Registration No. 2-89548
811-3970
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
X
Pre-Effective Amendment No.
Post-Effective Amendment No. 21
X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 22
X
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(212) 723-9218
Christina T. Sydor
Secretary
Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to Rule 485(b)
X on April 28, 1995 pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)
_____ on ________________ pursuant to Rule 485(a)
____________________________________________________________
_______________
_________
The Registrant has previously filed a declaration of
indefinite
registration of its shares pursuant to Rule 24f-2 under the
Investment
Company Act of 1940, as amended. Registrant's Rule 24f-2
Notice for the
fiscal year ended February 28, 1995 was filed on April 26,
1995.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund
Management of the Fund;
Distributor;
Additional Information; Annual
Report
6. Capital Stock and Other
Securities
Investment Objective
and Managment Policies;
Dividends, Distributions and
Taxes; Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares;
Valuation of Shares; Redemption of
Shares; Exchange Privilege;
Minimum Account Size;
Distributor; Additional
Information
8. Redemption or Repurchase
Purchase of Shares;
Redemption of Shares; Exchange
Privilege
9. Legal Proceedings
Not Applicable
Part B
Item No.
Statement of
Additional Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Contents
12. General Information
Distributor; Additional
Information
13. Investment Objectives and
Policies
Investment Objective and
Management Policies
14. Management of the Fund
Management of the Fund;
Distributor
15. Control Persons and Principal
Holders of Securities
Management of the Fund
16. Investment Advisory and Other
Services
Management of the Fund;
Distributor
17. Brokerage Allocation
Investment Objective and
Management Policies;
Distributor
18. Capital Stock and Other
Securities
Invesment Objective and
Management Policies; Purchase
of Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing of Securities Being
Offered
Purchase of Shares; Redemption of
Shares; Distributor; Valuation of
Shares; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
<PAGE>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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%
- ------------------------------------------------------------
- ------------------
</TABLE>
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in the
aggregate, will be made at net asset value with no sales
charge, but will
be subject to a CDSC of 1.00% on redemptions made within
12 months.
** Upon conversion of Class B shares to Class A shares,
such shares will no
longer be subject to a distribution fee. Class C shares
do not have a
conversion feature and, therefore, are subject to an
ongoing distribution
fee. As a result, long-term shareholders of Class C
shares may pay more
than the economic equivalent of the maximum front-end
sales charge
permitted by the National Association of Securities
Dealers, Inc.
*** For Class 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.
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>
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
- ------------------------------------------------------------
- ------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to
Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN
THOSE SHOWN.
10
<PAGE>
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%
- ------------------------------------------------------------
- -------------------------
</TABLE>
* 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.
11
<PAGE>
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%
- ------------------------------------------------------------
- ----------------
</TABLE>
* 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.
12
<PAGE>
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%
- ------------------------------------------------------------
- -------------------
</TABLE>
* 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.
13
<PAGE>
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%
- ------------------------------------------------------------
- ----
</TABLE>
* 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.
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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* * *
*
-----------------------------------------------------------
- -----------------------
</TABLE>
* Purchases of Class A shares, which when combined with
current
holdings of Class A shares offered with a sales charge
equal
or exceed $500,000 in the aggregate, will be made at net
asset
value without any initial sales charge, but will be
subject to
a CDSC of 1.00% on redemptions made within 12 months of
purchase. The CDSC on Class A shares is payable to Smith
Barney, which compensates Smith Barney Financial
Consultants
and other dealers whose clients make purchases of
$500,000 or
more. The CDSC is waived in the same circumstances in
which
the CDSC applicable to Class B and Class C shares is
waived.
See "Deferred Sales Charge Alternatives" and "Waivers of
CDSC."
Members of the selling group may receive up to 90% of the
sales charge and
may be deemed to be underwriters of the Fund as defined in
the Securities Act
of 1933, as amended.
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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
</TABLE>
- --------
* 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.
3
<PAGE>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
("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>
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>
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>
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>
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>
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>
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>
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]
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended
February 28, 1995
and the Report of Independent Accountants dated April ,
1995 are
incorporated by reference to the Definitive 30b2-1 filed on
April 26, 1995
as Accession #0000091155-95-000009.
The Registrant's Semi-Annual Report for the six-month period
year ended
August 31, 1994 is incorporated by reference to the
Definitive 30b2-1 filed
on November 4, 1994 Accession # 0000053798-94-000511.
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
All references are to the Registrant's Registration
Statement on Form N-1A
as filed with the Securities and Exchange Commission on
February 21, 1984.
File Nos. 2-89548 and 811-3970 (the "Registration
Statement").
(1)(a) Registrant's Articles of Incorporation dated
February 16, 1984
are incorporated by reference to the Registration Statement.
(b) Articles of Amendment dated August 26, 1987,
December 14, 1988,
November 4, 1992 and July 30, 1993, respectively, to
Articles of
Incorporation are incorporated by reference to
Post-Effective Amendment No.
18 to the Registration Statement ("Post-Effective Amendment
No. 18").
(c) Articles of Amendment dated October 14, 1994
are filed herein.
(d) Form of Articles of Amendment to the Articles of
Incorporation
is filed herein.
(e) Articles Supplementary dated November 2, 1992, to
Articles of
Incorporation are incorporated by reference to
Post-Effective Amendment No.
18.
(f) Form of Articles Supplementary to the Articles of
Incorporation is filed herein.
(2)(a) Registrant's By-Laws dated March 21, 1984 are
incorporated by
reference to Pre-Effective Amendment No. 1 to the
Registration Statement
("Pre-Effective Amendment No. 1").
(b) Amendments to Registrant's By-Laws dated March 21,
1987 are
incorporated by reference to Post-Effective Amendment No. 5
to the
Registration Statement ("Post-Effective Amendment No. 5").
(3) Not Applicable.
(4) Registrant's form of stock certificate for Class A and
Class B shares
is incorporated by reference to Post-Effective Amendment No.
16 to the
Registration Statement filed on October 23, 1992
("Post-Effective Amendment
No. 16").
(5) (a) Investment Advisory Agreement between the
Registrant and Greenwich
Street Advisors dated July 30, 1993 is incorporated by
reference to Post-
Effective Amendment No. 18.
(b) Form of Transfer and Assumption of Investment
Advisory Agreement dated as of November 7, 1994 is filed
herewith.
(6) Distribution Agreement between the Registrant and Smith
Barney
Shearson Inc. dated July 30, 1993 is incorporated by
reference to Post-
Effective Amendment No. 18.
(7) Not Applicable.
(8) Custodian Agreement with Boston Safe Deposit and Trust
Company dated
March 26, 1984 is incorporated by reference to Pre-Effective
Amendment No.
1.
(9) (a) Transfer Agency Agreement between the Registrant
and The
Shareholders Services Group, Inc. dated August 2, 1993 is
incorporated by
reference to Post-Effective Amendment No. 18.
(b) Administration Agreement dated April 20, 1994
between the
Registrant and Smith, Barney Advisers, Inc. ("SBA") is filed
herein.
(c) Sub-Administration Agreement dated April 20, 1994
between the
Registrant, SBA and The Boston Company Advisors, Inc. is
filed herein.
(10) Not Applicable.
(11)(a) Consent of Independent Accountants is filed
herein.
(b) Consent of Morningstar Mutual Fund Values is
incorporated by
reference to Post-Effective Amendment No. 16.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Amended Service and Distribution Plan pursuant to Rule
12b-1 between
the Registrant and Smith Barney Inc. ("Smith Barney") is
filed herein.
(16) Performance Data dated is incorporated by reference to
Post-Effective
Amendment No. 10 to the Registration Statement filed on June
28, 1989
("Post-Effective Amendment No. 10").
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Title of Class Holders by Class as of April 25,
1995
Common Stock Class A - 26,158,819.541
par value $.001 per Class B -
8,462,369.039
share Class C -
65,838.115
Class Y - 0.000
Item 27. Indemnification
The response to this item is incorporated by reference
to Post-
Effective Amendment No. 16.
Item 28(a). Business and Other Connections of Investment
Adviser
Investment Adviser - - Smith Barney Mutual Funds Management
Inc., formerly
known as Smith Barney Advisers, Inc. ("SBMFM")
SBMFM was incorporated in December 1968 under the laws of
the State of
Delaware. SBFMF is a wholly owned subsidiary of Smith Barney
Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.),
which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly
known as Primerica
Corporation) ("Travelers"). SBMFM is registered as an
investment adviser
under the Investment Advisers Act of 1940 (the "Advisers
Act").
The list required by this Item 28 of officers and directors
of SBMFM
together with information as to any other business,
profession, vocation or
employment of a substantial nature engaged in by such
officers and
directors during the past two years, is incorporated by
reference to
Schedules A and D of FORM ADV filed by SBMFM pursuant to the
Advisers Act
(SEC File No. 801-8314).
Prior to the close of business on November 7, 1994,
Greenwich Street
Advisors served as investment adviser. Greenwich Street
Advisors, through
its predecessors, has been in the investment counseling
business since 1934
and is a division of Mutual Management Corp. ("MMC"). MMC
was incorporated
in 1978 and is a wholly owned subsidiary of Smith Barney
Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.)
("Holdings"), which
is in turn a wholly owned subsidiary of The Travelers Inc.
(formerly known
as Primerica Corporation) ("Travelers"). The list required
by this Item 28
of officers and directors of MMC and Greenwich Street
Advisors, together
with information as to any other business, profession,
vocation or
employment of a substantial nature engaged in by such
officers and
directors during the past two fiscal years, is incorporated
by reference to
Schedules A and D of FORM ADV filed by MMC on behalf of
Greenwich Street
Advisors pursuant to the Advisers Act (SEC File No.
801-14437).
Prior to the close of business on July 30, 1993 (the
"Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of
Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the
Registrant's
investment adviser. On the Closing, Travelers and Smith
Barney Inc.
(formerly known as Smith Barney Shearson Inc.) acquired the
domestic retail
brokerage and asset management business of Shearson Lehman
Brothers, which
included the business of the Registrant's prior investment
adviser.
Shearson Lehman Brothers was a wholly owned subsidiary of
Shearson Lehman
Brothers Holdings Inc. ("Shearson Holdings"). All of the
issued and
outstanding common stock of Shearson Holdings (representing
92% of the
voting stock) was held by American Express Company.
Information as to any
past business vocation or employment of a substantial nature
engaged in by
officers and directors of Shearson Lehman Advisors can be
located in
Schedules A and D of FORM ADV filed by Shearson Lehman
Brothers on behalf
of Shearson Lehman Advisors prior to July 30, 1993. (SEC
FILE NO. 801-
3701)
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as
distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney New York
Municipals Fund
Inc., Smith Barney California Municipals Fund Inc., Smith
Barney
Massachusetts Municipals Fund, Smith Barney Global
Opportunities Fund,
Smith Barney Aggressive Growth Fund Inc., Smith Barney
Appreciation Fund
Inc., Smith Barney Principal Return Fund, Smith Barney
Income Funds, Smith
Barney Equity Funds, Smith Barney Investment Funds Inc.,
Smith Barney
Precious Metals and Minerals Fund Inc., Smith Barney
Telecommunications
Trust, Smith Barney Arizona Municipals Fund Inc., Smith
Barney New Jersey
Municipals Fund Inc., The USA High Yield Fund N.V.,
Garzarelli Sector
Analysis Portfolio N.V., Smith Barney Fundamental Value Fund
Inc., Smith Barney Series Fund, Consulting Group Capital
Markets Funds, Smith Barney Income Trust, Smith Barney
Adjustable Rate Government Income Fund, Smith Barney Florida
Municipals Fund, Smith Barney Oregon
Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni
Funds, Smith
Barney World Funds, Inc., Smith Barney Money Funds, Inc.,
Smith Barney Municipal Money Market Fund, Inc., Smith Barney
Variable Account Funds, Smith Barney U.S. Dollar Reserve
Fund (Cayman), Worldwide Special Fund, N.V., Worldwide
Securities Limited, (Bermuda), Smith Barney International
Fund (Luxembourg) and various series of unit investment
trusts.
Smith Barney is a wholly owned subsidiary of Smith
Barney Holdings
Inc., which in turn is a wholly owned subsidiary of The
Travelers Inc. (formerly known as
Primerica Corporation) ("Travelers"). On June 1, 1994,
Smith Barney changed its
name from Smith Barney Shearson Inc. to its current name.
The information required
by this Item 29 with respect to each director, officer and
partner of Smith
Barney is incorporated by reference to Schedule A of FORM BD
filed by Smith
Barney pursuant to the Securities Exchange Act of 1934 (SEC
File No. 812-
8510).
Item 30. Location of Accountants and Offices
(1) Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
(4) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(5) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None.
Rule 485(b) Certification
The Registrant hereby certifies that it meets all
requirements for
effectiveness pursuant to Rule 485(b) under the Securities
Act of 1933, as
amended.
The Registrant further represents pursuant to Rule
485(b)(2)(iv) that
the resignations of Robert A. Frankel and Paul Hardin were
not due to any disagreement with
the Registrant on any matter relating to its operations,
policies or
practices. Messrs. Frankel and Hardin resigned because of
increased board responsibilities for other investment
companies and a desire to reduce travel and minimize
scheduling conflicts with other professional obligations.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY
CALIFORNIA MUNICIPALS FUND INC., has duly caused this
Amendment to the
Registration Statement to be signed on its behalf by the
undersigned,
thereunto duly authorized, all in the City of New York,
State of New York
on the 26th day of April, 1995.
SMITH BARNEY
CALIFORNIA MUNICIPALS
FUND INC.
By: /s/ Heath B.
McLendon*
Heath B. McLendon,
Chief
Executive Officer
We, the undersigned, hereby severally constitute and
appoint Heath
B. McLendon, Christina T. Sydor and Caren A. Cunningham
and each of them
singly, our true and lawful attorneys, with full power to
them and each of
them to sign for us, and in our hands and in the capacities
indicated
below, any and all Amendments to this Registration Statement
and to file
the same, with all exhibits thereto, and other documents
therewith, with
the Securities and Exchange Commission, granting unto said
attorneys, and
each of them, acting alone, full authority and power to do
and perform each
and every act and thing requisite or necessary to be done in
the premises,
as fully to all intents and purposes as he might or could do
in person,
hereby ratifying and confirming all that said attorneys or
any of them may
lawfully do or cause to be done by virtue thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of
1933, as
amended, this Amendment to the Registration Statement and
the above Power
of Attorney has been signed below by the following persons
in the
capacities and on the dates indicated.
.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the Board
4/26/95
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone * Treasurer (Chief
Financial
4/26/95
Lewis E. Daidone and Accounting Officer)
/s/ Herbert Barg * Director
4/26/95
Herbert Barg
/s/ Alfred J. Bianchetti * Director
4/26/95
Alfred J. Bianchetti
/s/ Martin Brody * Director
4/26/95
Martin Brody
/s/ Dwight B. Crane * Director
4/26/95
Dwight B. Crane
/s/ James J. Crisona * Director
4/26/95
James J. Crisona
/s/ Burt N. Dorsett *
Director
4/26/95
Burt N. Dorsett
/s/ Elliot S. Jaffe
Director
4/26/95
Elliot S. Jaffe
/s/ Stephen E. Kaufman * Director
4/26/95
Stephen E. Kaufman
/s/ Joseph J. McCann * Director
4/26/95
Joseph J. McCann
/s/ Cornelius C. Rose
Director
4/26/95
Cornelius C. Rose, Jr.
*Signed by Caren A. Cunningham , their
duly authorized attorney-in-fact,
pursuant to power of attorney dated
as of April 19, 1995
/s/ Caren A. Cunningham
Caren A. Cunningham
FORM OF TRANSFER AND ASSUMPTION OF
INVESTMENT ADVISORY AGREEMENT
for
SMITH BARNEY CALIFORNIA MUNICIPALS FUND, INC.
TRANSFER AND ASSUMPTION OF INVESTMENT
ADVISORY AGREEMENT, made as of
the 7th day
of November, 1994, by and among Smith Barney California
Municipal Fund Inc., a Maryland Corporation (the "Fund"),
Mutual Management Corp., a New
York corporation ("MMC"), and Smith Barney Mutual Funds
Management Inc.
("SBMFM"), a Delaware corporation.
WHEREAS, the Fund is registered with the Securities
and Exchange
Commission as an open-end management investment company
under the
Investment Company Act of 1940, as amended (the "Act");
and
WHEREAS, the Fund, and MMC entered into an
Investment Advisory Agreement on____________________,
under which MMC serves as
the investment adviser (the "Investment Adviser") for the
Fund ; and
WHEREAS, MMC desires that its interest, rights,
responsibilities and
obligations in and under the Investment Advisory Agreement
be transferred
to SBMFM and SBMFM desires to assume MMC's interest,
rights, responsibilities and obligations in and under the
Investment Advisory
Agreement; and
WHEREAS, this Agreement does not result in a change
of actual control
or management of the Investment Adviser to the Fund and,
therefore, is not
an "assignment" as defined in Section 2(a)(4) of the Act
nor an
"assignment" for the purposes of Section 15(a)(4) of the
Act.
NOW, THEREFORE, in consideration of the mutual
covenants set forth in
this Agreement and other good and valuable consideration,
the receipt and
sufficiency of which is hereby acknowledged, the parties
hereby agree as
follows:
1. Assignment. Effective as of November 7, 1994
(the "Effective
Date"), MMC hereby transfers to SBMFM all of MMC's
interest, rights,
responsibilities and obligations in and under the
Investment Advisory
Agreement dated______________, to which MMC is a party
with the Fund.
2. Assumption and Performance of Duties. As of the
Effective
Date, SBMFM hereby accepts all of MMC's interest and
rights,
and assumes
and agrees to perform all of MMC's responsibilities and
obligations in, and
under the Investment Advisory Agreement; SBMFM agrees to
subject to all of
the terms and conditions of said Agreement; and SBMFM
shall indemnify and
hold harmless MMC from any claim or demand made
thereunder arising or
incurred after the Effective Date.
3. Representation of SBMFM. SBMFM represents and
warrants that:
(1) it is registered as an investment adviser under the
Investment Advisers
Act of 1940, as amended; and (2) Smith Barney Holdings
Inc. is its sole
shareholder.
4. Consent. The Fund hereby consents to this
transfer by MMC to
SBMFM of MMC's interest, rights, responsibilities and
obligations in and
under the Investment Advisory Agreement and to the
acceptance and
assumption by SBMFM of the same. The Fund agrees, subject
to the terms
and conditions of said Agreement, to look solely to SBMFM
for the
performance of the Investment Adviser's responsibilities
and obligations
under said Agreement from and after the Effective Date,
and to recognize as
inuring solely to SBMFM the interest and rights heretofore
held by MMC
thereunder.
5. Limitation of Liability of Directors, Officers
and Shareholders.
It is expressly agreed that the obligations of the Fund
hereunder shall
not be binding upon any of the Directors, shareholders,
nominees, officers,
agents, or employees of the Fund, personally, but shall
bind only the
Fund property of the Fund, as provided in the Articles of
Incorporation of the
Fund. The execution and delivery of this Agreement have
been authorized
by the Directors of the Fund and signed by the President
of the Fund,
acting as such, and neither such authorization by such
Director nor such
execution and delivery by such officer shall be deemed to
have been made by
any of them individually of to impose any liability on any
of them,
personally, but shall bond only the Fund property of the
as provided
in its Articles of Incorporation.
6. Counterparts. This Agreement may be signed in
any number of
counterparts, each of which shall be an original, with the
same effect as
if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to
be executed by their duly authorized officers hereunto
duly attested.
Attest:
By:
Secretary Smith Barney California
Municipals
Fund
Attest:
By:
Secretary Mutual Management Corp.
Attest:
By:
Secretary Smith Barney Mutual Funds
Management Inc.
shared/domestic/clients/shearosn/fund/slit/imca
[ARTICLE] 6
[SERIES]
[NUMBER] 0
[NAME] SB California Muni Fund Inc. - Class A
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] Feb-28-1995
[PERIOD-END] Feb-28-1995
[INVESTMENTS-AT-COST] 523,894,336
[INVESTMENTS-AT-VALUE] 532,273,669
[RECEIVABLES] 13,017,781
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 545,291,450
[PAYABLE-FOR-SECURITIES] 14,147,973
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 749,650
[TOTAL-LIABILITIES] 14,897,623
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 532,095,552
[SHARES-COMMON-STOCK] 26,089,810
[SHARES-COMMON-PRIOR] 26,318,838
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 283,943
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 9,797,115
[ACCUM-APPREC-OR-DEPREC] 8,379,333
[NET-ASSETS] 530,393,827
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 33,395,101
[OTHER-INCOME] 0
[EXPENSES-NET] 4,659,781
[NET-INVESTMENT-INCOME] 28,735,320
[REALIZED-GAINS-CURRENT] (7,515,865)
[APPREC-INCREASE-CURRENT] (10,764,421)
[NET-CHANGE-FROM-OPS] 10,455,034
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 23,065,859
[DISTRIBUTIONS-OF-GAINS] 4,752,153
<DISTRIBUTION-OTHER> 0
[NUMBER-OF-SHARES-SOLD] 3,394,819
[NUMBER-OF-SHARES-REDEEMED] 4,747,129
[SHARES-REINVESTED] 1,123,282
[NET-CHANGE-IN-ASSETS] (2,526,728)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 3,960,384
[OVERDISTRIB-NII-PRIOR] 255,704
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,776,849
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,659,781
[AVERAGE-NET-ASSETS] 508,801,109
[PER-SHARE-NAV-BEGIN] 16.15
[PER-SHARE-NII] 0.89
[PER-SHARE-GAIN-APPREC] (0.56)
[PER-SHARE-DIVIDEND] 0.89
[PER-SHARE-DISTRIBUTIONS] 0.19
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 15.40
[EXPENSE-RATIO] 0.80
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[SERIES]
[NUMBER] 0
[NAME] SB California Muni Fund Inc. - Class B
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] Feb-28-1995
[PERIOD-END] Feb-28-1995
[INVESTMENTS-AT-COST] 523,894,336
[INVESTMENTS-AT-VALUE] 532,273,669
[RECEIVABLES] 13,017,781
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 545,291,450
[PAYABLE-FOR-SECURITIES] 14,147,973
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 749,650
[TOTAL-LIABILITIES] 14,897,623
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 532,095,552
[SHARES-COMMON-STOCK] 8,305,989
[SHARES-COMMON-PRIOR] 6,670,240
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 283,943
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 9,797,115
[ACCUM-APPREC-OR-DEPREC] 8,379,333
[NET-ASSETS] 530,393,827
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 33,395,101
[OTHER-INCOME] 0
[EXPENSES-NET] 4,659,781
[NET-INVESTMENT-INCOME] 28,735,320
[REALIZED-GAINS-CURRENT] (7,515,865)
[APPREC-INCREASE-CURRENT] (10,764,421)
[NET-CHANGE-FROM-OPS] 10,455,034
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 6,071,846
[DISTRIBUTIONS-OF-GAINS] 1,481,373
<DISTRIBUTION-OTHER> 0
[NUMBER-OF-SHARES-SOLD] 2,727,908
[NUMBER-OF-SHARES-REDEEMED] 1,386,281
[SHARES-REINVESTED] 294,122
[NET-CHANGE-IN-ASSETS] (2,526,728)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 3,960,384
[OVERDISTRIB-NII-PRIOR] 255,704
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,776,849
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,659,781
[AVERAGE-NET-ASSETS] 508,801,109
[PER-SHARE-NAV-BEGIN] 16.15
[PER-SHARE-NII] 0.81
[PER-SHARE-GAIN-APPREC] (0.57)
[PER-SHARE-DIVIDEND] 0.80
[PER-SHARE-DISTRIBUTIONS] 0.19
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 15.40
[EXPENSE-RATIO] 1.32
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[SERIES]
[NUMBER] 0
[NAME] SB California Muni Fund Inc. - Class C
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] Feb-28-1995
[PERIOD-END] Feb-28-1995
[INVESTMENTS-AT-COST] 523,894,336
[INVESTMENTS-AT-VALUE] 532,273,669
[RECEIVABLES] 13,017,781
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 545,291,450
[PAYABLE-FOR-SECURITIES] 14,147,973
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 749,650
[TOTAL-LIABILITIES] 14,897,623
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 532,095,552
[SHARES-COMMON-STOCK] 49,505
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 283,943
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 9,797,115
[ACCUM-APPREC-OR-DEPREC] 8,379,333
[NET-ASSETS] 530,393,827
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 33,395,101
[OTHER-INCOME] 0
[EXPENSES-NET] 4,659,781
[NET-INVESTMENT-INCOME] 28,735,320
[REALIZED-GAINS-CURRENT] (7,515,865)
[APPREC-INCREASE-CURRENT] (10,764,421)
[NET-CHANGE-FROM-OPS] 10,455,034
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 8,000
[DISTRIBUTIONS-OF-GAINS] 8,107
<DISTRIBUTION-OTHER> 0
[NUMBER-OF-SHARES-SOLD] 49,120
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 385
[NET-CHANGE-IN-ASSETS] (2,526,728)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 3,960,384
[OVERDISTRIB-NII-PRIOR] 255,704
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,776,849
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4,659,781
[AVERAGE-NET-ASSETS] 508,801,109
[PER-SHARE-NAV-BEGIN] 14.19
[PER-SHARE-NII] 0.24
[PER-SHARE-GAIN-APPREC] 1.39
[PER-SHARE-DIVIDEND] 0.23
[PER-SHARE-DISTRIBUTIONS] 0.19
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 15.40
[EXPENSE-RATIO] 1.37
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Smith Barney California Municipals Fund Inc.:
We hereby consent to the following with respect to
Post-Effective Amendment No. 21 to the Registration Statement on
Form N-1A (File No. 2-89548) under the Securities Act of 1933,
as amended, of Smith Barney California Municipals Fund Inc.
(formerly Smith Barney Shearson California Municipals Fund Inc.):
1. The incorporation by reference of our report dated April 10,
1995 accompanying the Annual Report for the fiscal year ended
February 28, 1995 of Smith Barney California Municipals Fund
Inc., in the Statement of Additional Information.
2. The reference to our firm under the heading "Financial
Highlights" in the Prospectus.
3. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 26, 1995
