combined net assets were
$1,034,833,204 for the Smith Barney California Money Market Portfolio.
7. Capital Shares
At March 31, 1995, there were an unlimited amount of shares of $.001 par
value capital stock authorized. The Fund has multiple classes of shares within
each Portfolio of the Fund. Each share of a class represents an identical
interest in its respective Portfolio and has the same rights, except that each
class bears certain expenses specifically related to the distribution of its
shares. At March 31, 1995, total paid-in capital amounted to the following for
each class and respective Portfolio:
<TABLE>
<CAPTION>
Portfolio Class A Class B Class C Class Y
=============================================================================
<S> <C> <C> <C> <C>
California Money Market $953,646,807 -- -- --
California Limited Term 5,520,311 -- $1,859,511 $497,565
California 156,275,600 $578,555 7,232,684 --
=============================================================================
</TABLE>
40
<PAGE>278
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each Portfolio were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1995 March 31, 1994
California Money ------------------------ ------------------------
Market Portfolio Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 2,335,326,000 $ 2,335,326,000 1,043,269,466 $ 1,043,269,466
Transfer from
Smith Barney
Shearson California
Municipal Money
Market Fund 831,064,777 831,064,777 -- --
Shares issued on
reinvestment 12,583,409 12,583,409 3,127,064 3,127,064
Shares redeemed (2,415,119,839) (2,415,119,839) (1,016,298,261) (1,016,298,261)
- ------------------------------------------------------------------------------------------------
Net Increase 763,854,347 $ 763,854,347 30,098,269 $ 30,098,269
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1995 March 31, 1994*
California Limited ------------------------ ------------------------
Term Portfolio Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 112,206 $ 711,580 1,698,497 $11,136,992
Shares issued on
reinvestment 31,795 202,029 37,037 246,457
Shares redeemed (560,588) (3,557,722) (484,046) (3,219,025)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) (416,587) $(2,644,113) 1,251,488 $ 8,164,424
================================================================================================
Class C+
Shares sold 49,747 $ 315,276 386,889 $ 2,558,573
Shares issued on
reinvestment 12,721 80,696 4,738 31,447
Shares redeemed (153,794) (974,055) (23,016) (152,426)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) (91,326) $ (578,083) 368,611 $ 2,437,594
================================================================================================
Class Y++
Shares sold -- -- 274,912 $ 1,799,098
Shares issued on
reinvestment 4,143 $ 26,294 793 5,204
Shares redeemed -- -- (198,663) (1,333,031)
- ------------------------------------------------------------------------------------------------
Net Increase 4,143 $ 26,294 77,042 $ 471,271
================================================================================================
<FN>
* For Class A shares, transactions are for the period from April 27, 1993
(inception date) to March 31, 1994; for Class C shares, transactions are for
the period from May 18, 1993 (inception date) to March 31, 1994 and for Class
Y shares, transactions are for the period from June 23, 1993 (inception date)
to March 31, 1994.
+ On November 7, 1994 the former Class B shares were renamed Class C shares.
++ On November 7, 1994 the former Class C shares were renamed Class Y shares.
</TABLE>
41
<PAGE>279
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1995 March 31, 1994
------------------------ ------------------------
California Portfolio Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A*
Shares sold 2,324,798 $ 27,987,508 2,938,814 $ 38,173,347
Shares issued on
reinvestment 287,711 3,455,371 313,867 4,066,011
Shares redeemed (3,314,660) (39,556,136) (2,305,447) (29,781,514)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) (702,151) $ (8,113,257) 947,234 $ 12,457,844
================================================================================================
Class B+
Shares sold 84,879 $ 1,001,483 -- --
Shares issued on
reinvestment 480 5,781 -- --
Shares redeemed (35,955) (428,708) -- --
- ------------------------------------------------------------------------------------------------
Net Increase 49,404 $ 578,556 -- --
================================================================================================
Class C++
Shares sold 161,193 $ 1,946,324 457,886 $ 5,950,014
Shares issued on
reinvestment 17,630 211,325 8,761 113,273
Shares redeemed (129,420) (1,524,112) (94,684) (1,212,861)
- ------------------------------------------------------------------------------------------------
Net Increase 49,403 $ 633,537 371,963 $ 4,850,426
================================================================================================
<FN>
* On October 10, 1994 the former Class C shares were exchanged into Class A
shares; therefore Class C share activity for the period from April 1, 1994 to
October 9, 1994 is included with the Class A share activity. The year ended
March 31, 1994 includes only Class A share activity.
+ For the period from November 11, 1994 (inception date) to March 31, 1995.
++ On November 7, 1994 the former Class B shares were renamed Class C
shares.
</TABLE>
42
<PAGE>280
Smith Barney Muni Funds
California Money Market Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares: 1995 1994 1993 1992 1991(a)
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income (1) 0.026 0.018 0.021 0.035 0.044
- --------------------------------------------------------------------------------------------------------------
Total Income from Investment Operations 0.026 0.018 0.021 0.035 0.044
- --------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.026) (0.018) (0.021) (0.035) (0.044)
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.026) (0.018) (0.021) (0.035) (0.044)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------
Total Return 2.66% 1.84% 2.05% 3.51% 4.49%++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $953,320 $189,783 $159,681 $167,172 $135,608
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (1) 0.61% 0.64% 0.67% 0.60% 0.46%+
Net investment income 3.02 1.82 2.05 3.46 4.73 +
==============================================================================================================
<FN>
(a) From May 10, 1990 (inception date) to March 31, 1991.
++ Not annualized, as the result may not be representative of the total
return for the year.
+ Annualized.
(1) The manager has waived all or part of its fees for the period ended March
31, 1991 and the year ended March 31, 1995. If such fees were not waived,
the per share decrease of net investment income and the ratios of expenses
to average net assets would be as follows:
</TABLE>
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases Without Fee Waivers
-----------------------------------------------------
1995 1991 1995 1991
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class A $.002 $.001 0.63% 0.60%+
</TABLE>
43
<PAGE>281
Smith Barney Muni Funds
California Limited Term Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class C(a) Class Y(b)
-------------------- -------------------- ------------------
1995 1994(c) 1995 1994(d) 1995 1994(e)
============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 6.41 $ 6.50 $ 6.41 $ 6.51 $6.41 $6.57
- ------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income(1) 0.32 0.27 0.30 0.25 0.31 0.15
Net realized and unrealized gain (loss)
on investments 0.04 (0.12) 0.05 (0.12) 0.05 (0.15)
- ------------------------------------------------------------------------------------------------------------
Total Income from Investment Operations 0.36 0.15 0.35 0.13 0.36 --
- ------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.32) (0.24) (0.31) (0.23) (0.32) (0.16)
Distributions from net realized gains
on security transactions (0.01) -- (0.01) -- (0.01) --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.33) (0.24) (0.32) (0.23) (0.33) (0.16)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 6.44 $ 6.41 $ 6.44 $ 6.41 $6.44 $6.41
- ------------------------------------------------------------------------------------------------------------
Total Return 5.89% 2.29%++ 5.56% 1.87%++ 5.87% N/A
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $5,377 $8,020 $1,786 $2,361 $523 $ 494
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(1) 0.40% 0.19%+ 0.69% 0.53%+ 0.43% 0.35%+
Net investment income 4.89 4.99+ 4.63 4.52+ 4.89 4.84+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27.40% 47.91% 27.40% 47.91% 27.40% 47.91%
============================================================================================================
<FN>
(a) On November 7, 1994 the former Class B shares were renamed Class C shares.
(b) On November 7, 1994 the former Class C shares were renamed Class Y shares.
(c) For the period from April 27, 1993 (inception date) to March 31, 1994.
(d) For the period from May 18, 1993 (inception date) to March 31, 1994.
(e) For the period from June 23, 1993 (inception date) to March 31, 1994.
++ Not annualized, as the result may not be representative of the total
return for the year.
+ Annualized.
(1) The manager has waived all of its fees and reimbursed expenses of $8,087 and
$10,992 for the year ended March 31, 1995 and the period ended March 31,
1994, respectively. If such fees were not waived, the per share decrease of
net investment income and the ratios of expenses to average net assets would
be as follows:
</TABLE>
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases Without Fee Waivers*
-------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class A $0.037 $0.032 0.95% 0.75%+
Class C 0.037 0.041 1.23 1.18+
Class Y 0.036 0.011 1.98 0.88+
<FN>
* As a result of voluntary expense limitations, the ratio of expenses to
average net assets will not exceed 0.80%, 1.00% and 0.65% for Class A, C and
Y Shares, respectively.
</TABLE>
44
<PAGE>282
Smith Barney Muni Funds
California Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares (a) 1995 1994 1993 1992 1991
====================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.27 $12.78 $12.05 $11.62 $11.47
- ----------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income (1) 0.74 0.76 0.78 0.81 0.84
Net realized and unrealized gain (loss)
on investments (2) 0.02 (0.47) 0.73 0.42 0.15
- ----------------------------------------------------------------------------------------------------
Total Income from Investment Operations 0.76 0.29 1.51 1.23 0.99
- ----------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.75) (0.77) (0.78) (0.80) (0.84)
Distributions from net realized gains
on security transactions -- (0.03) -- -- --
- ----------------------------------------------------------------------------------------------------
Total Distributions (0.75) (0.80) (0.78) (0.80) (0.84)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.28 $12.27 $12.78 $12.05 $11.62
- ----------------------------------------------------------------------------------------------------
Total Return 6.47% 2.15% 12.93% 11.11% 8.90%
- ----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $161,993 $164,833 $159,635 $123,268 $98,740
- ----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (1) 0.59% 0.51% 0.53% 0.38% 0.21%
Net investment income 6.16 5.90 6.32 6.78 7.25
- ----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31.65% 38.68% 24.28% 44.03% 45.37%
====================================================================================================
Class B Shares 1995(b)
====================================================================================================
Net Asset Value, Beginning of Period $11.52
- ----------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.30
Net realized and unrealized gain
on security transactions (2) 0.75
- ----------------------------------------------------------------------------------------------------
Total Income from Investment Operations 1.05
- ----------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.28)
Distributions from net realized gains
on security transactions --
- ----------------------------------------------------------------------------------------------------
Total Distributions (0.28)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.29
- ----------------------------------------------------------------------------------------------------
Total Return 9.18%++
- ----------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $607
- ----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.19%+
Net investment income 5.56+
- ----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31.65%
====================================================================================================
<FN>
(a) On October 10, 1994 the former Class C shares were exchanged into Class A
shares.
(b) For the period from November 11, 1994 (inception date) to March 31, 1995.
(1) See page 45 for full footnote disclosure.
(2) Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at net asset values less
than the beginning of the period.
++ Not annualized, as the result may not be representative of the total
return for the year.
+ Annualized.
</TABLE>
45
<PAGE>283
Smith Barney Muni Funds
California Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares (a) 1995 1994 1993(b)
======================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $12.26 $12.77 $12.46
- ------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.67 0.68 0.20
Net realized and unrealized gain (loss)
on investments (2) 0.01 (0.48) 0.29
- ------------------------------------------------------------------------------------------------------
Total Income from Investment Operations 0.68 0.20 0.49
- ------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.66) (0.68) (0.18)
Distributions from net realized gains
on security transactions -- (0.03) --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.66) (0.71) (0.18)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.28 $12.26 $12.77
- ------------------------------------------------------------------------------------------------------
Total Return 5.80% 1.45% 3.95%++
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $6,888 $6,269 $1,784
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.23% 1.22% 1.20%+
Net investment income 5.57 5.15 5.44+
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31.65% 38.68% 24.28%
======================================================================================================
<FN>
(a) On November 7, 1994 the former Class B shares were renamed Class C shares.
(b) From January 5, 1993 (inception date) to March 31, 1993.
++ Not annualized, as the result may not be representative of the total
return for the year.
+ Annualized.
(1) The manager has waived all or part of its fees for each of the periods in
the two-year period ended March 31, 1992. If such fees were not waived, the
per share decrease of net investment income and the ratios of expenses to
average net assets would be as follows:
</TABLE>
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decrease Without Fee Waivers*
----------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1991 1992 1991
---- ---- ---- ----
Class A $0.017 $0.029 0.51% 0.46%
<FN>
* As a result of voluntary expense limitations, the ratios of expenses to
average net assets will not exceed 0.80%, 1.30% and 1.35% for Class A, B and
C shares, respectively.
(2) Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at net asset values less
than the beginning of the period.
</TABLE>
46
<PAGE>284
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of the California Money Market, California Limited Term
and California Portfolios of Smith Barney Muni Funds:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the California Money Market,
California Limited Term and California Portfolios of Smith Barney Muni Funds as
of March 31, 1995, the related statements of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended with respect to the California Money Market and California
Portfolios and for the year then ended and the period from April 27, 1993
(commencement of operations) to March 31, 1994 with respect to the California
Limited Term Portfolio and the financial highlights for each of the years in the
four-year period then ended and for the period from May 10, 1990 (commencement
of operations) to March 31, 1991 with respect to the California Money Market
Portfolio, for the year then ended and the period from April 27, 1993
(commencement of operations) to March 31, 1994 with respect to the California
Limited Term Portfolio and for each of the years in the five-year period then
ended with respect to California Portfolio. These financial statements and
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
47
<PAGE>285
Smith Barney Muni Funds
- --------------------------------------------------------------------------------
Independent Auditors' Report (continued)
- --------------------------------------------------------------------------------
In our opinion, the financials statements referred to above present fairly,
in all material respects, the financial position of the California Money Market
California Limited Term and California Portfolios of Smith Barney Muni Funds as
of March 31, 1995, the results of their operations for the year then ended, the
changes in net assets for each of the years in the two-year period then ended
with respect to the California Money Market and California Portfolios and for
the year then ended and the period from April 27, 1993 (commencement of
operations) to March 31, 1994 with respect to the California Limited Term
Portfolio and the financial highlights for each of the years in the four-year
period then ended and the period from May 10, 1990 (commencement of operations)
to March 31, 1991 with respect to the California Money Market Portfolio, for the
year then ended and the period from April 27, 1993 (commencement of operations)
to March 31, 1994 with respect to the California Limited Term Portfolio and for
each of the years in the five-year period then ended with respect to the
California Portfolio, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
May 15, 1995
48
<PAGE>286
SMITH BARNEY
- ------------
A Member of Travelers Group [LOGO APPEARS HERE]
Smith Barney
Muni Funds
Trustees
Jessica M. Bibliowicz
Ralph D. Creasman
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P.Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
C. Richard Youngdahl
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Peter M. Coffey
Vice President
Daniel Malone
Vice President
Karen L. Mahoney-Malcomson
Vice President
Irving P. David
Controller
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Muni Funds California Money Market, California Limited Term and
California Portfolios. It is not authorized for distribution to prospective
investors unless accompanied or preceded by a current Prospectus for the
Portfolio, which contains information concerning the Portfolio's investment
policies and expenses as well as other pertinent information.
Smith Barney Muni Funds
388 Greenwich Street
New York, New York 10013
FD2309 E5 82110
<PAGE>287
PRO FORMA FINANCIAL STATEMENTS
<PAGE>288
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES AT FEBRUARY 28, 1995 (unaudited)
<TABLE>
<CAPTION>
Smith Barney Smith Barney Pro Forma Pro Forma
California Municipals California Portfolio Adjustments Combined
--------------------- -------------------- ----------- --------
(Historical) (Historical)
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost-$686,897,598) $532,273,669 $167,214,958 $256,099 (d) $699,744,726
Interest receivable 7,651,867 2,519,985 - 10,171,852
Receivable for Fund shares sold 1,226,037 167,271 - 1,393,308
Receivable for securities sold 4,139,877 963,333 - 5,103,210
Other Assets - 559 - 559
------------ ------------ --------- -------------
Total Assets 545,291,450 170,866,106 256,099 716,413,655
------------ ------------ --------- -------------
LIABILITIES:
Payable for securities purchased 14,147,973 1,791,853 - 15,939,826
Dividends payable 283,943 - - 283,943
Service fee payable 59,551 397 - 59,948
Distribution cost payable 48,055 58,560 - 106,615
Payable for Fund shares purchased 21,935 - - 21,935
Accrued expenses and other liabilities 336,166 103,622 - 439,788
------------ ------------ --------- -------------
Total Liabilities 14,897,623 1,954,432 - 16,852,055
------------- ------------ ---------- --------------
Net Assets $530,393,827 $168,911,674 $256,099 $699,561,600
============ ============ ========== ==============
NET ASSETS:
Par value of capital shares $344,453 $13,835 $96,042 (b)(e) $454,330
Capital paid in excess of par value 531,751,098 164,492,508 (96,042)(b)(e) 696,147,564
Undistributed (distribution in excess
of) net investment income (283,943) 171,011 - (112,932)
Accumulated net realized gain (loss) (9,797,114) 22,624 - (9,774,490)
Net unrealized appreciation of investments 8,379,333 4,211,696 256,099 (d) 12,847,128
----------- ------------ ---------- --------------
Net Assets $530,393,827 $168,911,674 $256,099 $699,561,600
============ ============ ========== ==============
Outstanding Shares:
CLASS A 26,089,810 13,211,906 (2,719,594)(b) 36,582,122
============ =========== ==============
CLASS B 8,305,989 56,092 (11,510)(b) 8,350,571
============ =========== ==============
CLASS C 49,505 567,633 (116,844)(b) 500,294
============ =========== ==============
Net Asset Value
- ---------------
CLASS A (and redemption price) $15.40 $12.21 $15.40
============ =========== ==============
CLASS B $15.40 $12.22 $15.40
============ =========== ==============
CLASS C $15.40 $12.21 $15.40
============ =========== ==============
MAXIMUM OFFERING PRICE $16.04 $12.72 $16.04
============ =========== ==============
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>289
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS For the year ended February 28, 1995 (unaudited)
<S> <C> <C> <C> <C>
Smith Barney Smith Barney Pro Forma Pro Forma
California Municipals California Portfolio Adjustments Combined
--------------------- -------------------- ------------ -----------
(Historical) (Historical)
INVESTMENT INCOME:
Interest
$33,395,101 $11,726,927 - $45,122,028
---------------- ----------------- ----------- -----------
EXPENSES:
Investment advisory fee 1,776,849 777,769 (224,689)(a) 2,329,929
Administration fee 1,014,965 - 311,108 (a) 1,326,073
Distribution costs 1,337,403 152,950 - 1,490,353
Transfer agent fees 138,544 28,449 - 166,993
Custodian fees 103,343 19,955 - 123,298
Shareholder Communications 85,673 25,662 (8,554)(c) 102,781
Legal and auditing fees 65,936 10,033 (6,689)(c) 69,280
Registration fees 43,267 12,520 (4,173)(c) 51,614
Directors' fees 44,641 5,491 (1,830)(c) 48,302
Pricing service fees 29,616 22,833 (7,611)(c) 44,838
Other 19,544 5,631 - 25,175
---------------- ----------------- --------- ------------
Total Expenses 4,659,781 1,061,293 57,562 5,778,636
---------------- ----------------- --------- ------------
NET INVESTMENT INCOME $28,735,320 $10,665,634 ($57,562)(f) $39,343,392
---------------- ----------------- --------- ------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain/(loss) on:
Securities (15,903,746) (389,427) - (16,293,173)
Futures contracts 8,387,881 - - 8,387,881
---------------- ----------------- ---------- -----------
Net Realized Loss on Investments (7,515,865) (389,427) - (7,905,292)
---------------- ----------------- ---------- -----------
Change in Unrealized Appreciation
of Investments
Securities (8,483,171) (8,601,975) 256,099 (d) (16,829,047)
Futures contracts (2,281,250) - - (2,281,250)
--------------- ---------------- -------- ------------
Change in Net Unrealized Appreciation (10,764,421) (8,601,975) 256,099 (19,110,297)
--------------- ---------------- -------- ------------
Net Gain (Loss) On Investments (18,280,286) (8,891,402) 256,099 (27,015,589)
--------------- ---------------- -------- ------------
NET INCREASE IN NET ASSETS $10,455,034 $1,674,232 $198,537 $12,327,803
RESULTING FROM OPERATIONS =============== ================ ======== ============
See accompanying notes to pro forma financial statements.
<FN>
(a) reflects management fee agreement of surviving fund
(b) reflects new shares issued by California Municipals
(c) decrease due to duplicative services
(d) reflects change from bid prices to mean prices by California Portfolio
(e) reflects change in par amount from $.001 to $.01 for California Portfolio
(f) increase in expenses not reflected in undistributed net investment income as
the Fund distributes substantially all its;' net investment income.
</TABLE>
<PAGE>290
PRO FORMA FOOTNOTES OF MERGER BETWEEN CALIFORNIA MUNICIPALS AND CALIFORNIA
PORTFOLIO
February 28, 1995 (unaudited)
1. GENERAL
The accompanying pro forma financial statements are presented to show the effect
of the proposed acquisition of Smith Barney California Portfolio (the
"Portfolio"), by the Smith Barney California Municipals Fund (the "Fund"), as if
such acquisition had taken place as of March 1, 1994.
Under the terms of the Plan of Reorganization the combination of the Portfolio
and the Fund will be treated as a tax-free business combination and accordingly
will be accounted for by a method of accounting for tax free mergers of
investment companies (sometimes referred to as the pooling without restatement
method). The acquisition would be accomplished by an acquisition of the net
assets of the Portfolio in exchange for shares of the Fund at net asset value.
The statements of assets and liabilities and the related statements of
operations of the Portfolio and the Fund have been combined as of and for the
year ended February 28, 1995. With certain limited exceptions, Smith Barney Inc.
is liable for the expenses incurred in connection with the Reorganization, which
are estimated to be $53,000.
The accompanying pro forma financial statements should be read in conjunction
with the financial statements and schedules of investments of the Portfolio and
the Fund which are included in their respective annual reports dated March 31,
1995 and February 28, 1995 respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund (formerly Smith Barney Shearson California Municipals Fund Inc.) was
incorporated under the laws of the State of Maryland on February 17, 1984. The
Fund is a non-diversified, open-end management investment company registered
with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended (the "1940 Act"). The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of the
pro-forma financial statements.
Portfolio valuation: Securities are valued by the Boston Company Advisors, Inc.
("Boston Advisors") after consultation with an independent pricing service (the
"Service") approved by the Board of Directors. Investments are valued at the
mean between the quoted bid prices and asked prices (as obtained by the Service
from dealers in such securities). Securities for which, in the judgment of the
Service, there are no readily obtainable market quotations (which may constitute
a majority of the portfolio securities) are carried at fair value as determined
by the Service, based on methods which include consideration of: yields or
prices of municipal securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. Short-
term investments that mature in 60 days or less are valued at amortized cost.
Futures contracts: The Fund may enter into futures contracts. Future
transactions will be entered into for hedging purposes to protect against a
decline in the price of securities that the Fund owns, or to protect the Fund
against an increase in the price of securities it is committed to purchase.
PRO FORMA FOOTNOTES OF MERGER BETWEEN CALIFORNIA MUNICIPALS AND CALIFORNIA
PORTFOLIO
February 28, 1995 (unaudited, continued)
<PAGE>291
Upon entering into a futures contract, the Fund is required to deposit with the
broker an amount of cash or cash equivalents equal to a certain percentage of
the contract amount. This is known as the "initial margin." Subsequent
payments ("variation margin") are made or received by the Fund each day,
depending on the daily fluctuation of the value of the contract.
For financial statement purposes, an amount equal to the settlement amount of
the contract is included in its Statement of Assets and Liabilities as an asset
and as an equivalent liability. For long futures positions, the asset is
marked-to-market daily; for short futures positions, the liability is marked-to-
market daily. The daily changes in the contract are recorded as unrealized
gains or losses. The Fund recognizes a realized gain or loss when the contract
is closed.
There are several risks in connection with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk the
Fund may not be able to enter into a closing transaction because of an illiquid
secondary market.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed delivery basis may be
settled a month or more after the trade date. Interest income on these
securities is not accrued until settlement date. When required, the Fund
instructs the custodian to segregate assets in a separate account with a current
value at least equal to the amount of its when-issued purchase commitments.
Realized gains and losses from securities sold are recorded on the identified
cost basis. Investment income and realized and unrealized gains and losses are
allocated based upon the relative net assets of each class of shares.
Dividends and distributions to shareholders: Dividends from net investment
income are determined on a class level, declared on each day that the Fund is
open for business and paid on the last day of the Smith Barney Inc. ("Smith
Barney") statement month. Distributions from net realized capital gains are
declared and paid annually.
Federal taxes: The Fund intends to comply with the requirements of the Internal
Revenue Code pertaining to regulated investment companies and to make the
required distributions to shareholders; therefore, no provision for Federal
income taxes has been made.
3. PRO-FORMA ADJUSTMENTS
The accompanying Pro Forma financial statements reflect changes in fund shares
and expenses as if the merger had taken place on March 1, 1994.
4. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, formerly a division of Mutual
Management Corp., which was transferred effective November 7, 1994 to Smith
Barney Mutual Funds Management Inc. ("SMBFM"). Mutual Management
PRO FORMA FOOTNOTES OF MERGER BETWEEN CALIFORNIA MUNICIPALS AND CALIFORNIA
PORTFOLIO
February 28, 1995 (unaudited, continued)
<PAGE>292
Corp. and SBMFM are both wholly owned subsidiaries of Smith Barney Holdings Inc.
("Holdings") a wholly-owned subsidiary of The Travelers Inc. Under the Advisory
Agreement, the Fund pays a monthly fee at the following annual rates: 0.35% of
the value of its average daily net assets up to $500 million and 0.32% of the
value of its average daily net assets in excess of $500 million.
Prior to April 20, 1994, the Fund was party to an administration agreement (the
"Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Administration
Agreement, the Fund paid a monthly fee at the annual rate of 0.20% of the value
of its average daily net assets up to $500 million and 0.18% of the value of its
daily net assets in excess of $500 million.
As of the close of business on April 20, 1994, SBMFM (formerly known as Smith,
Barney Advisers, Inc.) succeeded Boston Advisors as the Fund's administrator.
The new agreement contains substantially the same terms and conditions,
including the same level of fees, as the predecessor agreement.
As of the close of business on April 20, 1994, the Fund and SBMFM entered into a
sub-administration agreement (the "Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, SBMFM pays Boston Advisors a
portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Fund from serving as a Director or officer of
the Fund.
5. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a distribution
agreement with the Fund, and sells shares of the Fund through Smith Barney or
its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a services and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class C
shareholders and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C shares of the Fund at the annual rate of 0.15% of the value
of the average daily net assets of each respective class of shares. Smith
Barney is also paid an annual distribution fee with respect to Class B and Class
C shares at the annual rate of 0.50% and 0.55%, respectively, of the value of
the average daily net assets of each class.
6. COMMON STOCK
As of February 28, 1995, the Fund had authorized capital of 500 million shares
of $.01 par value common stock divided into four classes: Class A, Class B,
Class C and Class Y.
PRO FORMA FOOTNOTES OF MERGER BETWEEN CALIFORNIA MUNICIPALS AND CALIFORNIA
PORTFOLIO
February 28, 1995 (unaudited, continued)
7. CONCENTRATION OF CREDIT
<PAGE>293
The Fund primarily invests in debt obligations issued by the State of California
and local governments in the State of California, its political subdivisions,
agencies and public authorities to obtain funds for various public purposes.
The Fund is more susceptible to factors adversely affecting issuers of
California municipal securities than is a municipal bond fund that is not
concentrated in these issuers to the same extent.
8. ORANGE COUNTY HOLDINGS
Approximately 6% of the portfolio was invested in securities issued by various
agencies located within Orange County. However, none of these holdings are
direct obligations of the county itself, and more than half are either insure
(AMBAC, MBIA or FGIC) or backed by guaranteed investment contracts. In addition,
another 4% of the portfolio was invested in a San Joaquin Transportation
corridor bond, whose issuer is a participant in Orange County's investment pool.
<PAGE>294
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$3,000,000 $3,000,000 Adelanto, California,
Improvement Agency,
Tax Allocation, (Adelanto
Improvement Project),
Series B, (FGIC Insured),
5.500% due 12/1/23......... AAA $2,741,250 $2,741,250
$2,000,000 2,000,000 Adelanto School District
Series-B, FGIC Insured,
6.70% due 9/1/18 $462,500 $2,500 $465,000
2,500,000 2,500,000 Alhambra Arcadia Azush
County, California,
Independent Cities
Authority, Risk Management,
Certificates of
Participation,
7.250% due 3/1/07 ......... NR $2,559,375 $2,559,375
4,500,000 4,500,000 Alhambra, California,
Redevelopment Agency,
Tax Allocation,
(AMBAC Insured),
5.850% due 5/1/23.......... AAA 4,325,625 $4,325,625
200,000 200,000 Anaheim, California,
Certificates of
Participation,
(Convention Center,
Refunding Project),
(MBIA Insured),
5.700% due 8/1/02 ......... AAA 205,000 $205,000
2,000,000 2,000,000 Anaheim COP, Convention Center
RITES, MBIA-Insured,
6.45% due 7/16/23 (f) AAA 2,037,500 5,000 $2,042,500
2,000,000 2,000,000 Anaheim Public Financing
Authority Tax Allocation
Revenue,
6.45% due 12/28/18 AAA 2,072,500 5,000 $2,077,500
1,500,000 1,500,000 Association of Bay Area
Governments Finance
Authority Nonprofit Corps,
California-Insured, COP,
Rehabilitation Mental
Health Services Inc.
Project, 6.55%, due 6/1/22 A 1,496,250 1,875 $1,498,125
1,000,000 1,000,000 Association of Bay Area
Governments:
Finance Corp.
California COP,
ABAG XXVI-Series A,
6.25% due 6/1/11 A 968,750 1,250 $970,000
Association of Bay Area
Governments:
Financing for Nonprofit
Corporations, California,
Certificates of
Participation,
500,000 500,000 Peninsula Family YMCA
Series A, 6.80% A3 505,000 625 $505,625
Association of Bay Area
Governments (ABAG),
Financing for Nonprofit
Corporations, California,
Certificates of Participation
(Stanford University Hospital):
2,100,000 2,100,000 5.250% due 11/1/06 ....... AA- 1,911,000 $1,911,000
3,305,000 3,305,000 5.250% due 11/1/07 ....... AA- 2,974,500 $2,974,500
5,120,000 5,120,000 5.250% due 11/1/08 ....... AA- 4,563,200 $4,563,200
8,955,000 8,955,000 5.500% due 11/1/13 ....... AA- 8,025,919 $8,025,919
5,935,000 5,935,000 5.250% due 11/1/20........ AA- 4,940,888 $4,940,888
1,000,000 1,000,000 Azusa Redevelopment Agency
Tax Allocation Refunding
Merged Project Area,
Series A,
6.75% due 8/1/23 Baa* 962,500 1,250 $963,750
1,025,000 1,025,000 Azusa COP Refunding Capital
Improvement
Refining Project,
6.625% due 8/1/13 Baa* 976,313 1,282 $977,594
1,200,000 1,200,000 Bakersfield, COP (Waste
Water Treatment
Plant 3 Projects),
8.00% due 1/1/10 A1* 1,293,000 1,500 $1,294,500
1,500,000 1,500,000 Bakersfield Hospital Revenue,
Bakersfield
Memorial Hospital,
Series A, 6.50%, due 1/1/22 A 1,449,375 3,750 $1,453,125
</TABLE>
<PAGE>295
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
Banning, California,
Certificates of Participation,
(Banning Wastewater
Facilities Corporation):
$115,000 $115,000 11.500% due 11/1/03.......... AAA $135,412 $135,412
125,000 125,000 11.500% due 11/1/04.......... AAA 147,500 147,500
140,000 140,000 11.600% due 11/1/05.......... AAA 165,900 165,900
155,000 155,000 11.650% due 11/1/06.......... AAA 184,256 184,256
175,000 175,000 11.700% due 11/1/07.......... AAA 208,469 208,469
195,000 195,000 11.750% due 11/1/08.......... AAA 233,025 233,025
220,000 220,000 11.750% due 11/1/09.......... AAA 263,450 263,450
2,695,000 2,695,000 Bay Area Government Association,
California, Revenue, Napa
Water Systems Project,
(MBIA Insured)
5.375% due 5/1/10............. AAA 2,546,775 2,546,775
$765,000 765,000 Bay Area Government Assoc., A* $815,681 $956 816,637
Municipal Financing Pool,
8.05% due 9/1/10
295,000 295,000 Brea Public Finance Authority
Tax Allocation, MBIA-Insured,
7.00% due 8/1/15.............. AAA 314,175 369 314,544
3,000,000 3,000,000 Brea, California,
Redevelopment Agency
Refunding Revenue,
(AB Project), Tax
Allocation Bonds,
(MBIA Insured),
5.750% due 8/1/23............. AAA 2,823,750 2,823,750
$3,510,000 3,510,000 Brea, California,
Redevelopment Agency
Revenue, (Project A),
Tax Allocation Revenue
Bonds, (MBIA Insured),
5.500% due 8/1/08 ............ AAA 3,404,700 3,404,700
Brisbane, California,
Brisbane Redevelopment
Agency, Tax Allocation
for Brisbane Community
Redevelopment,
General Obligations:
200,000 200,000 9.400% due 5/1/05 ........... A+ 206,000 206,000
220,000 220,000 9.400% due 5/1/06 ........... A+ 226,600 226,600
2,000,000 2,000,000 Burbank Redevelopment Agency
Tax Allocation Series A,
6.00% due 12/1/23............. A- 1,780,000 2,500 1,782,500
1,000,000 1,000,000 California Alternative
Energy Source,
Financing Authority Revenue,
(SRI International Project),
Cogeneration Revenue,
9.750% due 12/1/05 (in default) NR 500,000 500,000
1,500,000 1,500,000 California COP Lease Finance
Authority, CSAC-Nevada County,
7.60% due 10/1/19,
(Escrowed with U.S. Government
Securities to 10/1/98
call @ 1...................... AAA 1,623,750 1,623,750
California Educational
Facilities, Revenue Bonds:
5,450,000 5,450,000 (Pepperdine University),
Series A, (MBIA Insured),
5.500% due 6/1/19............. AAA 5,000,375 5,000,375
(Southwestern University
Project):
1,000,000 1,000,000 6.600% due 11/1/14............ NR 1,021,250 1,021,250
4,505,000 4,505,000 6.700% due 11/1/24............ NR 4,600,731 4,600,731
2,500,000 2,500,000 (University of San Diego),
6.500% due 10/1/22............ NR 2,518,750 2,518,750
1,000,000 1,000,000 California Educational
Facilities Authority Revenue,
Pooled College & University
Financing Series B, Refunding,
6.125% due 6/1/09............. Baa* 967,500 1,250 968,750
2,000,000 2,000,000 California Public School
District Financing Authority
Convertable Capital
Appreciation Bonds,
Palmdale School District,
FSA-Insured, Series 1993B,
stepped zero coupon to 9/30/99
then 6.20% to maturity,
due 10/1/23................... AAA 1,320,000 12,500 1,332,500
</TABLE>
<PAGE>296
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
California Health Facilities
Financing Authority
Revenue Bonds:
$2,015,000 $2,015,000 Hospital Revenue Bonds
(Daughters of Charity
National Health System),
Series 1994 A, 5.65%,
due 10/1/14 Aa* $1,838,688 $5,038 $1,843,725
1,150,000 1,150,000 Episcopal Homes Foundation
Project, CHFCLI-Insured,
7.70%, due 7/1/18 A 1,208,938 1,438 1,210,375
465,000 465,000 Community Provider Pooled
Loan Program Series 1990A,
LOC Swiss Bank
Corporation,
7.35%, due 6/1/20 A+ 490,575 581 491,156
1,250,000 1,250,000 South Coast Medical Center,
CHFCLI-Insured, 7.25%
due 7/1/15 A 1,290,625 1,562 1,292,187
1,450,000 1,450,000 St. Elizabeth Hospital
Project,
6.20% due 11/15/09 A+ 1,417,375 3,625 1,421,000
$5,000,000 5,000,000 5.550% due 8/15/25...... AA $4,387,500 4,387,500
1,000,000 1,000,000 (Adventist Health-West),
Series A, (MBIA Insured),
10.000% due 3/1/14...... AAA 1,020,160 1,020,160
250,000 250,000 (St. Joseph's Health
System), Series 1,
9.750% due 7/1/99 ........ AAA 257,085 257,085
250,000 250,000 (Victory Valley Community
Hospital), Series 1984A,
(STINS Insured),9.875%
due 7/1/12 A+ 256,563 256,563
California HFA Home
Mortgage Revenue:
235,000 235,000 8.25%, due 8/1/08(a) Aa* 247,044 293 247,337
770,000 770,000 8.60%, due 8/1/19(a) Aa* 808,500 962 809,462
40,000 40,000 9.125%, due 2/1/07 AA 41,200 41,200
350,000 350,000 Zero Coupon due 8/1/15 Aa* 44,625 44,625
615,000 615,000 8.30%, due 8/1/19(a) Aa* 638,063 1,538 639,600
520,000 520,000 Series E, 8.35%,
due 8/1/19(a) Aa* 543,400 1,300 544,700
1,000,000 1,000,000 7.00%, due 8/1/26 AA- 1,026,250 2,500 1,028,750
480,000 480,000 California Housing Finance
Agency Revenue Housing
Series C, (MBIA-Insured),
7.00% due 8/1/23 (a) AAA 494,400 1,200 495,600
California Housing Finance
Agency, (Home Ownership
Mortgage), Series A:
15,000 15,000 9.200% due 8/1/15 ...... AA 15,450 15,450
4,750,000 4,750,000 (MBIA Insured),
5.500% due 2/1/14..... AAA 4,340,312 4,340,312
10,000 10,000 Series 1984,
10.250% due 2/1/14.... AA- 10,200 10,200
310,000 310,000 Series 1984B,
Zero Coupon due 8/1/16. AA- 29,063 29,063
245,000 245,000 Multi-Family Housing
Revenue, MBIA-Insured,
8.75% due 8/1/10(d) 258,781 613 259,394
1,630,000 1,630,000 California Housing Finance
Agency Revenue Multi-Unit
Rental Housing Series A,
6.625% due 2/1/24 A1 1,607,588 4,075 1,611,662
1,000,000 1,000,000 California Health Facilities
Financing Authority
Pacific Presbyterian
Medical Center, 6.85%,
due 6/1/19 BBB* 931,250 2,500 933,750
California Pollution Control
Financing Authority:
2,500,000 2,500,000 PCR (Pacific Gas &
Electric Co.),
6.35% due 6/1/09(a) A1* 2,531,250 6,250 2,537,500
800,000 800,000 PCR (Pacific Gas &
Electric Co.),
8.20% due 12/1/18 A1* 863,000 863,000
1,500,000 1,500,000 San Diego Gas & Electric Co.
Series A,
6.80% due 6/1/15(a) Aa3* 1,601,250 3,750 1,605,000
2,125,000 2,125,000 Southern California,
6.40% due 12/1/24(a) AAA 2,151,563 2,657 2,154,219
</TABLE>
<PAGE>297
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
California Pollution Control
Financing Authority:
$500,000 $500,000 Resource Recovery Revenue
Bonds (Waste
Management Inc.),
1991 Corporate Series A,
7.15% due 2/1/11(a) AA- $541,250 $1,250 $542,500
$605,000 605,000 California Public Capital
Improvement Finance
Authority, Pooled Project,
Series B, (BIGI Insured),
8.100% due 3/1/18 ....... AAA $641,300 641,300
2,000,000 500,000 2,500,000 California Special Districts
Finance Authority,
Certificates of
Participation, Series A,
8.500% due 7/1/18 ....... Baa* 540,625 625 2,165,000 2,706,250
California State, General
Obligation Bonds,
Veteran Series:
455,000 455,000 Series AL,
9.700% due 4/1/02 ... A+ 569,319 569,319
725,000 725,000 Series AM,
9.000% due 10/1/02 .. A+ 876,344 876,344
Series AT:
4,000,000 4,000,000 9.700% due 2/1/01 ... A+ 4,885,000 4,885,000
1,000,000 1,000,000 9.500% due 2/1/10 ... A+ 1,368,750 1,368,750
2,000,000 2,000,000 Series AU,
8.400% due 10/1/06 .. A+ 2,440,000 2,440,000
1,000,000 1,000,000 California State Public Works
Board High Technology
Facility Revenue,
San Jose Facility Series-A,
7.75% due 8/1/06 A- 1,120,000 1,250 1,121,250
California State Public Works
Board Lease Revenue:
2,500,000 2,500,000 Franchise Tax Board,
Series A, 6.25%,
due 9/1/11 A- 2,459,375 3,125 2,462,500
2,000,000 2,000,000 Various California State
University Projects,
Series A, 6.70%,
due 10/1/17 A- 2,025,000 2,500 2,027,500
1,000,000 1,000,000 Department of Corrections
(State Prison-Madera
County), 7.00%,
due 9/1/09
(Escrowed with U.S.
Government Securities
to 9/1/00 call @ 102) AAA 1,110,000 1,110,000
California Statewide
Communities Development
Corporation:
1,200,000 1,200,000 COP (Villaview Hospital),
CHFCLI-Insured, 7.00%,
due 9/1/09 AAA 1,240,500 1,500 1,242,000
1,100,000 1,100,000 (Solheim Lutheran Home),
6.50% due 11/1/17 A 1,021,625 2,750 1,024,375
2,680,000 2,680,000 5.000% due 10/1/14..... AAA 2,334,950 2,334,950
California Statewide
Communities Development
Authority Certificates
of Participation,
(St. Joseph's Health
Facilities):
5,000,000 1,000,000 6,000,000 6.625%, due 7/1/21 AA 1,013,750 2,500 5,081,250 6,097,500
4,825,000 4,825,000 5.500% due 7/1/14 .... AA 4,366,625 4,366,625
(Sutter Health
Facilities),
(MBIA- Insured):
3,145,000 3,145,000 5.400% due 8/15/07 ... AAA 3,038,856 3,038,856
3,500,000 3,500,000 5.500% due 8/15/09 ... AAA 3,333,750 3,333,750
12,100,000 12,100,000 5.500% due 8/15/23.... AAA 10,920,250 10,920,250
(Unihealth Facilities
Corporation), Series A,
(AMBAC Insured),
4,515,000 4,515,000 5.500% due 10/1/07 .. AAAA 4,424,700 4,424,700
2,000,000 2,000,000 Calleguas - Las Virgines,
California, Water Revenue,
(Calleguas Municipal
Water District
Project),
(FGIC Insured),
5.125% due 7/1/21...... AAA 1,725,000 1,725,000
</TABLE>
<PAGE>298
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$1,000,000 $1,000,000 Carson Redevelopment Agency
Redevelopment Project
Area No. 2, 6.00%, due
10/1/13 BBB $911,250 $1,250 $912,500
Concord Redevelopment Agency
Tax Allocation Bonds:
30,000 30,000 (Central Concord
Redevelopment Project),
BIG-Insured, 8.00%, due
7/1/18 AAA 33,000 75 33,075
1,245,000 1,245,000 (Central Concord
Redevelopment Project),
BIG-Insured, 8.00%, due
7/1/18 (Escrowed with U.S.
Government Securities to
7/1/98 call @102) AAA 1,383,506 1,383,506
$6,000,000 6,000,000 (Central Concord
Redevelopment Project),
AMBAC Insured, 5.25%
due 7/1/19 AAA $5,310,000 5,310,000
150,000 150,000 Concord Santa Cruz South
Gate COP, 7.625% due
6/1/11 150,188 150,188
1,405,000 1,405,000 Contra Costa County,
California COP,
Merrithew Memorial
Hospital, 6.50% due
11/1/06 A+ 1,419,050 3,513 1,422,563
270,000 270,000 Contra Costa County Home
Mortgage, GNMA-
Collateralized,
(Escrowed to Maturity
with U.S. Government
Securities), 7.75% due
5/1/22 (a) AAA 320,288 338 320,625
1,500,000 1,500,000 Corona Public Finance
Authority 1993 Public
Improvement Refunding
Revenue Bonds, 6.00%
due 7/1/14 Baa* 1,342,500 1,875 1,344,375
6,000,000 6,000,000 Corona, California,
Redevelopment Agency,
Tax Allocation,
(Redevelopment Project
Area A), Series A,
(FGIC Insured), 5.500%
due 9/1/24..............AAA 5,460,000 5,460,000
11,135,000 11,135,000 Culver City, California,
Redevelopment Finance
Authority Revenue, Tax
Allocation, (AMBAC
Insured), 5.000% due
11/1/23.................AAA 9,395,156 9,395,156
1,500,000 1,500,000 Desert Hospital Corporation
Project, COP Series
1990, (Escrowed with
U.S. Government
Securities to 7/1/00
call @ 102) 8.100% due
7/1/20 AAA 1,736,250 1,736,250
320,000 320,000 Dublin COP, Public Facilities
Project No. 1, (Escrowed
with U.S. Government
Securities to 2/1/96
call @ par), 9.25% due
2/1/10 AAA 333,600 333,600
Dublin, California,
Certificates of Participation,
(Civic Center Project),
(AMBAC Insured):
1,305,000 1,305,000 5.600% due 2/1/06 ......AAA 1,301,738 1,301,738
1,380,000 1,380,000 5.625% due 2/1/07 ......AAA 1,367,925 1,367,925
4,615,000 4,615,000 5.625% due 2/1/10 ......AAA 4,499,625 4,499,625
2,000,000 2,000,000 East Bay, California,
Municipal Utility
Distribution, Water
System Revenue, (MBIA
Insured), 5.000% due
6/1/21..................AAA 1,697,500 1,697,500
1,400,000 1,400,000 Eastside, California, Unified
High School, Santa Clara
County District Revenue,
Series B, 5.000% due
9/1/18..................AAA 1,198,750 1,198,750
Eastern Municipal Water
District, California, Water
and Sewer Revenue, (FGIC
Insured), Series A:
1,000,000 1,000,000 FGIC-Insured, 6.75% due
7/1/12 AAA 1,091,250 1,250 1,092,500
1,000,000 1,000,000 FGIC-Insured, 5.375%
due 7/1/13..............AAA 918,750 918,750
1,000,000 1,000,000 FGIC-Insured, 5.250%
due 7/1/23..............AAA 880,000 880,000
750,000 750,000 El Camino Hospital Revenue
COP, (Escrowed with U.S.
Government Securities to
9/1/97 call @ 102),
8.50% due 9/1/17 AAA 821,250 938 822,188
</TABLE>
<PAGE>299
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$2,150,000 $2,150,000 Fairfield, California, Public
Finance Authority,
Revenue, (MBIA Insured),
5.800% due 4/1/23.......... AAA $2,050,562 $2,050,562
2,250,000 2,250,000 Fontana, California, Public
Financing Authority,
Tax Allocation Revenue Bonds,
Series A, (MBIA Insured),
5.000% due 9/1/20.......... AAA 1,912,500 1,912,500
455,000 455,000 Fresno, California, Airport
Revenue Bonds, 10.900% due
7/1/14................ NR 472,631 472,631
Fresno, California, Health
Facilities Revenue,
(Holy Cross Health System):
2,200,000 2,200,000 5.200% due 12/1/04 ......... AA- 2,095,500 2,095,500
2,435,000 2,435,000 5.375% due 12/1/06 ......... AA- 2,307,163 2,307,163
$1,000,000 1,000,000 6.625% due 6/1/21 Aa* $1,010,000 $2,500 1,012,500
Fresno, California, Joint
Powers Financing Authority,
Lease Revenue, (Street Light
Acquisition Project), Series A:
200,000 200,000 5.375% due 8/1/03 ........... A+ 191,000 191,000
3,860,000 3,860,000 5.500% due 8/1/12 ........... A+ 3,411,275 3,411,275
Fresno, California, Joint
Powers Financing Authority,
Local Agency Revenue, Series A:
2,000,000 2,000,000 6.000% due 9/2/01........... BBB 1,980,000 1,980,000
1,000,000 1,000,000 6.200% due 9/2/03........... BBB 988,750 988,750
1,500,000 1,500,000 6.550% due 9/2/12........... BBB 1,436,250 1,436,250
15,000 15,000 Fresno County, California,
Housing Finance Revenue,
Series A, (FHA Insured),
12.500% due 9/15/12......... NR 15,225 15,225
Garden Grove, California,
Community Agency,
Tax Allocation Revenue:
500,000 500,000 5.375% due 10/1/03 .......... A 473,125 473,125
3,275,000 3,275,000 5.700% due 10/1/08 .......... A 3,013,000 3,013,000
2,550,000 2,550,000 Garden Grove, California,
Public Financing Authority,
Revenue, (Water Services
Capital Improvement
Project), (FGIC Insured),
5.500% due 12/15/23......... AAA 2,323,687 2,323,687
1,000,000 1,000,000 Gilroy California Unified
School District, COP
Refunding,FSA-Insured, 6.25%
due 9/1/12 AAA 1,016,250 1,250 1,017,500
250,000 250,000 Glendale Hospital Revenue
Refunding (Glendale Memorial
Hospital), 9.00% due 11/1/17 BB+ 262,188 313 262,500
550,000 550,000 Grossmont Hospital District,
MBIA-Insured, (Escrowed with
U.S. Government Securities to
11/15/97 call @ 102), 8.00%
due 11/15/17 AAA 603,625 603,625
2,000,000 2,000,000 Hawthorne, California,
Community Redevelopment,
Tax Allocation, (Project
Area 2),6.625% due
9/1/14................ NR 1,895,000 1,895,000
1,740,000 1,740,000 Hayward, California, Housing
Authority Revenue,
FNMA, Multifamily Revenue,
(Cypress Garden (Project),
Revenue Bonds, Series C,
9.375% due 12/1/18 ........ NR 1,844,400 1,844,400
</TABLE>
<PAGE>300
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$1,200,000 $1,200,000 Huntington Beach COP, Civic
Center Project, (Escrowed
with U.S. Government
Securities to 8/1/95 call
@ 102), 7.90% due 8/1/16 AAA $1,240,500 $1,240,500
1,000,000 1,000,000 Inglewood Insured Hospital
Revenue Bonds (Daniel
Freeman Hospital Inc.),
Series 1991, CHFCLI-
Insured, 6.75% due 5/1/13 A+ 1,010,000 $1,250 1,011,250
$1,500,000 1,500,000 Intercommunity Hospital,
California, Financing
Authority, Certificates of
Participation, (North Bay
Health Care), 9.750% due
8/1/15 ....................... AAA $1,576,875 1,576,875
Irvine Ranch, California, Water
District, Joint Powers Agency,
Local Pool Revenue:
9,000,000 9,000,000 7.800% due 2/15/08 ......... A+ 9,393,750 9,393,750
8,500,000 1,000,000 9,500,000 Issue II, 8.250% due 8/15/23 A+ 1,062,500 1,250 9,041,875 10,105,625
1,750,000 1,750,000 7.875% due 2/15/23(d) A+ 1,826,563 2,188 1,828,750
100,000 100,000 Kern, California, High School
District, Series C,
(MBIA-Insured), 8.750% due
8/1/03 ...................... AAA 120,875 120,875
500,000 500,000 Kings County, California,
Waste Management Authority,
Solid Waste Revenue,
7.200% due 10/1/14........... BBB+ 514,375 514,375
1,500,000 1,500,000 Kings River Conservation
District, California,
Pine Flat Power Revenue,
Series D, 5.500% due 1/1/20.. AA 1,368,750 1,368,750
1,500,000 1,500,000 Kings River Conservation
District, Pine Flat Power
Revenue Series C, (Escrowed
with U.S. Government
Securities to 1/1/97 call
@ 102)(d) 7.90% due 1/1/20 AAA 1,610,625 1,610,625
2,000,000 2,000,000 Lancaster, California,
Redevelopment Agency,
Multifamily Housing
Revenue, (High Valley
Apartment Project),
(FHA Insured),
9.180% due 11/1/13........... A- 2,060,000 2,060,000
7,000,000 7,000,000 Lancaster, California
Redevelopment Agency, Tax
Allocation, Sheriffs Combined
Redevelopment Project Areas,
(MBIA Insured), 5.700%,
due 8/1/23 AAA 6,545,000 6,545,000
465,000 465,000 Local Government Finance,
Joint Powers Authority,
California Revenue,
(Anaheim Redevelopment
Agency), Series A, 8.200%,
due 9/1/15 NR 520,219 520,219
2,000,000 2,000,000 Loma Linda, California,
Hospital Revenue Bonds,
(Loma Linda University Medical
Center Project), Series B,
9.000%, due 12/1/12 BBB 2,105,000 2,105,000
640,000 640,000 Loma Linda California Water
Revenue, 9.25% due 12/1/10 AAA 675,200 675,200
3,000,000 3,000,000 Long Beach, California,
Financing Authority Revenue,
(AMBAC Insured), 5.50%,
due 11/1/22 AAA 2,756,250 2,756,250
200,000 200,000 Los Angeles, California,
Certificates of
Participation, Revenue Bonds,
Waste Water, 6.600% due
11/1/99 AA 209,000 209,000
1,000,000 1,000,000 Los Angeles, California,
Community Redevelopment
Agency, Tax Allocation Bond,
(Central Business District),
Series F, 8.500% due 7/1/02.. A- 1,031,250 1,031,250
</TABLE>
<PAGE>301
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$450,000 $450,000 Los Angeles Convention and
Exhibition Center Authority
COP, (Escrowed with U.S.
Government Securities to
12/1/05 call @ par),
9.00% due 12/1/20 AAA $583,875 $583,875
Los Angeles, California,
Convention and Exhibition
Center Authority, Lease
Revenue, Series A,
(MBIA Insured):
$6,000,000 6,000,000 5.375% due 8/15/18......... AAA $5,430,000 5,430,000
12,000,000 12,000,000 5.125% due 8/15/21......... AAA 10,380,000 10,380,000
Los Angeles Department of Water
and Power:
1,000,000 1,000,000 Electric Revenue, (Escrowed
with U.S. Government
Securities to 5/1/98
call @ 102), 7.90% due 5/1/28 AAA 1,102,500 1,102,500
1,950,000 1,950,000 Electric Revenue, (Escrowed
with U.S. Government
Securities AAA 2,149,875 $2,437 2,152,312
to 1/15/01 call @ 102), 7.10%
due 1/15/31
2,000,000 2,000,000 Electric Revenue, 5.375%,
due 9/1/23 AAA 1,782,500 2,500 1,785,000
1,550,000 1,550,000 Los Angeles Department of Water
and Power, Water Works Revenue,
(Escrowed with U.S. Government
Securities to 2/15/99
call @ 102)
7.20% due 2/15/19 AAA 1,695,313 1,695,313
1,425,000 1,425,000 Los Angeles Wastewater Systems
Revenue 5.60% due 6/1/20 AAA 1,327,031 1,781 1,328,812
1,375,000 1,375,000 Los Angeles, California, Home
Mortgage Revenue Bonds,
GNMA, Second Mortgage
Program, 8.100% due 5/1/17 ... NR 1,498,750 1,498,750
800,000 800,000 Los Angeles Single-Family Home
Mortgage Revenue,
GNMA-Collateralized Mortgage
Backed Securities Program,
Issue A, 7.55% due 12/1/23(a) AAA 830,000 2,000 832,000
1,000,000 1,000,000 Los Angeles County, IDA Revenue
(Altshule Properties Project)
LOC Security Pacific, 7.20%
due 10/1/11(a) A1 1,023,750 1,250 1,025,000
1,200,000 1,200,000 Los Angeles Waste Water System
Revenue, (Escrowed with U.S.
Government Securities to
11/1/97 call @ 102),
8.125% due 11/1/17 AAA 1,320,000 1,320,000
Los Angeles, California,
Wastewater Systems
Revenue, Series A,
(MBIA Insured):
2,930,000 2,930,000 5.700% due 6/1/09 ........ AAA 2,864,075 2,864,075
7,960,000 7,960,000 5.750% due 6/1/11 ........ AAA 7,731,150 7,731,150
1,000,000 1,000,000 5.700% due 6/1/20......... AAA 945,000 945,000
2,500,000 2,500,000 5.875% due 6/1/24......... AAA 2,418,750 2,418,750
1,000,000 1,000,000 Series D, (FGIC Insured),
5.200% due 11/1/21...... AAA 873,750 873,750
1,500,000 1,500,000 Los Angeles County, California,
Certificates of Participation:
(Van Nuys Courthouse Project),
9.00% due 6/1/15 AAA 1,608,750 1,608,750
1,000,000 1,000,000 1991 Master Refunding
Project-RIBS, 8.772%
due 5/1/15(f) A- 1,048,750 2,500 1,051,250
1,000,000 1,000,000 Multiple Capital Facilities
Projects III SYCC, 7.34%
due 11/1/11 A 1,015,000 2,500 1,017,500
2,000,000 2,000,000 Los Angeles County, California,
Financing Authority Revenue,
Capital Projects, Series A,
5.250% due 10/1/19........... AA 1,757,500 1,757,500
15,075,000 15,075,000 Los Angeles County, California,
Transportation Authority Sales
Tax Revenue, (Project A),
Series A, (FGIC Insured),
5.000% due 7/1/21............ AAA 12,794,906 12,794,906
</TABLE>
<PAGE>302
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$500,000 $500,000 Los Angeles County Transportation
Commission Sales Tax Revenue,
Series A, (Escrowed with U.S.
Government Securities
to 7/1/98 call @ 102),
8.00% due 7/1/18 AAA $555,625 $555,625
$125,000 125,000 Martinez, California, Home Mortgage,
Housing Revenue, (Escrowed to
Maturity), 10.750% due 2/1/16...... AAA $131,250 131,250
375,000 375,000 Marysville, California, Hospital
Revenue, (Freemont Rideout Health
Group), Series A, (AMBAC Insured),
6.000% due 1/1/04.................. AAA 388,594 388,594
2,000,000 2,000,000 Mendocino County Public Facilities
Authority Corporation,
Certificates of Participation,
Series 1993, 6.00% due 8/15/23 A 1,792,500 $2,500 1,795,000
4,890,000 4,890,000 Metropolitan Water District of
Southern, California, Series G,
5.750% due 3/1/14.................. AAA 4,706,625 4,706,625
1,070,000 1,070,000 Modesto, California, Certificates
of Participation, (Golf Course
Refining Project), Series B,
(FGIC Insured), 5.000%, due 11/1/23 AAA 902,813 902,813
Mojave, California, Water Agency,
Improvement District, Series M,
(Morongo Basin):
1,500,000 1,500,000 6.600% due 9/1/13................... BBB+ 1,503,750 1,503,750
5,510,000 5,510,000 6.600% due 9/1/22................... BBB+ 5,461,787 5,461,787
1,300,000 1,300,000 Murrieta Financing Authority
Police & Civic Center Lease BBB 1,191,125 1,625 1,192,750
Revenue, Series A, 6.375% due 8/1/18
1,000,000 1,000,000 West Nevada County, COP, Solid
Waste, 7.50% due 6/1/21 A- 973,750 1,250 975,000
3,000,000 3,000,000 New Haven, California, Unified
School District, School
Building Corporation, Certificates
of Participation, Refunding Bonds,
9.600% due 7/1/01 ................. NR 3,112,590 3,112,590
Northern California Power Agency,
Public Power Revenue Bonds:
45,000 45,000 Geothermal Project No. 3, Series
1984A, 11.50%, due 7/1/10 AAA 46,350 46,350
1,110,000 1,110,000 Geothermal Project No. 3, 5.00%,
due 7/1/09 A* 969,863 1,388 971,250
2,000,000 2,000,000 Hydroelectric Project No. 1,
Series A, 5.50%, due 7/1/16 AAA 1,850,000 2,500 1,852,500
425,000 425,000 Norwalk Redevelopment Agency
(Norwalk Redevelopment Area 1),
(Escrowed with U.S. Government
Securities to 12/1/95 call @ 102)
9.10% due 12/1/15 AAA 445,188 532 445,719
Oceanside, California, Certificates
of Participation, Water Systems
Refunding Project, AMBAC-Insured:
500,000 500,000 (Escrowed with U.S. Government
Securities to 8/1/02 call @ 102)
7.30% due 8/1/21 AAA 573,750 573,750
4,750,000 4,750,000 5.800% due 8/1/21.................. AAA 4,554,063 4,554,063
6,025,000 6,025,000 Orange County, California, Housing
Finance Agency, Single Family
Residential Mortgage, Revenue
Bonds, Tax-Exempt Interest
Accumulator, Zero Coupon due
7/1/17++........................... BBB+ 707,938 707,938
2,000,000 2,000,000 Orange County, California,
Redevelopment Agency, Tax
Allocation Revenue, (Southwest
Redevelopment Project), Series A,
(AMBAC Insured), 5.700%
due 10/1/23++...................... AAA 1,867,500 1,867,500
</TABLE>
<PAGE>303
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
Orange County Community
Facilities District Special Tax:
$1,000,000 $1,000,000 #87-5A Rancho Santa
Margarita, 7.80% due
8/15/13 A- $1,106,250 $1,106,250
1,500,000 1,500,000 Rancho Santa Margarita,
CGIC-Insured, 7.125% due
8/15/17 AAA 1,573,125 $1,875 1,575,000
1,000,000 1,000,000 Orange County (Mission Viejo)
Series A 1990, Special Tax
Bonds Community Facilities
District, (Mello Roos),
7.80% due 8/15/15 A* 1,142,500 1,142,500
1,300,000 1,300,000 Orange County COP, Orange County
Public Facilities Corp.
(Solid Waste Management),
7.875% due 12/1/07 CAA 1,313,000 3,250 1,316,250
$2,800,000 2,800,000 Orange County, California,
Sanitation Districts No. 1,
2 & 3, Certificates of
Participation, (Joint
Facility Report) 12.000%
due 8/1/96++............... A $3,083,500 3,083,500
2,330,000 2,330,000 Oxnard, California, Public
Facilities Corporation,
Certificates of
Participation, (Oxnard
Public (Facility
Corporation), Wastewater
Treatment Plant Project,
(AMBAC Insured), 7.500%
due 9/1/06 .................AAA 2,565,912 2,565,912
180,000 180,000 Palm Springs, California,
Financing Authority, (Palm
Springs Regional Airport
Revenue), (MBIA Insured),
5.400%, due 1/1/03 AAA 179,100 179,100
2,250,000 2,250,000 Palmdale, California,
Certificates of
Participation, Water
District Revenue,
(Littlerock Dam Project),
Series A, (MBIA Insured),
5.750% due 10/1/23..........AAA 2,123,437 2,123,437
4,390,000 4,390,000 Pasadena, California,
Certificates of
Participation, Refunding and
Capital Projects, (AMBAC
Insured), 5.000% due
2/1/16......................AAA 3,791,863 3,791,863
3,325,000 3,325,000 Perris County California Single
Family Mortage Revenue,
GNMA-Backed Security, Series
A(Escrowed to Maturity with
U.S. Government Securities),
8.30% due 6/1/13 (a) AAA 4,006,625 4,156 4,010,781
4,560,000 4,560,000 Pittsburg, California, Public
Financing Authority,
Wastewater Revenue, Series
A, (FGIC Insured), 5.375%
due 6/1/22..................AAA 4,086,900 4,086,900
Pittsburg, California,
Redevelopment Agency, Tax
Allocation:
6,750,000 6,750,000 (Los Medenos Community
Development Project),
(FGIC Insured),
5.500% due 8/1/15.........AAA 6,269,062 6,269,062
1,240,000 1,240,000 Series A, (AMBAC Insured),
5.000% due 8/1/17.........AAA 1,061,750 1,061,750
2,985,000 2,985,000 Placer County, California,
Certificates of
Participation, Water Agency
Revenue, (MBIA Insured),
5.600% due 7/1/21...........AAA 2,761,125 2,761,125
400,000 400,000 Pleasanton Capital Projects 1 &
2, (Escrowed to Maturity
with U.S. Government
Securities),8.75% due
10/1/08 AAA 444,000 444,000
6,000,000 6,000,000 Pleasanton-Suisun City Home
Finance Authority Home
Motgage Revenue, MBIA-
Insured, (Escrowed to
Maturity with U.S.
Government Securities),
zero coupon due 10/1/16 AAA 1,462,500 1,462,500
</TABLE>
<PAGE>304
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$1,000,000 $1,000,000 Pomona Public Finance
Authority Revenue
Refunding Southwest
Pomona Redevelopment,
5.50% due 2/1/08 Baa* $912,500 $1,250 $913,750
1,020,000 1,020,000 Pomona Unified School
District, Series B,
FGIC-Insured,
6.25% due 8/1/14 AAA 1,051,875 1,275 1,053,150
$2,000,000 2,000,000 Port Oakland, California,
Special Facilities
Revenue, Series A
6.750% due 1/1/12 ..... A+ $2,060,000 2,060,000
6,000,000 6,000,000 Poway, California,
Redevelopment Agency,
(Paraguay Redevelopment
Project), (FGIC
Insured),
5.500% due 12/15/23..... AAA 5,467,500 5,467,500
750,000 750,000 Public Capital Improvements
Financing Authority,
BIG-Insured,
8.50% due 3/1/18 Baa* 804,375 937 805,312
1,000,000 1,000,000 Rancho Water District Finance
Authority Revenue Bonds,
Series 1991,
RITES, AMBAC-Insured,
(Escrowed with U.S.
Government Securities
to 8/17/01
call @ 104) (f),
8.37% due 8/17/21 AAA 1,162,500 2,500 1,165,000
Rancho Mirage Joint Powers
Financing Authority
(Eisenhower Memorial
Hospital),
7.00% due 3/1/22 A 1,001,250 2,500 1,003,750
15,750,000 15,750,000 Rancho Cucamonga, California,
(Rancho Redevelopment
Project),
(MBIA Insured), 5.500%,
due 9/1/23 AAA 14,352,188 14,352,188
2,000,000 2,000,000 Redding, California, Joint
Powers Finance
Authority,
Solid Waste and
Corporate Yard,
Series A:
5.500% due 1/1/13 ...... BBB+ 1,740,000 1,740,000
3,200,000 3,200,000 Redding, California, Joint
Powers Finance
Authority,
Wastewater Revenue,
Series A,FGIC Insured,
5.500% due 12/1/18 ..... AAA 2,944,000 2,944,000
1,000,000 1,000,000 Redding COP Electric System
Revenue, 8.65%
due 7/1/22(f) AAA 1,066,250 2,500 1,068,750
Rialto, California,
Certificates of
Participation,
Wastewater Systems
Revenue, (MBIA Insured):
1,005,000 1,005,000 5.400% due 11/1/06 ..... AAA 984,900 984,900
1,000,000 1,000,000 5.500% due 11/1/07 ..... AAA 980,000 980,000
1,000,000 1,000,000 5.500% due 11/1/08 ..... AAA 968,750 968,750
Riverside County, California,
Asset Leasing Corporation,
Leasehold Revenue, Riverside
County Hospital Project:
2,500,000 2,500,000 (Escrowed with U.S.
Government Securities
to 6/1/99 call @ 102)
7.40% due 6/1/14 AAA 2,762,500 2,762,500
2,000,000 2,000,000 6.375% due 6/1/09 A+ 1,975,000 5,000 1,980,000
1,500,000 1,500,000 Riverside, California,
Redevelopment Agency,
Tax Allocation, Merged
Redevelopment Project,
Series A,
(MBIA Insured),
5.625% due 8/1/23...... AAA 1,393,125 1,393,125
955,000 955,000 Riverside, California,
Unified School District,
Certificates of
Participation,
(Air Conditioning
Equipment Facilities
Project),
9.000% due 7/15/00 ..... A- 975,294 975,294
1,470,000 295,000 1,765,000 Riverside County, California,
Housing Authority
Revenue Bonds, Series A,
7.900% due 10/1/18 ..... Baa* 307,906 738 1,537,987 1,846,631
</TABLE>
<PAGE>305
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
Riverside County, California,
Single Family Revenue Bonds:
$15,000 $15,000 10.500% due 9/1/14......... BBB+ $15,788 $15,788
$2,620,000 2,620,000 (Escrowed to Maturity with
U.S. Government Securities),
8.30% due 11/1/12 AAA $3,183,300 $3,275 3,186,575
Sacramento, California,
Municipal Utility District,
Elecetric Revenue:
4,000,000 4,000,000 Series D, (FGIC Insured),
5.250% due 11/15/12......... AAA 3,675,000 3,675,000
4,500,000 4,500,000 Series D, (MBIA Insured),
5.250% due 11/15/20......... AAA 3,971,250 3,971,250
3,000,000 3,000,000 Series E,
5.700% due 5/15/12......... A- 2,775,000 2,775,000
500,000 1,000,000 1,500,000 Series P, 8.625% due 7/1/10
(Escrowed with U.S. Govern-
ment Securities to 7/1/95
call @ 102) AAA 1,034,320 517,160 1,551,480
Sacramento, California,
Regional Transportation
District, Certificates of
Participation, Series A:
200,000 200,000 6.375% due 3/1/02 ....... NR 209,250 209,250
400,000 400,000 6.400% due 3/1/03 ...... NR 418,500 418,500
2,500,000 2,500,000 Sacramento County Airport
System Revenue, Series A,
FGIC-Insured, AAA 2,484,375 3,125 2,487,500
6.00% due 7/1/12 (a)
1,500,000 1,500,000 Sacramento County Single-
Family Mortgage Revenue
GNMA-Collateralized, Issue
A (Escrowed to Maturity
with Government
Securities), 8.125% due
7/1/16 (a) AAA 1,786,875 1,875 1,788,750
San Bernardino County,
California, Certificates
of Participation:
1,000,000 1,000,000 West Valley Detention
Center Project, 7.70%
due 11/1/18 (Escrowed with
U.S. Government Securities
to 11/1/98 call @ 102) AAA 1,111,250 1,111,250
1,325,000 1,325,000 Capital Improvements
Project, 7.800%, due 7/1/16
(Escrowed with U.S.
Government Securities to
7/1/96 call @ 102) NR 1,386,281 1,386,281
2,000,000 2,000,000 Series B, 6.875% due 8/1/24
(Escrowed to Maturity with
U.S. Government
Securities) A 2,207,500 2,500 2,210,000
2,620,000 2,620,000 Medical Center Financing
Project, 6.00% due 8/1/09 A- 2,433,325 6,550 2,439,875
1,000,000 1,000,000 San Diego Public Safety
Communication Project,
6.65% due 7/15/11 AAA 1,083,750 1,250 1,085,000
1,000,000 1,000,000 San Diego, California,
Industrial Development
Authority, Revenue Bonds,
San Diego Gas &
Electric Company, Series A,
9.250% due 9/1/20 ........ A+ 1,036,250 1,036,250
2,000,000 250,000 2,250,000 San Diego, California,
Redevelopment Agency Marina
Redevelopment Project, Tax
Allocation, (Escrowed with
U.S. Government Securities
to 12/1/97 call @ 101.500),
8.750% due 12/1/08 ....... AAA 278,438 2,227,500 2,505,938
650,000 650,000 San Diego, California, Sewer
Revenue, Series A,
(AMBAC Insured), 5.250%,
due 5/15/20 AAA 573,625 573,625
4,000,000 4,000,000 San Dieguito Union High
School District COP,
FSA-Insured, stepped 2,800,000 20,000 2,820,000
zero coupon to 4/1/00
then 5.95% to maturity,
due 4/1/23
3,000,000 3,000,000 San Francisco City & County
Airports Second Series
Issue 5, AAA 3,067,500 3,750 3,071,250
FGIC-Insured, 6.50% due
5/1/19(a)
5,000,000 2,400,000 7,400,000 San Francisco, California,
City & County Redevelopment
Agency Multi-Family
Housing, GNMA-
Collateralized, South
Beach Project, 5.700%
due 3/1/29........... NR 2,199,000 6,000 4,593,750 6,798,750
</TABLE>
<PAGE>306
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$17,000,000 $17,000,000 San Francisco, California,
City & County Sewer
Revenue, (FGIC Insured),
5.375% due 10/1/22........... AAA $15,193,750 $15,193,750
1,500,000 1,500,000 San Francisco, California,
City & County Redevelopment
Finance Agency, Tax
Allocation Redevelopment
Project, Series C, 5.400%
due 8/1/2..................... A 1,290,000 1,290,000
$115,000 115,000 San Francisco City & County
Single-Family Mortgage Revenue
GNMA & FNMA Mortgage Backed
Securities Program, Series
1990, 7.45% due 1/1/24 (a) AAA $120,031 $288 120,319
1,000,000 1,000,000 San Buenaventura COP (1990
Water Enterprise Financing),
AMBAC-Insured, 7.500%, due
10/1/20 AAA 1,135,000 1,135,000
1,000,000 1,000,000 San Diego County Building
Authority, Registered Fixed
Option Certificates, 6.363%
due 11/18/19 AAA 1,015,000 2,500 1,017,500
San Francisco, California,
Downtown Parking,
Corporate Parking Revenue:
135,000 135,000 6.250% due 4/1/04.......... NR 134,325 134,325
1,800,000 1,800,000 6.550% due 4/1/12.......... NR 1,775,250 1,775,250
750,000 750,000 6.650% due 4/1/18.......... NR 742,500 742,500
2,750,000 2,750,000 San Joaquin County COP, General
Hospital Project 1993,
6.25% due 9/1/13 A* 2,636,562 6,875 2,643,437
San Joaquin Hills, California,
Transportation Authority,
Sr. Lien, Toll Revenue:
5,000,000 5,000,000 Zero Coupon due 1/1/14..... NR 1,318,750 1,318,750
60,000,000 60,000,000 Zero Coupon due 1/1/16..... NR 13,650,000 13,650,000
17,500,000 17,500,000 Zero Coupon due 1/1/17..... NR 3,696,875 3,696,875
25,000,000 25,000,000 Zero Coupon due 1/1/18..... NR 4,937,500 4,937,500
20,000,000 20,000,000 Zero Coupon due 1/1/19..... NR 3,675,000 3,675,000
San Jose, California, Airport
Revenue Bonds,
Series 93, (FGIC Insured):
200,000 200,000 5.400% due 3/1/04........... AAA 196,000 196,000
1,735,000 1,735,000 5.500% due 3/1/05........... AAA 1,698,131 1,698,131
1,945,000 1,945,000 5.500% due 3/1/07........... AAA 1,874,494 1,874,494
2,150,000 2,150,000 5.625% due 3/1/13.......... AAA 2,010,250 2,010,250
10,325,000 10,325,000 San Jose, California,
Financing Authority Revenue,
Series D, 5.250%, due
10/15/23 A+ 8,556,844 8,556,844
6,250,000 6,250,000 San Jose, California,
Redevelopment Agency,
Merged Area Redevelopment
Project, (MBIA-Insured),
5.000% due 8/1/20............ AAA 5,320,312 5,320,312
1,500,000 1,500,000 San Jose Multi-Family Housing
Senior Revenue (Timberwood
Apartments), Series A, LOC,
Wells Fargo Bank, 7.50% due
2/1/20 A1* 1,545,000 3,750 1,548,750
530,000 530,000 San Luis Obispo, California,
Multifamily Housing
Authority Revenue, FNMA,
(Parkwood Apartments
Project), Series A, 5.700%,
due 8/1/08 AAA 505,488 505,488
4,310,000 4,310,000 San Marcos Public Facilities
Authority Public Facilities
Revenue (Escrowed to
Maturity with U.S.
Government Securities),
zero coupon due 1/1/19 AAA 899,713 899,713
415,000 415,000 San Pablo, California,
Redevelopment Agency
Revenue, Single Family
Mortgage, 10.125%, due
12/1/14 NR 444,050 444,050
</TABLE>
<PAGE>307
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$1,250,000 $1,250,000 Santa Barbara COP Harbor
Refunding Project,
6.75% due 10/1/27 A* $1,109,375 $3,125 $1,112,500
2,875,000 2,875,000 Santa Ana California
Financing Authority
Lease Revenue
Police Administration &
Holding Facility,
6.25% due 7/1/24 AAA 2,921,719 3,594 2,925,313
500,000 500,000 Santa Clara County,
1986 COP Capital Project I
(Courthouse and
Detention Center), (Escrowed
with U.S. Government
Securities to 10/1/96
call @ 102),
8.00% due 10/1/16 AAA 535,000 535,000
Santa Margarita,
Dana Point Authority,
California, Revenue
$5,000,000 5,000,000 (MBIA Insured),
5.750%, due 8/1/20 AAA 4,762,500 4,762,500
1,500,000 1,500,000 (MBIA Insured),
7.250%, due 8/1/14 AAA 1,710,000 1,875 1,711,875
700,000 700,000 Santa Rosa Hospital Revenue,
Santa Rosa Memorial Hospital
Project, (Escrowed to
Maturity with U.S.
Government Securities),
10.30% due 3/1/01 AAA 920,500 875 921,375
1,320,000 1,320,000 Santa Rosa, California,
Mortgage Revenue,
Village Square Apartments
Project, Series A,
(FHA-Insured),
6.875% due 9/1/27 AAA 1,349,700 1,349,700
750,000 750,000 Southeast Resource Recovery
Facilities Authority,
Lease Revenue,
9.00% due 12/1/08 A- 780,937 938 781,875
3,000,000 3,000,000 Signal Hill, California,
Redevelopment Agency
Revenue, Tax Allocation,
Signal Hill Redevelopment
Project, Series 1-B,
(MBIA Insured),
5.250%, due 10/1/23 AAA 2,632,500 2,632,500
2,470,000 2,470,000 Simi Valley Community
Development Agency COP,
Simi Valley Business
Center, Guaranty Agreement
with New England Mutual Life,
6.05% AA- 2,494,700 3,087 2,497,787
Sonoma County, California,
Certificates of
Participation, Honor Farm
Detention Facilities Project:
290,000 290,000 9.100% due 6/1/01 A+ 308,125 308,125
320,000 320,000 9.100% due 6/1/02 A+ 340,000 340,000
345,000 345,000 9.100% due 6/1/03 A+ 366,562 366,562
4,200,000 4,200,000 5.000% due 11/15/13 A+ 3,486,000 3,486,000
3,000,000 3,000,000 5.000% due 11/15/17 A+ 2,426,250 2,426,250
2,000,000 2,000,000 South Orange County
Public Financing Authority
Special Tax Revenue
Series A,
7.00% due 9/1/10 AAA 2,225,000 2,500 2,227,500
25,000 25,000 Sonoma County Home
Mortgage Revenue,
9.125% due 6/1/15(d) BBB+ 25,750 63 25,813
195,000 195,000 Southern California Home
Financing Authority
Single-Family
Mortgage Revenue, GNMA &
FNMA Mortgage Backed
Securities Program,
1990 Issue B,
7.75% due 3/1/24 (a) AAA 206,700 487 207,187
Southern California
Public Power Authority,
Power Project Revenue:
5,455,000 5,455,000 Mead Phoenix Project,
Series A, (AMBAC Insured),
5.000% due 7/1/17 AAA 4,691,300 4,691,300
1,500,000 1,500,000 Palo Verde Project,
Series C, (AMBAC Insured),
(Escrowed with U.S.
Government Securities
to 7/1/02 @ 100)
5.750% due 7/1/17 AAA 1,554,375 1,554,375
11,740,000 11,740,000 San Juan Project,
Series A, (MBIA Insured),
5.000% due 1/1/20 AAA 10,008,350 10,008,350
Southern California
Public Power Authority:
3,000,000 3,000,000 Southern Transmission Project,
5.500%, due 7/1/20 AA- 2,711,250 2,711,250
275,000 2,750,000 Subseries A,
(MBIA Insured),
5.000%, due 7/1/22 AAA 2,327,188 2,327,188
600,000 600,000 Southern California
Public Power Authority,
Multiple Project Revenue,
1989 Series,
5.50% due 7/1/20 A 531,750 750 532,500
</TABLE>
<PAGE>308
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
$4,135,000 $4,135,000 South Napa, California, Waste
Management Authority Revenue,
Solid Waste Transfer
Facility, 6.500% due 2/15/14..NR $3,979,937 $3,979,937
9,195,000 9,195,000 South Orange County, California,
(Foothill Area Project), Financing
Authority Special Tax Revenue,
Series C, (FGIC Insured),
5.750% due 8/15/18++............AAA 8,758,237 8,758,237
Standard, California, School
District, Certificates of
Participation, Capital Improvement
Project, Series A:
320,000 320,000 6.200% due 3/1/10............ A- 309,600 309,600
340,000 340,000 6.250% due 3/1/11............ A- 328,525 328,525
1,500,000 1,500,000 Suisun City, California,
Redevelopment Agency, Tax
Allocation, (MBIA Insured),
5.500% due 10/1/23.......... AAA 1,368,750 1,368,750
3,080,000 $910,000 3,990,000 Torrance, California, Hospital
Revenue Bonds, Mary Greeley
Hospital, 6.875%, due 7/1/15 A $928,200 $2,275 3,149,300 4,079,775
1,760,000 1,760,000 Trinity County Public Utilities
District COP Electric District
Facilities, 6.75% due
4/1/23 (a) BBB- 1,700,600 2,200 1,702,800
4,500,000 4,500,000 Ukiah, California, Unified School
District, Certificates of
Participation, Measure A
Capital Projects, 6.000%,
due 9/1/10 BBB 4,106,250 4,106,250
University Of California, Revenue
Bonds:
4,750,000 4,750,000 Multiple Purpose Projects,
Series C, (AMBAC Insured),
5.200%, due 9/1/10 AAA 4,364,062 4,364,062
Series A:
1,070,000 1,070,000 5.500% due 9/1/06............ A- 1,025,863 1,025,863
1,125,000 1,125,000 5.600% due 9/1/07............ A- 1,081,406 1,081,406
1,195,000 1,195,000 5.600% due 9/1/08............ A- 1,141,225 1,141,225
1,255,000 1,255,000 5.700% due 9/1/09............ A- 1,176,562 1,176,562
1,330,000 1,330,000 5.700% due 9/1/10............ A- 1,236,900 1,236,900
500,000 500,000 Upland COP, (Police Building
Construction Project),
(Escrowed with Government
Securities to 8/1/98 call @
102), 8.20% due 8/1/16 AAA 533,750 533,750
1,700,000 1,700,000 Upland, California, Hospital
Revenue, Certificates of
Participation, (San Antonio
Community Hospital), 7.800%
due 1/1/18 ................. A 1,891,250 1,891,250
1,500,000 1,500,000 Valley Health System COP Refunding
Project, 6.875% due 5/15/23 NR 1,323,750 3,750 1,327,500
West & Central Basin Finance
Authority, California, West Basin
Project:
4,490,000 4,490,000 (FGIC Insured), 5.000%, due
8/1/16 AAA 3,872,625 3,872,625
12,625,000 12,625,000 Series A, (AMBAC Insured),
5.000% due 8/1/16..........AAA 10,889,062 10,889,062
1,000,000 1,000,000 Woodland, California, Hospital
Revenue, Certificates of
Participation, (Woodland
Memorial Hospital), 8.200%
due 8/1/15................... A 1,070,000 1,070,000
1,300,000 1,300,000 Yolo County Flood Control & Water
Conservation District COP,
FGIC- Insured, 7.125% due
7/15/15 AAA 1,472,250 1,472,250
2,500,000 2,500,000 Yuba City Unified School District
COP, Andors Karperos School
Construction Project, 6.70%
due 2/1/13 Baa1* 2,440,625 3,125 2,443,750
</TABLE>
<PAGE>309
<TABLE>
<CAPTION>
SMITH SMITH SMITH SMITH SMITH
BARNEY BARNEY BARNEY BARNEY BARNEY
CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA CALIFORNIA
MUNICIPAL PORTFOLIO TOTAL PORTFOLIO PORTFOLIO MUNICIPAL TOTAL
FACE FACE FACE MARKET Bid to Mean MARKET MARKET
AMOUNT AMOUNT AMOUNT SECURITY RATING VALUE Adjustment VALUE VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C> <C> <C>
Colorado - 1.4%
$50,000,000 $50,000,000 Dawson Ridge, Colorado,
Metropolitan District
Commission, No. 1, Series B,
Zero Coupon due 10/1/22....... NR $ 7,625,000 $ 7,625,000
-----------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $678,797,598)............ $167,214,958 $256,099 524,373,669 691,844,726
------------ -------- ----------- -----------
SHORT-TERM TAX-EXEMPT INVESTMENTS - 1.5%
California - 1.5%
300,000 California Health Facilities
Financing Authority Revenue
Bonds, (Sutter), Series A,
3.700% due 3/1/20+............ A1+ 300,000 300,000
California Pollution Control
Financing Authority,
Pollution Control Revenue:
400,000 (Atlantic Richfield Company
Project), Series A, 4.000%
due 12/1/24+................... A1 400,000 400,000
2,600,000 (Burney Forest Project), Series
A, 3.750% due 9/1/20+.......... NR 2,600,000 2,600,000
100,000 (Delano Project), 3.900% due
8/1/19+........................ NR 100,000 100,000
200,000 (Exxon Oil Project), 3.800% due
12/1/12+....................... AAA 200,000 200,000
Los Angeles, California, Regional
Airports, Flexible American
Airlines - LA, Lease Revenue:
2,000,000 Series A,
3.650% due 12/1/24+............ NR 2,000,000 2,000,000
1,000,000 Series G, 4.450% due 12/1/24+... NR 1,000,000 1,000,000
1,300,000 Los Angeles County, California,
Metropolitan Transportation
Authority, Sales Tax Revenue,
Series A, (MBIA Insured),
3.900% due 7/1/20+.............. AAA 1,300,000 1,300,000
TOTAL SHORT-TERM TAX EXEMPT
INVESTMENTS (Cost $8,100,000)... 0 7,900,000 7,900,000
---------- ------- ---------- ----------
TOTAL INVESTMENTS (Cost $686,897,598*)................................. 167,214,958 256,099 532,273,669 699,744,726
</TABLE>
<PAGE>310
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is incorporated by reference to
"Liability of Directors/Trustees" under the caption
"Information on Shareholders' Rights" in Part A of this
Registration Statement.
Item 16. Exhibits -- References are to 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 26, 1984
are incorporated by reference to the Registration Statement.
(1) (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.
(1) (c) Articles of Amendment to the Articles of Incorporation, dated
October 14, 1994, are incorporated by reference to Exhibit
1(d) of Post-Effective Amendment No. 21 to the Registration
Statement.
(1) (d) Articles of Amendment to the Articles of Incorporation of the
Registrant effective November 7, 1994.**
(1) (e) Articles Supplementary dated November 2, 1992 to Articles of
Incorporation are incorporated by reference to Post-Effective
Amendment No. 18 to the Registration Statement.
(1) (f) Articles Supplementary to the Articles of Incorporation of the
Registrant effective November 7, 1994.**
<PAGE>311
(2) (a) By-Laws of the Registrant are incorporated by reference to
Pre-Effective Amendment No. 1 to the Registration Statement.
(2) (b) Amendments to Registrant's By-Laws dated March 21, 1987 are
incorporated by reference to Post-Effective Amendment No. 21
to the Registration Statement.
(3) Not Applicable.
(4) Agreement and Plan of Reorganization (included as Exhibit A to
Registrant's Prospectus/Proxy Statement contained in Part A of
this Registration Statement).*
(5) Not Applicable.
(6) (a) Investment Advisory Agreement dated July 30, 1993 for the
Registrant is incorporated by reference to Post-Effective
Amendment No. 36 to the Registration Statement.
(6) (b) Form of Transfer and Assumption Agreement dated as of
November 7, 1994 is incorporated by reference to Post-
Effective Amendment No. 21 to the Registration Statement.
(7) Distribution Agreement dated July 30, 1993 is incorporated by
reference to Post-Effective Amendment No. 18 to the
Registration Statement.
(8) Not Applicable.
(9) (a) Form of Custodian Agreement effective July 11, 1995.*
(9) (b) Transfer Agency Agreement dated August 3, 1993 is incorporated
by reference to Post-Effective Amendment No. 18 to the
Registration Statement.
(10) Amended Services and Distribution Plan of the Registrant
pursuant to Rule 12b-1 is incorporated by reference to Post-
Effective Amendment No. 21 to the Registration Statement.
(11) (a) Opinion and Consent of Willkie Farr & Gallagher with respect
to validity of shares.*
<PAGE>312
(11) (b) Opinion and Consent of Venable, Baetjer and Howard, LLP with
respect to certain matters under Maryland law.*
(12) Opinion and Consent of Willkie Farr & Gallagher with respect
to tax matters.*
(13) Not Applicable.
(14) (a) Consent of Coopers & Lybrand L.L.P.*
(14) (b) Consent of KPMG Peat Marwick LLP.*
(15) Not Applicable.
(16) Powers of Attorney (included on signature page).**
(17) (a) Form of Proxy Card.*
(17) (b) Registrant's Declaration pursuant to Rule 24f-2 is
incorporated by reference to its initial Registration
Statement.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by
any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) of the Securities Act of 1933, the
reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as a part of
an amendment to the Registration Statement and will not be
used until the amendment is
[FN]
* Filed herewith.
** Previously filed.
<PAGE>313
effective, and that, in determining any liability under the
Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering of
them.
<PAGE>314
SIGNATURES
As required by the Securities Act of 1933, this Registration
Statement has been signed on behalf of the registrant, in the City of New York
and State of New York on the 24th day of October, 1995.
Smith Barney California Municipals Fund Inc.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board and
Chief Executive Officer
As required by the Securities Act of 1933, this Registration has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board October 24, 1995
Heath B. McLendon and Chief Executive Officer
/s/ Lewis E. Daidone Senior Vice President and October 24, 1995
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
* Director October 24, 1995
Herbert Barg
* Director October 24, 1995
Alfred J. Bianchetti
<PAGE>315
* Director October 24, 1995
Martin Brody
* Director October 24, 1995
Dwight B. Crane
* Director October 24, 1995
Burt N. Dorsett
* Director October 24, 1995
Elliott S. Jaffe
Director October , 1995
Stephen E. Kaufman
* Director October 24, 1995
Joseph J. McCann
* Director October 24, 1995
Cornelius Rose
*By:/s/ Caren A. Cunningham
Caren A. Cunningham
Attorney-in-fact
<PAGE>316
EXHIBIT INDEX
Exhibit Number Description Page
(1)(d) Articles of Amendment to the Articles of **
Incorporation of the Registrant effective
November 7, 1994.
(1)(f) Articles Supplementary to the Articles of **
Incorporation of the Registrant effective
November 7, 1994.
(4) Agreement and Plan of Reorganization *
(included as Exhibit A to Registrant's
Prospectus/Proxy Statement contained in Part A
of this Registration Statement).
(9)(a) Form of Custodian Agreement effective July 11, 1995. *
(11) (a) Opinion and Consent of Willkie Farr & Gallagher *
with respect to validity of shares.
(11) (b) Opinion and Consent of Venable, Baetjer and Howard, LLP *
with respect to certain matters under Maryland law.
(12) Opinion and Consent of Willkie Farr & *
Gallagher with respect to tax matters.
(14) (a) Consent of Coopers & Lybrand L.L.P. *
(14) (b) Consent of KPMG Peat Marwick LLP. *
(16) Powers of Attorney (included on signature page). **
(17) (a) Form of Proxy Card. *
[FN]
* Filed herewith.
** Previously filed.
<PAGE>1
FORM OF
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of ___________ by and between
_______________, a Maryland corporation/Massachusetts business trust (the
"Fund") and PNC BANK, NATIONAL ASSOCIATION, a national banking association
("PNC Bank"). The Fund is registered as an open-end investment company
under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund wishes to retain PNC Bank to provide custodian services and PNC
Bank wishes to furnish such services, either directly or through an
affiliate or affiliates, as more fully described herein. In consideration of
the premises and mutual covenants herein contained, the parties agree as
follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall mean any
officer of the Fund and any other person, who is duly authorized
by the Fund's Governing Board, to give Oral and Written Instructions on behalf
of the Fund. Such persons are listed in the Certificate attached hereto
as the Authorized Persons Appendix, as such Appendix may be amended in
writing by the Fund's Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal
agency securities, its successor or successors, and its nominee or nominees
and any book-entry system maintained by an
<PAGE>2
exchange registered with the SEC under the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(g) "Securities and Commodities Laws". The term "Securities and
Commodities Laws" shall mean the "1933 Act" which shall mean the Securities
Act of 1933, the "1934 Act" which shall mean the Securities Exchange Act of
1934, the 1940 Act, and the "CEA" which shall mean the Commodities Exchange
Act, as amended.
(h) "Shares". The term "Shares" shall mean the shares of stock of
any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment
<PAGE>3
items which the Fund may from time to time deposit, or cause to be deposited,
with PNC Bank or which PNC Bank may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the
Fund, which are received by PNC Bank from time to time,
from or on behalf of the Fund.
(j) "Written Instructions". The term "Written Instructions" shall
mean written instructions signed by one Authorized Person and received by PNC
Bank. The instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services to the Fund, and PNC Bank accepts such appointment and agrees to
furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of PNC Bank or its
affiliates to provide services;
<PAGE>4
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if PNC Bank is
not providing the Fund with such services; (f) copies
of any shareholder servicing agreements made in respect of the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank
undertakes to comply with all applicable requirements of the Securities and
Commodities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PNC Bank hereunder. Except as specifically set forth herein, PNC Bank assumes
no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
shall act only upon Oral and Written Instructions. PNC Bank shall be entitled
to rely upon any Oral and Written Instructions it receives from an Authorized
Person (or from a person reasonably believed by PNC Bank to be an Authorized
Person) pursuant to this Agreement. PNC Bank may assume that any
<PAGE>5
Oral or Written Instructions received hereunder are not in any way
inconsistent with the provisions of organizational documents or this Agreement
or of any vote, resolution or proceeding of the Fund's Governing Board or of
the Fund's shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming
Oral Instructions so that PNC Bank receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received.
The fact that such confirming Written Instructions are not received by PNC
Bank shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any action
it should or should not take, PNC Bank may request directions or advice,
including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PNC
Bank may request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's advisor or PNC Bank, at the
option of PNC Bank).
<PAGE>6
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral
or Written Instructions it receives from the Fund or from counsel and which
PNC Bank believes, in good faith, to be consistent with those directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (i) to seek such directions, advice or Oral or
Written Instructions, or (ii) to act in accordance with such directions,
advice or Oral or Written Instructions unless, under the terms of other
provisions of this Agreement, the same is a condition of PNC Bank's properly
taking or not taking such action.
7. Records. The books and records pertaining to the Fund which are in
the possession of PNC Bank, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all time
during PNC Bank's normal business hours. Upon the reasonable request of the
<PAGE>7
Fund, copies of any such books and records shall be provided by PNC Bank to
the Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records of
the Fund and information relative to the Fund and its shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall not be unreasonably withheld and may not be withheld where PNC
Bank may be exposed to civil or criminal contempt proceedings or when required
to divulge. The Fund further agrees that, should PNC Bank be required to
provide such information or records to duly constituted authorities (who may
institute civil or criminal contempt proceedings for failure to comply), PNC
Bank shall not be required to seek the Fund's consent prior to disclosing such
information.
9. Cooperation with Accountants. PNC Bank shall cooperate with the
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is
<PAGE>8
available. In the event of equipment failures, PNC Bank shall, at no
additional expense to the Fund, take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
11. Compensation. As compensation for custody services rendered by PNC
Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee or
fees as may be agreed to in writing from time to time by the Fund and PNC
Bank.
12. Indemnification. The Fund agrees to indemnify and hold harmless PNC
Bank and its nominees from all taxes, charges, expenses, assessment, claims
and liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws and any state and foreign securities and blue
sky laws, and amendments thereto, and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action which PNC Bank takes or does not take (i) at the request or on the
direction of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither PNC Bank, nor any of its nominees, shall be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of PNC Bank's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to take
any action on behalf of the Fund except as
<PAGE>9
specifically set forth herein or as may be specifically agreed to by PNC Bank,
in writing. PNC Bank shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith and to use its best
effort, within reasonable limits, in performing services provided for under
this Agreement. PNC Bank shall be responsible for its own negligent failure
to perform its duties under this Agreement. Notwithstanding the foregoing, PNC
Bank shall not be responsible for losses beyond its control, provided that PNC
Bank has acted in accordance with the standard of care set forth above; and
provided further that PNC Bank shall only be responsible for that portion of
losses or damages suffered by the Fund that are attributable to the negligence
of PNC Bank.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under
this Agreement, shall not be under any duty or obligation to inquire into and
shall not be liable for (a) the validity or invalidity or authority or lack
thereof of any Oral or Written Instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, and which PNC Bank
reasonably believes to be genuine; or (b) delays or errors or loss of data
occurring by reason of circumstances beyond PNC Bank's control, including acts
of civil or military authority, national emergencies, labor difficulties,
fire, flood or catastrophe, acts of God, insurrection, war, riots or failure
of the mails,
<PAGE>10
transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank
shall have no liability to the Fund for any consequential, special or indirect
losses or damages which the Fund may incur or suffer by or as a consequence of
PNC Bank's performance of the services provided hereunder, whether or not the
likelihood of such losses or damages was known by PNC Bank.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange for
delivery to PNC Bank, all the property owned by the Fund, including cash
received as a result of the distribution of its Shares, during the period that
is set forth in this Agreement. PNC Bank will not be responsible for such
property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon
Written Instructions, shall open and maintain separate account(s) in the
Fund's name using all cash received from or for the account of the Fund,
subject to the terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial accounts for each
separate series, class or portfolio of the Fund and shall hold in such
account(s) all cash received from or for the accounts of the Fund specifically
designated to each separate series, class or portfolio. PNC Bank shall make
cash payments from or for the account of the Fund only for:
<PAGE>11
(i) purchases of securities in the name of the Fund or PNC
Bank or PNC Bank's nominee as provided in sub-paragraph j
and for which PNC Bank has received a copy of the broker's
or dealer's confirmation or payee's invoice, as
appropriate;
(ii) purchase or redemption of Shares of the Fund delivered
to PNC Bank;
(iii) payment of, subject to Written Instructions, interest,
taxes, administration, accounting, distribution, advisory,
management fees or similar expenses which are to be borne
by the Fund;
(iv) payment to, subject to receipt of Written Instructions,
the Fund's transfer agent, as agent for the shareholders,
an amount equal to the amount of dividends and
distributions stated in the Written Instructions to be
distributed in cash by the transfer agent to shareholders,
or, in lieu of paying the Fund's transfer agent, PNC Bank
may arrange for the direct payment of cash dividends and
distributions to shareholders in accordance with
procedures mutually agreed upon from time to time by and
among the Fund, PNC Bank and
<PAGE>12
the Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in
connection with the conversion, exchange or surrender of
securities owned or subscribed to by the Fund and held by
or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with
respect to securities sold short; payments made to a
sub-custodian pursuant to provisions in sub-paragraph c of
this Paragraph; and
(viii) payments, upon Written Instructions made for other proper
Fund purposes. PNC Bank is hereby authorized to endorse
and collect all checks, drafts or other orders for the
payment of money received as custodian for the account of
the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received by it for the
account of the Fund in a separate account that physically
segregates such securities from those of any other
persons, firms or corporations, except for securities held
in a Book-Entry System. All such securities shall be
held or disposed of
<PAGE>13
only upon Written Instructions of the Fund pursuant to the terms of this
Agreement. PNC Bank shall have no power or authority to assign, hypothecate,
pledge or otherwise dispose of any such securities or investment, except upon
the express terms of this Agreement and upon Written Instructions, accompanied
by a certified resolution of the Fund's Governing Board, authorizing the
transaction. In no case may any member of the Fund's Governing Board, or any
officer, employee or agent of the Fund withdraw any securities. At PNC Bank's
own expense and for its own convenience, PNC Bank may enter into sub-custodian
agreements with other banks or trust companies to perform duties described in
this sub-paragraph c. Such bank or trust company shall have an aggregate
capital, surplus and undivided profits, according to its last published
report, of at least one million dollars ($1,000,000), if it is a subsidiary or
affiliate of PNC Bank, or at least twenty million dollars ($20,000,000) if
such bank or trust company is not a subsidiary or affiliate of PNC Bank. In
addition, such
<PAGE>14
bank or trust company must agree to comply with the relevant provisions of the
1940 Act and other applicable rules and regulations. PNC Bank shall remain
responsible for the performance of all of its duties as described in this
Agreement and shall hold the Fund harmless from PNC Bank's own (or any
sub-custodian chosen by PNC Bank under the terms of this sub-paragraph c) acts
or omissions, under the standards of care provided for herein.
(d) Transactions Requiring Instructions. Upon receipt of Oral or
Written Instructions and not otherwise, PNC Bank, directly or through the use
of the Book-Entry System, shall:
(i) deliver any securities held for the Fund against the
receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be designated
in such Oral or Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the
authority of the Fund as owner of any securities may be
exercised;
(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are
<PAGE>15
called, redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to PNC Bank;
(iv) deliver any securities held for the Fund against receipt
of other securities or cash issued or paid in connection
with the liquidation, reorganization, refinancing, tender
offer, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(v) deliver any securities held for the Fund to any
protective committee, reorganization committee or other
person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or
sale of assets of any corporation, and receive and hold
under the terms of this Agreement such certificates of
deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such
delivery;
(vi) make such transfer or exchanges of the assets of the Fund
and take such other steps as shall be stated in said Oral
or Written Instructions to be for the purpose of
<PAGE>16
effectuating a duly authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of the Fund;
(vii) release securities belonging to the Fund to any bank or
trust company for the purpose of a pledge or hypothecation
to secure any loan incurred by the Fund; provided,
however, that securities shall be released only upon
payment to PNC Bank of the monies borrowed, except that in
cases where additional collateral is required to secure a
borrowing already made subject to proper prior
authorization, further securities may be released for that
purpose; and repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in
connection with any repurchase agreement entered into on
behalf of the Fund, but only on receipt of payment
therefor; and pay out moneys of the Fund in connection
with such repurchase agreements, but only upon the
delivery of the securities;
<PAGE>17
(ix) release and deliver or exchange securities owned by the
Fund in connection with any conversion of such securities,
pursuant to their terms, into other securities;
(x) release and deliver securities owned by the Fund for the
purpose of redeeming in kind shares of the Fund upon
delivery thereof to PNC Bank; and
(xi) release and deliver or exchange securities owned by the
Fund for other corporate purposes. PNC Bank must also
receive a certified resolution describing the nature of
the corporate purpose and the name and address of the
person(s) to whom delivery shall be made when such action
is pursuant to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
certified resolutions of the Fund's Governing Board approving, authorizing and
instructing PNC Bank on a continuous and on-going basis, to deposit in the
Book-Entry System all securities belonging to the Fund eligible for deposit
therein and to utilize the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the Fund,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings.
<PAGE>18
PNC Bank shall continue to perform such duties until it receives Written or
Oral Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of the Fund which are
maintained in the Book-Entry system, established pursuant
to this sub-paragraph e hereof, the records of PNC Bank
shall identify by Book-Entry or otherwise those securities
belonging to the Fund. PNC Bank shall furnish the Fund a
detailed statement of the Property held for the Fund under
this Agreement at least monthly and from time to time and
upon written request.
(ii) Securities and any cash of the Fund deposited in the
Book-Entry System will at all times be segregated from
any assets and cash controlled by PNC Bank in other than a
fiduciary or custodian capacity but may be commingled with
other assets held in such capacities. PNC Bank and its
sub-custodian, if any, will pay out money only upon
receipt of securities and will deliver securities only
upon the receipt of money.
(iii) All books and records maintained by PNC Bank
<PAGE>19
which relate to the Fund's participation in the Book-Entry System will at all
times during PNC Bank's regular business hours be open to the inspection of
the Fund's duly authorized employees or agents, and the Fund will be furnished
with all information in respect of the services rendered to it as it may
require.
(iv) PNC Bank will provide the Fund with copies of any report
obtained by PNC Bank on the system of internal accounting
control of the Book-Entry System promptly after receipt of
such a report by PNC Bank. PNC Bank will also provide the
Fund with such reports on its own system of internal
control as the Fund may reasonably request from time to
time.
(f) Registration of Securities. All Securities held for the Fund
which are issued or issuable only in bearer form, except such securities held
in the Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name of the Fund; PNC
Bank; the Book-Entry System; a sub-custodian; or any duly appointed nominee(s)
of the Fund, PNC Bank, Book-Entry system or sub-custodian. The Fund reserves
the right to instruct PNC Bank as to the method of registration and
safekeeping of the securities of the Fund. The Fund agrees to furnish to PNC
Bank appropriate instruments to
<PAGE>20
enable PNC Bank to hold or deliver in proper form for transfer, or to register
its registered nominee or in the name of the Book-Entry System, any securities
which it may hold for the account of the Fund and which may from time to time
be registered in the name of the Fund. PNC Bank shall hold all such
securities which are not held in the Book-Entry System in a separate account
for the Fund in the name of the Fund physically segregated at all times from
those of any other person or persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee
shall vote any of the securities held pursuant to this Agreement by or for the
account of the Fund, except in accordance with Written Instructions. PNC
Bank, directly or through the use of the Book-Entry System, shall execute in
blank and promptly deliver all notice, proxies, and proxy soliciting materials
to the registered holder of such securities. If the registered holder is not
the Fund then Written or Oral Instructions must designate the person(s) who
owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PNC Bank is authorized to take the following
actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund, all
income, dividends, distributions, coupons, option
premiums, other payments and similar items,
<PAGE>21
included or to be included in the Property, and, in addition, promptly advise
the Fund of such receipt and credit such income, as collected, to the Fund's
custodian account;
(B) endorse and deposit for collection, in the name of
the Fund, checks, drafts, or other orders for the
payment of money;
(C) receive and hold for the account of the Fund all
securities received as a distribution on the Fund's
portfolio securities as a result of a stock dividend,
share split-up or reorganization, recapitalization,
readjustment or other rearrangement or distribution
of rights or similar securities issued with respect
to any portfolio securities belonging to the Fund
held by PNC Bank hereunder;
(D) present for payment and collect the amount payable
upon all securities which may mature or be called,
redeemed, or retired, or otherwise become payable on
the date such securities become payable; and
<PAGE>22
(E) take any action which may be necessary and proper in
connection with the collection and receipt of such
income and other payments and the endorsement for
collection of checks, drafts, and other negotiable
instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver or cause to be
delivered Property against payment or other
consideration or written receipt therefor in the
following cases:
(1) for examination by a broker or dealer selling
for the account of the Fund in accordance with
street delivery custom;
(2) for the exchange of interim receipts or
temporary securities for definitive securities;
and
(3) for transfer of securities into the name of the
Fund or PNC Bank or nominee of either, or for
exchange of securities for a different number of
bonds,certificates, or other evidence,
representing the same aggregate face amount or
number of
<PAGE>23
units bearing the same interest rate, maturity date and call provisions, if
any; provided that, in any such case, the new securities are to be delivered
to PNC Bank.
(B) Unless and until PNC Bank receives Oral or Written
Instructions to the contrary, PNC Bank shall:
(1) pay all income items held by it which call for
payment upon presentation and hold the cash
received by it upon such payment for the account
of the Fund;
(2) collect interest and cash dividends received,
with notice to the Fund, to the Fund's account;
(3) hold for the account of the Fund all stock
dividends, rights and similar securities issued
with respect to any securities held by PNC Bank;
and
(4) execute as agent on behalf of the Fund
all necessary ownership certificates required by
the Internal Revenue Code or the Income Tax
Regulations of the United States
<PAGE>24
Treasury Department or under the laws of any State now or hereafter in effect,
inserting the Fund's name, on such certificate as the owner of the securities
covered thereby, to the extent it may lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written or Oral
Instructions establish and maintain segregated account(s)
on its records for and on behalf of the Fund. Such
account(s) may be used to transfer cash and securities,
including securities in the Book-Entry System:
(A) for the purposes of compliance by the Fund with the
procedures required by a securities or option
exchange, providing such procedures comply with the
1940 Act and any releases of the SEC relating to the
maintenance of segregated accounts by registered
investment companies; and
(B) Upon receipt of Written Instructions, for other
proper corporate purposes.
(ii) PNC Bank may enter into separate custodial agreements with
various futures commission
<PAGE>25
merchants ("FCMs") that the Fund uses ("FCM Agreement"). Pursuant to an FCM
Agreement, the Fund's margin deposits in any transactions involving futures
contracts and options on futures contracts will be held by PNC Bank in
accounts ("FCM Account") subject to the disposition by the FCM involved in
such contracts and in accordance with the customer contract between FCM and
the Fund ("FCM Contract"), SEC rules and the rules of the applicable
commodities exchange. Such FCM Agreements shall only be entered into upon
receipt of Written Instructions from the Fund which state that:
(A) a customer agreement between the FCM and the Fund
has been entered into; and
(B) the Fund is in compliance with all the rules and
regulations of the CFTC. Transfers of initial margin
shall be made into a FCM Account only upon Written
Instructions; transfers of premium and variation
margin may be made into a FCM Account pursuant to
Oral Instructions.
Transfers of funds from a FCM Account to the FCM for
which PNC Bank holds such an
<PAGE>26
account may only occur upon certification by the FCM to PNC Bank that pursuant
to the FCM Agreement and the FCM Contract, all conditions precedent to its
right to give PNC Bank such instructions have been satisfied.
(iii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such share- holders holding Shares
through IRA accounts, in accordance with the Fund's
prospectuses, the Internal Revenue Code (including
regulations), and with such other procedures as are
mutually agreed upon from time to time by and among the
Fund, PNC Bank and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the securities,
including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased and
accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
<PAGE>27
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through
whom the purchase was made. PNC Bank shall upon receipt of
securities purchased by or for the Fund pay out of the
moneys held for the account of the Fund the total amount
payable to the person from whom or the broker through whom
the purchase was made, provided that the same conforms to
the total amount payable as set forth in such Oral or
Written Instructions.
(k) Sales of Securities. PNC Bank shall settle sold securities
upon receipt of Oral or Written Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued
interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the
<PAGE>28
person to whom the sale was made; and
(vii) the location to which the security must be delivered and
delivery deadline, if any. PNC Bank shall deliver the
securities upon receipt of the total amount payable to the
Fund upon such sale, provided that the total amount
payable is the same as was set forth in the Oral or
Written Instructions. Subject to the foregoing, PNC Bank
may accept payment in such form as shall be satisfactory
to it, and may deliver securities and arrange for payment
in accordance with the customs prevailing among dealers in
securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions and
entries for the account of the Fund, listing the
portfolio securities belonging to the Fund with the
adjusted average cost of each issue and the market
value at the end of such month, and stating the cash
account of
<PAGE>29
the Fund including disbursement;
(C) the reports to be furnished to the Fund pursuant to
Rule 17f-4; and
(D) such other information as may be agreed upon from
time to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or conversion
or similar communication received by it as custodian of
the Property. PNC Bank shall be under no other obligation
to inform the Fund as to such actions or events.
(m) Collections. All collections of monies or other property, in
respect, or which are to become part of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time after proper
demands have been made, PNC Bank shall notify the Fund in writing, including
copies of all demand letters, any written responses, memoranda of all oral
responses and telephonic demands thereto, and await instructions from the
Fund. PNC Bank shall not be obliged to take legal action for collection
unless and until reasonably indemnified to its satisfaction. PNC Bank shall
also notify the Fund as soon as reasonably practicable whenever income due on
securities is not collected in due course.
<PAGE>30
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty (60) days' prior written notice
to the other party. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders of the Fund
to dissolve or to function without a custodian of its cash, securities or
other property), PNC Bank shall not deliver cash, securities or other property
of the Fund to the Fund. It may deliver them to a bank or trust company of
PNC Bank's choice, having an aggregate capital, surplus and undivided profits,
as shown by its last published report, of not less than twenty million dollars
($20,000,000), as a custodian for the Fund to be held under terms similar to
those of this Agreement. PNC Bank shall not be required to make any such
delivery or payment until full payment shall have been made to PNC Bank of all
of its fees, compensation, costs and expenses. PNC Bank shall have a security
interest in and shall have a right of setoff against Property in the Fund's
possession as security for the payment of such fees, compensation, costs and
expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address: Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, marked for the attention of the Custodian
Services Department (or its successor) (b) if to the Fund, at the
<PAGE>31
address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such notice or other
communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
five days after it has been mailed. If notice is sent by messenger, it shall
be deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought. 18. Delegation. PNC
Bank may assign its rights and delegate its duties hereunder to any
wholly-owned direct or indirect subsidiary of PNC Bank, National Association
or PNC Bank Corp., provided that (i) PNC Bank gives the Fund thirty (30) days
prior written notice; (ii) the delegate agrees with PNC Bank to comply with
all relevant provisions of the 1940 Act; and (iii) PNC Bank and such delegate
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the assignment, including (without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. 20. Further
Actions. Each party agrees to perform such
<PAGE>32
further acts and execute such further documents as are necessary to effectuate
the purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the
parties may embody in one or more separate documents their agreement, if any,
with respect to delegated duties and/or Oral Instructions. The captions in
this Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania and
governed by Pennsylvania law, without regard to principles of conflicts of
law. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
<PAGE>33
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
By: Title:
[NAME OF FUND]
By: Title:
<PAGE>34
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
<PAGE>1
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
October 23, 1995
Smith Barney California Municipals
Fund Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We have acted as counsel for Smith Barney California Municipals Fund
Inc., a corporation organized under the laws of the State of Maryland (the
"Acquiring Fund"), in connection with the transfer of all or substantially all
of the assets of the California Portfolio (the "Acquired Fund"), a series of
Smith Barney Muni Funds ("SBMF"), a business trust organized under the laws of
The Commonwealth of Massachusetts, to the Acquiring Fund and the related
issuance of shares of the Acquiring Fund's Class A, Class B and Class C shares
of common stock, par value $.01 per share (the "Acquiring Fund Shares"), and
the assumption by the Acquiring Fund of scheduled liabilities of the Acquired
Fund in exchange therefor, all pursuant to an Agreement and Plan of
Reorganization dated as of October 23, 1995 (the "Agreement") between the
Acquiring Fund and SBMF on behalf of the Acquired Fund. Capitalized terms
used herein have the same meanings ascribed to them in the Agreement unless
defined otherwise herein.
As counsel for the Acquiring Fund, we have examined the Acquiring
Fund's Registration Statement on Form N-14 substantially in the form in which
it is to become effective (the "Registration Statement"), the Acquiring Fund's
Articles of Incorporation and By-laws, and all amendments thereto, and the
Agreement.
We have also examined and relied upon such organizational records of
the Acquiring Fund and other documents and certificates with respect to
factual matters as we have deemed necessary to render the opinions expressed
herein. We have assumed without independent verification the genuineness of
all signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals and the conformity with originals of
all documents submitted to us as copies. As to matters of Maryland law, we
have relied solely on the opinion of Venable Baetjer and Howard, LLP with
respect to the matters addressed therein, which is satisfactory to us in form
and scope and a copy of which is annexed hereto.
<PAGE>2
Smith Barney California Municipals
Fund Inc.
October 23, 1995
Page 2
Anything in this opinion to the contrary notwithstanding, we render
or imply no opinion with respect to compliance with any applicable securities
or anti-fraud statutes, rules, regulations or other similar laws of any state
(including Maryland) or the United States of America. In rendering the
opinions herein, we assume that there will be no material changes in the facts
and conditions on which we base such opinions between the date hereof and the
time of issuance of the Acquiring Fund Shares pursuant to the Agreement.
Based upon the foregoing, we are of the opinion that the Acquiring
Fund is a corporation validly existing and in good standing under the laws of
the State of Maryland. We are further of the opinion that the Acquiring Fund
Shares to be issued as contemplated in the Agreement have been, to the extent
of the number of shares of the respective class authorized in the Acquiring
Fund's Charter and then unissued, duly authorized, and, subject to the receipt
by the Acquiring Fund of consideration equal to the net asset value thereof
(but in no event less than the par value thereof), when issued in accordance
with the Agreement will be validly issued, fully paid and nonassessable under
the laws of the State of Maryland.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to us in the Prospectus/Proxy
Statement included as part of the Registration Statement and to the filing of
this opinion as an exhibit to any application made by or on behalf of the
Acquiring Fund or any distributor or dealer in connection with the
registration or qualification of the Acquiring Fund or the Acquiring Fund
Shares under the securities laws of any state or other jurisdiction.
This opinion is furnished by us as counsel to the Acquiring Fund, is
solely for the benefit of the Acquiring Fund and its governing board in
connection with the above described acquisition of assets and liabilities and
may not be relied upon for any other purpose or by any other person.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE>3
[LETTERHEAD OF VENABLE, BAETJER AND HOWARD, LLP]
October 23, 1995
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022-4669
Re: Smith Barney California Municipals Fund Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel to Smith Barney California
Municipals Fund Inc., a Maryland corporation (the "Company"), in connection
with the proposed acquisition by the Company of all or substantially all the
assets and certain scheduled liabilities of the California Portfolio (the
"Acquired Fund"), a portfolio of Smith Barney Muni-Funds, a Massachusetts
business trust (the "Trust"), in exchange for Class A, Class B, and Class C
shares of the Company (the "Class A Shares," "Class B Shares," and "Class C
Shares," respectively), pursuant to an Agreement and Plan of Reorganization
to be executed by the Company and by the Trust, on behalf of the Acquired
Fund (the "Agreement").
We have examined the Company's Registration Statement on Form N-14
substantially in the form in which it is to become effective (the
"Registration Statement"), the Company's Charter and Bylaws, and a draft of
the Agreement substantially in the form in which it is to be attached to the
Prospectus/Proxy Statement included in the Registration Statement. We have
further examined and relied upon a certificate of the Maryland State
Department of Assessments and Taxation to the effect that the Company is duly
incorporated and existing under the laws of the State of Maryland and is in
good standing and duly authorized to transact business in the State of
Maryland.
We have also examined and relied upon such corporate records of the
Company and other documents and certificates with respect to factual matters
as we have deemed necessary to render the opinion expressed herein. We have
assumed, without independent verification, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity with originals of all documents submitted to us as copies. We have
further assumed that the Agreement will be duly executed and delivered in
substantially the same form as the draft submitted to us and that upon such
execution and delivery,
<PAGE>4
Willkie Farr & Gallagher
November , 1995
Page 2
it will constitute the legal, valid and binding obligation of the Trust,
enforceable against the Trust in accordance with its terms, and, further, that
the number of Class A Shares, Class B Shares, and Class C Shares to be issued
by the Company to the Trust and then distributed to the shareholders of the
Acquired Fund pursuant to the Agreement will not exceed the respective number
of then unissued Class A Shares, Class B Shares, and Class C Shares authorized
in the Company's Charter.
Based upon the foregoing, we are of the opinion that:
1 . The Company is a corporation validly existing and in good
standing under the laws of the State of Maryland.
2. The Class A Shares, Class B Shares, and Class C Shares of the
Company to be issued as contemplated in the Agreement have been, to the extent
of the number of shares of the respective class authorized in the Charter of
the Company and then unissued, duly authorized, and, subject to the receipt by
the Company of consideration equal to the net asset value thereof (but in no
event less than the par value thereof, when issued in accordance with the
Agreement will be validly issued, fully paid and nonassessable Class A Shares,
Class B Shares, and Class C Shares of the Company under the laws of the State
of Maryland.
This letter expresses our opinion with respect to the Maryland
General Corporation Law governing matters such as the authorization and
issuance of stock. It does not extend to the securities or "blue sky" laws of
Maryland, to federal securities laws or to other laws.
You may rely on our foregoing opinion in rendering your opinion to
the Company that is to be filed as an exhibit to the Registration Statement.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to us under the caption "Legal Matters" in the
Prospectus/Proxy Statement included in the Registration Statement. We do not
thereby admit that we are "experts" as that term is used in the Securities Act
of 1933 and the regulations thereunder.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP
<PAGE>1
[LETTERHEAD OF VENABLE, BAETJER AND HOWARD, LLP]
October 23, 1995
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022-4669
Re: Smith Barney California Municipals Fund Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel to Smith Barney California
Municipals Fund Inc., a Maryland corporation (the "Company"), in connection
with the proposed acquisition by the Company of all or substantially all the
assets and certain scheduled liabilities of the California Portfolio (the
"Acquired Fund"), a portfolio of Smith Barney Muni-Funds, a Massachusetts
business trust (the "Trust"), in exchange for Class A, Class B, and Class C
shares of the Company (the "Class A Shares," "Class B Shares," and "Class C
Shares," respectively), pursuant to an Agreement and Plan of Reorganization
to be executed by the Company and by the Trust, on behalf of the Acquired
Fund (the "Agreement").
We have examined the Company's Registration Statement on Form N-14
substantially in the form in which it is to become effective (the
"Registration Statement"), the Company's Charter and Bylaws, and a draft of
the Agreement substantially in the form in which it is to be attached to the
Prospectus/Proxy Statement included in the Registration Statement. We have
further examined and relied upon a certificate of the Maryland State
Department of Assessments and Taxation to the effect that the Company is duly
incorporated and existing under the laws of the State of Maryland and is in
good standing and duly authorized to transact business in the State of
Maryland.
We have also examined and relied upon such corporate records of the
Company and other documents and certificates with respect to factual matters
as we have deemed necessary to render the opinion expressed herein. We have
assumed, without independent verification, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity with originals of all documents submitted to us as copies. We have
further assumed that the Agreement will be duly executed and delivered in
substantially the same form as the draft submitted to us and that upon such
execution and delivery,
<PAGE>2
Willkie Farr & Gallagher
November , 1995
Page 2
it will constitute the legal, valid and binding obligation of the Trust,
enforceable against the Trust in accordance with its terms, and, further, that
the number of Class A Shares, Class B Shares, and Class C Shares to be issued
by the Company to the Trust and then distributed to the shareholders of the
Acquired Fund pursuant to the Agreement will not exceed the respective number
of then unissued Class A Shares, Class B Shares, and Class C Shares authorized
in the Company's Charter.
Based upon the foregoing, we are of the opinion that:
1 . The Company is a corporation validly existing and in good
standing under the laws of the State of Maryland.
2. The Class A Shares, Class B Shares, and Class C Shares of the
Company to be issued as contemplated in the Agreement have been, to the extent
of the number of shares of the respective class authorized in the Charter of
the Company and then unissued, duly authorized, and, subject to the receipt by
the Company of consideration equal to the net asset value thereof (but in no
event less than the par value thereof, when issued in accordance with the
Agreement will be validly issued, fully paid and nonassessable Class A Shares,
Class B Shares, and Class C Shares of the Company under the laws of the State
of Maryland.
This letter expresses our opinion with respect to the Maryland
General Corporation Law governing matters such as the authorization and
issuance of stock. It does not extend to the securities or "blue sky" laws of
Maryland, to federal securities laws or to other laws.
You may rely on our foregoing opinion in rendering your opinion to
the Company that is to be filed as an exhibit to the Registration Statement.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to us under the caption "Legal Matters" in the
Prospectus/Proxy Statement included in the Registration Statement. We do not
thereby admit that we are "experts" as that term is used in the Securities Act
of 1933 and the regulations thereunder.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP
<PAGE>1
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
October 23, 1995
Smith Barney Muni Funds - California Portfolio
388 Greenwich Street
New York, New York 10013
Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
You have asked us for our opinion concerning certain federal income tax
consequences to (a) California Portfolio (the "Acquired Fund"), a separate
series of Smith Barney Muni Funds, (b) Smith Barney California Municipals Fund
Inc. (the "Acquiring Fund"), and (c) holders of shares of beneficial interest
in the Acquired Fund (the "Acquired Fund Shareholders") when the holders of
Class A, Class B and Class C shares of the Acquired Fund receive Class A,
Class B and Class C shares, respectively, of the Acquiring Fund (all such
shares of the Acquiring Fund referred to hereinafter as the "Acquiring Fund
Shares") in liquidation of their interests in the Acquired Fund pursuant to an
acquisition by the Acquiring Fund of all or substantially all of the assets of
the Acquired Fund in exchange for the Acquiring Fund Shares and the assumption
by the Acquiring Fund of scheduled liabilities of the Acquired Fund and the
subsequent liquidation of the Acquired Fund and distribution in liquidation of
the Acquiring Fund Shares to the Acquired Fund Shareholders.
We have reviewed such documents and materials as we have considered necessary
for the purpose of rendering this opinion. In rendering this opinion, we
assume that such documents as yet unexecuted will, when executed, conform in
all material respects to the proposed forms of such documents that we have
examined. In addition, we assume the genuineness of all signatures, the
capacity of each party executing a document so to execute that document, the
authenticity of all documents submitted to us as originals and the conformity
to original documents of all
<PAGE>2
documents submitted to us as certified or photostatic copies.
We have made inquiry as to the underlying facts that we considered to be
relevant to the conclusions set forth in this letter. The opinions expressed
in this letter are based upon certain factual statements relating to the
Acquired Fund and the Acquiring Fund set forth in the Registration Statement
on Form N-14 (the "Registration Statement") filed by the Acquiring Fund with
the Securities and Exchange Commission and representations to be made in
letters from the Acquired Fund and the Acquiring Fund addressed to us for our
use in rendering this opinion. Based on information received from the
Acquired Fund and the Acquiring Fund, we have no reason to believe that we
will not be able to render this opinion as a final opinion at the Closing. We
have no reason to believe that these representations and facts will not be
valid, but we have not attempted and will not attempt to verify independently
any of these representations and facts, and this opinion is based upon the
assumption that each of them is accurate. Capitalized terms used herein and
not otherwise defined shall have the meaning given them in the Registration
Statement.
The conclusions expressed herein are based upon the Internal Revenue Code of
1986 (the "Code"), Treasury regulations issued thereunder, published rulings
and procedures of the Internal Revenue Service and judicial decisions, all as
in effect on the date of this letter.
Based upon the foregoing, it is our opinion that:
(1) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for Acquiring Fund Shares and the assumption by the
Acquiring Fund of scheduled liabilities of the Acquired Fund will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C) of the Code, and
the Acquired Fund and the Acquiring Fund are each a "party to a
reorganization" within the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in exchange for Acquiring Fund
Shares and the assumption by the Acquiring Fund of scheduled liabilities of
the Acquired Fund;
(3) no gain or loss will be recognized by the Acquired Fund upon the
transfer of the Acquired Fund's assets to the Acquiring Fund in exchange for
Acquiring Fund Shares and the assumption by the Acquiring Fund of scheduled
liabilities of the Acquired Fund
<PAGE>3
or upon the distribution (whether actual or constructive) of Acquiring Fund
Shares to Acquired Fund Shareholders;
(4) no gain or loss will be recognized by Acquired Fund Shareholders
upon the exchange of their shares of the Acquired Fund for Acquiring Fund
Shares;
(5) the aggregate tax basis of Acquiring Fund Shares received by each
Acquired Fund Shareholder pursuant to the Reorganization will be the same as
the aggregate tax basis of the shares of the Acquired Fund surrendered in
exchange therefor, and the holding period of the Acquiring Fund Shares to be
received by each Acquired Fund Shareholder will include the period during
which the shares of the Acquired Fund exchanged therefor were held by such
Acquired Fund Shareholder (provided the shares of the Acquired Fund were held
as capital assets on the date of the Reorganization); and
(6) the tax basis to the Acquiring Fund of the Acquired Fund's assets
acquired by the Acquiring Fund will be the same as the tax basis of such
assets to the Acquired Fund immediately prior to the Reorganization, and the
holding period of the assets of the Acquired Fund in the hands of the
Acquiring Fund will include the period during which those assets were held by
the Acquired Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our
firm in the Registration Statement or in the Prospectus/Proxy Statement
constituting a part thereof.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE>1
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 the
Registration Statement on Form N-14 under the Securities Act of
1933, as amended, of Smith Barney California Municipals Fund
Inc.:
1. The incorporation by reference of our report dated April 10, 1995,
accompanying the Annual Report of the Smith Barney California
Municipals Fund Inc. (formerly the Smith Barney Shearson
California Municipals Fund Inc.) as of February 28, 1995, in the
Prospectus/Proxy Statement.
2. The reference to our firm under the heading "Financial
Statements and Experts" in the Prospectus/Proxy Statement.
3. The reference to our firm under the heading "Financial
Highlights" in the Prospectus dated April 29, 1995 of the
Smith Barney California Municipals Fund Inc.
4. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information dated
April 29, 1995 of the Smith Barney California Municipals Fund Inc.
/s/ Coopers & Lybrand L.L.P.
Coppers & Lybrand L.P.P.
Boston, Massachusetts
October 25, 1995
<PAGE>1
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
Independent Auditors' Consent
To the Shareholders and Board of Trustees
of the Smith Barney Muni Funds:
We consent to the use of our report dated May 15, 1995 with respect to the
California Portfolio incorporated herein by reference in the Prospectus and
included in this Registration Statement on Form N-14 for Smith Barney Muni
Funds and to the references to our firm under the headings "Financial
Statements and Experts" in the Prospectus/Proxy Statement and "Financial
Highlights" in the Prospectus incorporated herein by reference.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
October 20, 1995
New York, New York
<PAGE>1
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
SMITH BARNEY MUNI FUNDS -- CALIFORNIA PORTFOLIO
PROXY SOLICITED BY THE BOARD OF TRUSTEES
The undersigned holder of shares of Smith Barney Muni Funds -- California
Portfolio ("California Portfolio"), hereby appoints Heath B. McLendon,
Christina T. Sydor and Caren A. Cunningham attorneys and proxies for the
undersigned with full powers of substitution and revocation, to represent the
undersigned and to vote on behalf of the undersigned all shares of the
California Portfolio that the undersigned is entitled to vote at the Special
Meeting of Shareholders of California Portfolio to be held at the offices of
California Portfolio, 388 Greenwich Street, 26th Floor, New York, New York on
November 14, 1995 at 3:30 p.m., and any adjournment or adjournments thereof.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
and Prospectus/Proxy Statement dated October 25, 1995 and hereby instructs
said attorneys and proxies to vote said shares as indicated herein. In their
discretion, the proxies are authorized to vote upon such other business as may
properly come before the Special Meeting. A majority of the proxies present
and acting at the Special Meeting in person or by substitute (or, if only one
shall be so present, then that one) shall have and may exercise all of the
power and authority of said proxies hereunder. The undersigned hereby revokes
any proxy previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Date: ________________________________________________
Note: Please sign exactly as your name appears on this
Proxy. If joint owners, EITHER may sign this Proxy.
When signing as attorney, executor, administrator,
trustee, guardian or corporate officer, please give your
full title.
________________________________________________
________________________________________________
Signature(s) (Title(s), if applicable)
<PAGE>2
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
Please indicate your vote by filling in the appropriate box below, as shown,
using blue or black ink or dark pencil. Do not use red ink [SYMBOL OF FILLED
IN BLACK BOX]. This proxy, if properly executed, will be voted in the
manner directed by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR APPROVAL OF THE PROPOSAL.
[ ] [ ] [ ]
1. To approve or disapprove the FOR AGAINST ABSTAIN
Agreement and Plan of Reorganization
dated as of October 23, 1995 providing for (i) the acquisition of all or
substantially all of the assets of Smith Barney Muni Funds -- California
Portfolio ("California Portfolio") by Smith Barney California Municipals
Fund Inc. ("California Fund") in exchange for shares of California Fund and
the assumption by California Fund of scheduled liabilities of California
Portfolio, (ii) the distribution to shareholders of California Portfolio of
such shares of California Fund in liquidation of California Portfolio and
(iii) the subsequent termination of California Portfolio.
