<PAGE>1
Rule 497(d)
33-61765
[Smith Barney Letterhead]
A SPECIAL NOTICE TO SHAREHOLDERS OF
SMITH BARNEY MUNI FUNDS -- CALIFORNIA PORTFOLIO
Your Vote is Important
Dear Shareholder:
The Board of Trustees of Smith Barney Muni Funds has recently reviewed and
unanimously endorsed a proposal for a reorganization of the California
Portfolio (the "California Portfolio") of Smith Barney Muni Funds which it
judges to be in the best interests of California Portfolio's shareholders.
Under the terms of the proposal, Smith Barney California Municipals Fund Inc.
("California Fund") would acquire all or substantially all of the assets and
liabilities of California Portfolio. After the transaction, California
Portfolio will be liquidated and you will become a shareholder of California
Fund, having received shares with an aggregate value equivalent to the
aggregate net asset value of your investment in California Portfolio at the
time of the transaction. No sales charge will be imposed in the transaction.
The transaction will, in the opinion of counsel, be free from federal income
taxes to you, California Portfolio and California Fund, and it is intended
that the combined fund will be managed by the same portfolio manager who
currently manages California Fund.
The Board of Trustees of Smith Barney Muni Funds has determined that it is
advantageous to combine California Portfolio with California Fund as part of
the consolidation and integration of the two separate and distinct groups of
mutual funds currently distributed by Smith Barney Inc. that resulted from the
acquisition by Travelers Group Inc. (formerly Primerica Corporation) of
certain assets of Lehman Brothers Inc. (formerly Shearson Lehman Brothers
Inc.), including its retail brokerage and domestic asset management business.
In particular, the combination of California Portfolio and California Fund is
expected to eliminate investor confusion associated with the offering by Smith
Barney Inc. of two similar California municipal bond funds that provide
differing yields and also should permit the funds' investment personnel to
concentrate their efforts on the management of one fund rather than having to
divide their attention between two funds with similar investment objectives.
<PAGE>2
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS IMPORTANT
To consider this transaction, we have called a Special Meeting of Shareholders
to be held on November 14, 1995. WE STRONGLY INVITE YOUR PARTICIPATION BY
ASKING YOU TO REVIEW, COMPLETE AND RETURN YOUR PROXY PROMPTLY.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. On behalf of the Board of Trustees, I thank you for
your participation as a shareholder and urge you to please exercise your right
to vote by completing, dating and signing the enclosed proxy card. A self-
addressed, postage-paid envelope has been enclosed for your convenience.
If you have any questions regarding the proposed transaction, please feel free
to call your Smith Barney Financial Consultant who will be pleased to assist
you.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED PROMPTLY.
Sincerely,
Heath B. McLendon
Chairman of the Board
October 25, 1995
<PAGE>3
SMITH BARNEY MUNI FUNDS -- CALIFORNIA PORTFOLIO
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on November 14, 1995
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of the California Portfolio ("California Portfolio") of Smith
Barney Muni Funds will be held at 388 Greenwich Street, 26th Floor, New York,
New York on November 14, 1995, commencing at 3:30 p.m. for the following
purposes:
1. To approve or disapprove the Agreement and Plan of Reorganization
dated as of October 23, 1995 providing for (i) the acquisition of
all or substantially all of the assets of California Portfolio by
Smith Barney California Municipals Fund Inc. ("California Fund") in
exchange for shares of California Fund and the assumption by
California Fund of scheduled liabilities of California Portfolio,
(ii) the distribution of such shares of California Fund to
shareholders of California Portfolio in liquidation of California
Portfolio and (iii) the subsequent termination of California
Portfolio.
2. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Trustees of Smith Barney Muni Funds has fixed the close
of business on September 25, 1995 as the record date for the determination of
shareholders of California Portfolio entitled to notice of and to vote at the
Meeting and any adjournment or adjournments thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE
URGED TO SIGN AND RETURN WITHOUT DELAY THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. INSTRUCTIONS FOR THE PROPER
EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE. PROXIES MAY BE
REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY THE SUBSEQUENT EXECUTION AND
SUBMISSION OF A REVISED PROXY, BY GIVING WRITTEN NOTICE OF REVOCATION TO
CALIFORNIA PORTFOLIO AT ANY TIME BEFORE THE PROXY IS EXERCISED OR BY VOTING IN
PERSON AT THE MEETING.
<PAGE>4
By Order of the Board of Trustees
Christina T. Sydor, Esq.
Secretary
October 25, 1995
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE
EXPENSE OF FURTHER SOLICITATION.
<PAGE>5
PROSPECTUS/PROXY STATEMENT DATED OCTOBER 25, 1995
Acquisition Of The Assets Of
CALIFORNIA PORTFOLIO
a separate investment portfolio of
SMITH BARNEY MUNI FUNDS
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Shares Of
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Prospectus/Proxy Statement is being furnished to shareholders
of the California Portfolio (the "Acquired Fund") of Smith Barney Muni Funds
in connection with a proposed plan of reorganization to be submitted to
shareholders of the Acquired Fund for consideration at a Special Meeting of
Shareholders to be held on November 14, 1995 at 3:30 p.m. (the "Meeting"), at
the offices of Smith Barney Inc. ("Smith Barney") located at 388 Greenwich
Street, 26th Floor, New York, New York 10013, or any adjournment or
adjournments thereof.
The plan provides for all or substantially all of the assets of the
Acquired Fund to be acquired by Smith Barney California Municipals Fund Inc.
(the "Acquiring Fund") in exchange for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of scheduled liabilities of the Acquired Fund
(hereinafter referred to as the "Reorganization"). (The Acquiring Fund and
the Acquired Fund are sometimes referred to hereinafter as the "Funds" and
individually as a "Fund".) Shares of the Acquiring Fund would be distributed
to shareholders of the Acquired Fund in liquidation of the Acquired Fund and
thereafter the Acquired Fund would be terminated. As a result of the proposed
Reorganization, each shareholder of the Acquired Fund will receive that number
of shares of the Acquiring Fund having an aggregate value equal to the
aggregate net asset value of such shareholder's shares of the Acquired Fund
immediately prior to the Reorganization. Holders of Class A shares of the
Acquired Fund will receive Class A shares of the Acquiring Fund, and no sales
charge will be imposed on the Class A shares of the Acquiring Fund received by
the Acquired Fund Class A shareholders. Holders of Class B or Class C shares
of the Acquired Fund will receive Class B or Class C shares, respectively, of
the Acquiring Fund. No contingent deferred sales charge ("CDSC") will be
imposed on Class B or Class C shares of the Acquiring Fund upon consummation
of the Reorganization. However, any CDSC which is
<PAGE>6
applicable to a shareholder's investment will continue to apply, and in
calculating the applicable CDSC payable upon the subsequent redemption of
Class B or Class C shares of the Acquiring Fund, the period during which an
Acquired Fund shareholder held Class B or Class C shares of the Acquired Fund
will be counted. This transaction is structured to be tax-free for federal
income tax purposes to shareholders and to both the Acquiring Fund and the
Acquired Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Acquiring Fund is an open-end, non-diversified management
investment company, whose investment objective is to provide California
investors with as high a level of dividend income exempt from federal income
tax and California state personal income tax as is consistent with prudent
investment management and the preservation of capital. The Acquired Fund is a
separate investment portfolio of Smith Barney Muni Funds, an open-end, non-
diversified management investment company, whose investment objective is to
pay its shareholders as high a level of monthly income exempt from federal
income taxes and from California personal income taxes as is consistent with
prudent investing.
Smith Barney Mutual Funds Management Inc., 388 Greenwich Street, New
York, New York 10013 (the "Manager"), serves as investment manager to both the
Acquiring Fund and the Acquired Fund. The Manager is a wholly owned
subsidiary of Smith Barney Holdings Inc. which, in turn, is a wholly owned
subsidiary of Travelers Group Inc. It is proposed that, in connection with
the Reorganization, Joseph P. Deane, the portfolio manager who manages the
Acquiring Fund's portfolio, would manage the combined fund. Mr. Deane, a
Managing Director of Smith Barney, has served as Vice President and Investment
Officer of the Acquiring Fund since November 1, 1988, and manages the day-to-
day operations of the Acquiring Fund, including making substantially all
investment decisions.
The investment policies of the Acquiring Fund are generally similar
to those of the Acquired Fund. Certain differences in the investment policies
of the Acquiring Fund and the Acquired Fund, however, are described under
"Comparison of Investment Objectives and Policies" in this Prospectus/Proxy
Statement.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Fund that
a prospective
<PAGE>7
investor should know before investing. Certain relevant documents listed
below, which have been filed with the Securities and Exchange Commission
("SEC"), are incorporated in whole or in part by reference. A Statement of
Additional Information dated October 25, 1995, relating to this Prospectus/
Proxy Statement and the Reorganization, has been filed with the SEC and is
incorporated by reference into this Prospectus/Proxy Statement. A copy of
such Statement of Additional Information is available upon request and without
charge by writing to the Acquired Fund at the address listed on the cover page
of this Prospectus/Proxy Statement or by contacting a Smith Barney Financial
Consultant.
1. The Prospectus of Smith Barney California Municipals Fund Inc. dated
April 29, 1995, as supplemented by Prospectus Supplements dated May
25, 1995, July 11, 1995, July 15, 1995 and July 20, 1995, is
incorporated in its entirety by reference and a copy accompanies
this Prospectus/Proxy Statement.
2. The Prospectus of Smith Barney Muni Funds -- California Portfolio
dated November 7, 1994, as supplemented by a Prospectus Supplement
dated July 26, 1995, is incorporated in its entirety by reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a
copy of the Agreement and Plan of Reorganization (the "Plan") for the proposed
transaction.
<PAGE>8
TABLE OF CONTENTS
PAGE
ADDITIONAL MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FEE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
REASONS FOR THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . 16
INFORMATION ABOUT THE REORGANIZATION . . . . . . . . . . . . . . . . . . 19
INFORMATION ABOUT THE ACQUIRING FUND . . . . . . . . . . . . . . . . . . 26
INFORMATION ABOUT THE ACQUIRED FUND . . . . . . . . . . . . . . . . . . . 38
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . 46
INFORMATION ON SHAREHOLDERS' RIGHTS . . . . . . . . . . . . . . . . . . . 55
ADDITIONAL INFORMATION ABOUT
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
AND SMITH BARNEY MUNI FUNDS . . . . . . . . . . . . . . . . . . . . . . . 58
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
FINANCIAL STATEMENTS AND EXPERTS . . . . . . . . . . . . . . . . . . . . 61
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
EXHIBIT A: AGREEMENT AND PLAN OF REORGANIZATION . . . . . . . . . . . . A-1
<PAGE>9
ADDITIONAL MATERIALS
The following additional materials, which have been incorporated by
reference into the Statement of Additional Information dated October 25,
1995 relating to this Prospectus/Proxy Statement and the Reorganization, will
be sent to all shareholders requesting a copy of such Statement of Additional
Information.
1. Statement of Additional Information of Smith Barney California
Municipals Fund Inc. dated April 29, 1995, as supplemented on July 11, 1995.
2. Annual Report of Smith Barney California Municipals Fund Inc. for the
fiscal year ended February 28, 1995.
3. Annual Report of Smith Barney Muni Funds -- California Portfolio for
the fiscal year ended March 31, 1995.
4. Pro Forma Financial Statements.
<PAGE>10
FEE TABLES
Following are tables showing current costs and expenses of the
Acquired Fund and the Acquiring Fund and the pro forma costs and expenses
expected to be incurred by the Acquiring Fund after giving effect to the
Reorganization, each based on the maximum sales charge or maximum CDSC that
may be incurred at the time of purchase or redemption.
CLASS A SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) . . . . . . . . . . . . . . . . . . . . . 4.00% 4.00% 4.00%
Maximum CDSC (as a percentage of
original cost or redemption proceeds,
whichever is lower) . . . . . . . . . None* None* None*
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . . . . 0.45% 0.55%**** 0.50%*****
12b-1 fees . . . . . . . . . . . . . . . . . . . . . . . . 0.15****** 0.15 0.15
Other expenses** . . . . . . . . . . . . . . . . . . . . . 0.07 0.10 0.07
Total Operating Expenses . . . . . . . . . . . . . . . . . . 0.67% 0.80% 0.72%
<FN>
* Purchases of Class A shares, which when combined with
current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be
made at net asset value with no sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12
months.
** "Other expenses" for Class A shares of the Acquired Fund
are based on expenses for the fiscal year ended March 31,
1995, for the Acquiring Fund are based on expenses for the
fiscal year ended February 28, 1995, and for the pro forma
financial figures are based on estimated expenses for the
fiscal year ended March 31, 1995.
*** The pro forma financial figures are intended to provide
shareholders with information about the continuing impact
of the Reorganization as if the Reorganization had taken
place as of April 1, 1994.
**** For investment advisory services, the Acquiring Fund pays
the Manager a fee at the following annual rates of average
daily net assets: 0.35% up to $500 million and 0.32% in
excess of $500 million. For administrative services
rendered, the Acquiring Fund pays the Manager a fee at the
following annual rates of average daily net assets: 0.20%
to $500 million and 0.18% in excess of $500 million.
<PAGE>11
***** Effective on November 17, 1995 (the anticipated date
of the Reorganization), the Manager has agreed to reduce
the Acquiring Fund's aggregate management fees to 0.50% of
the Acquiring Fund's average daily net assets.
****** 12b-1 fees for the fiscal year ended March 31, 1995 have
been restated to reflect the annualized level of 12b-1
fees currently authorized to be paid. 12b-1 fees were
instituted by the Acquired Fund in November 1994.
</TABLE>
<PAGE>12
CLASS B SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of offering
price) . . . . . . . . . . . None None None
Maximum CDSC (as a percentage of
original cost or redemption proceeds,
whichever is lower) . . . . . 4.50% 4.50% 4.50%
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . 0.45% 0.55%**** 0.50%*****
12b-1 fees* . . . . . . . . . . . . . . . . . . . . 0.65 0.65 0.65
Other expenses** . . . . . . . . . . . . . . . . . . 0.09 0.12 0.08
Total Operating Expenses . . . . . . . . . . . . . . . 1.19% 1.32% 1.23%
<FN>
* Upon conversion of Class B shares to Class A shares, such
shares will no longer be subject to a distribution fee.
** "Other expenses" for Class B shares of the Acquired Fund
are based on expenses for the fiscal year ended March 31,
1995, for the Acquiring Fund are based on expenses for the
fiscal year ended February 28, 1995, and for the pro forma
financial figures are based on estimated expenses for the
fiscal year ended March 31, 1995.
*** The pro forma financial figures are intended to provide
shareholders with information about the continuing impact
of the Reorganization as if the Reorganization had taken
place as of April 1, 1994.
**** For investment advisory services, the Acquiring Fund pays
the Manager a fee at the following annual rates of average
daily net assets: 0.35% up to $500 million and 0.32% in
excess of $500 million. For administrative services
rendered, the Acquiring Fund pays the Manager a fee at the
following annual rates of average daily net assets: 0.20%
to $500 million and 0.18% in excess of $500 million.
***** Effective on November 17, 1995 (the anticipated date of
the Reorganization), the Manager has agreed to reduce the
Acquiring Fund's aggregate management fees to 0.50% of the
Acquiring Fund's average daily net assets.
</TABLE>
<PAGE>13
CLASS C SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of offering
price) . . . . . . . . . . . . None None None
Maximum CDSC (as a percentage of
original cost or redemption proceeds,
whichever is lower) . . . . . . . . . . . . . . . . . 1.00% 1.00% 1.00%
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . .
12b-1 fees* . . . . . . . . . . . . . . . . . . . . . 0.45% 0.55%**** 0.50%*****
Other expenses** . . . . . . . . . . . . . . . . . . 0.70 0.70 0.70
0.08 0.12 0.08
Total Operating Expenses . . . . . . . . . . . . . . . . 1.23% 1.37% 1.28%
<FN>
* Class C shares do not have a conversion feature and, therefore, are
subject to an ongoing distribution fee. As a result, long-term
shareholders of Class C shares may pay more than the economic equivalent
of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.
** "Other expenses" for Class C shares of the Acquired Fund
are based on expenses for the fiscal year ended March
31, 1995, for the Acquiring Fund are based on expenses for
the fiscal year ended February 28, 1995, and for the pro
forma financial figures are based on estimated expenses
for the fiscal year ended March 31, 1995.
*** The pro forma financial figures are intended to provide shareholders with
information about the continuing impact of the Reorganization as if the
Reorganization had taken place as of April 1, 1994.
**** For investment advisory services, the Acquiring Fund pays the Manager a
fee at the following annual rates of average daily net assets: 0.35% up
to $500 million and 0.32% in excess of $500 million. For administrative
services rendered, the Acquiring Fund pays the Manager a fee at the
following annual rates of average daily net assets: 0.20% to $500 million
and 0.18% in excess of $500 million.
***** Effective on November 17, 1995 (the anticipated date of the
Reorganization), the Manager has agreed to reduce the Acquiring Fund's
aggregate management fees to 0.50% of the Acquiring Fund's average daily
net assets.
</TABLE>
<PAGE>14
Examples
The following examples are intended to assist an investor in
understanding the various costs that an investor will bear directly or
indirectly. The examples assume payment of operating expenses at the levels
set forth in the tables above.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years*
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual return
and (2) redemption at the end of each time period:
Class A
Acquired Fund . . . . . . . . . . . . . . . . . $47 $61 $76 $120
Acquiring Fund . . . . . . . . . . . . . . . . . 48 65 83 135
Pro Forma . . . . . . . . . . . . . . . . . . . 47 62 78 126
Class B
Acquired Fund . . . . . . . . . . . . . . . . . $57 $68 $75 $130
Acquiring Fund . . . . . . . . . . . . . . . . . 58 72 82 145
Pro Forma . . . . . . . . . . . . . . . . . . . 58 69 78 135
Class C
Acquired Fund . . . . . . . . . . . . . . . . . $23 $39 $68 $149
Acquiring Fund . . . . . . . . . . . . . . . . . 24 43 75 165
Pro Forma . . . . . . . . . . . . . . . . . . . 23 41 70 155
<FN>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
</TABLE>
<PAGE>15
An investor would pay the following expenses on the same investment, assuming
the same annual return and no redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years*
<S> <C> <C> <C> <C>
Class A
Acquired Fund . . . . . . . . . . . . . . . $47 $61 $76 $120
Acquiring Fund . . . . . . . . . . . . . . . 48 65 83 135
Pro Forma . . . . . . . . . . . . . . . . . 47 62 78 126
Class B
Acquired Fund . . . . . . . . . . . . . . . $12 $38 $65 $130
Acquiring Fund . . . . . . . . . . . . . . . 13 42 72 145
Pro Forma . . . . . . . . . . . . . . . . . 13 39 68 135
Class C
Acquired Fund . . . . . . . . . . . . . . . $13 $39 $68 $149
Acquiring Fund . . . . . . . . . . . . . . . 14 43 75 165
Pro Forma . . . . . . . . . . . . . . . . . 13 41 70 155
<FN>
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
</TABLE>
The examples also provide a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00%
annual return assumption. However, each Fund's actual return will vary and
may be greater or less than 5.00%. THESE EXAMPLES SHOULD NOT BE CONSIDERED
REPRESENTATIONS OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
<PAGE>16
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
ADDITIONAL INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT,
THE AGREEMENT AND PLAN OF REORGANIZATION, A COPY OF WHICH IS ATTACHED TO THIS
PROSPECTUS/PROXY STATEMENT AS EXHIBIT A, THE ACCOMPANYING PROSPECTUS OF THE
ACQUIRING FUND DATED APRIL 29, 1995, AS SUPPLEMENTED BY PROSPECTUS SUPPLEMENTS
DATED MAY 25, 1995, JULY 11, 1995, JULY 15, 1995 AND JULY 20, 1995, AND THE
PROSPECTUS OF THE ACQUIRED FUND DATED NOVEMBER 7, 1994, AS SUPPLEMENTED BY A
PROSPECTUS SUPPLEMENT DATED JULY 26, 1995.
PROPOSED REORGANIZATION. The Plan provides for the transfer of all
or substantially all of the assets of the Acquired Fund to the Acquiring Fund
in exchange for shares of the Acquiring Fund and the assumption by the
Acquiring Fund of scheduled liabilities of the Acquired Fund. The Plan also
calls for the distribution of shares of the Acquiring Fund to the Acquired
Fund's shareholders in liquidation of the Acquired Fund. (The foregoing
proposed transaction is referred to in this Prospectus/Proxy Statement as the
"Reorganization".) As a result of the Reorganization, each shareholder of the
Acquired Fund will become the owner of that number of full and fractional
shares of the Acquiring Fund having an aggregate value equal to the aggregate
net asset value of the shareholder's shares of the Acquired Fund as of the
close of business on the date that the Acquired Fund's assets are exchanged
for shares of the Acquiring Fund. (Shareholders of Class A, Class B or Class
C shares of the Acquired Fund will receive Class A, Class B or Class C
shares, respectively, of the Acquiring Fund.) See "Information About the
Reorganization -- Plan of Reorganization."
For the reasons set forth below under "Reasons for the
Reorganization," the Board of Trustees of Smith Barney Muni Funds, including
the Trustees of Smith Barney Muni Funds who are not "interested persons" (the
"Independent Trustees"), as that term is defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), has concluded that the Reorganization
would be in the best interests of the shareholders of the Acquired Fund and
that the interests of the Acquired Fund's existing shareholders will not be
diluted as a result of the transaction contemplated by the Reorganization and
therefore has submitted the Plan for approval by the Acquired Fund's
shareholders. The Board of Directors of the Acquiring Fund has reached
similar conclusions with respect to the Acquiring Fund and has also approved
the Reorganization in respect of the Acquiring Fund.
Approval of the Reorganization will require the affirmative vote of
a majority, as defined in the 1940 Act, of the outstanding shares of the
Acquired Fund, which is the lesser of: (i) 67% of the voting securities of the
Acquired Fund present at the Meeting, if the
<PAGE>17
holders of more than 50% of the outstanding voting securities of the Acquired
Fund are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities of the Acquired Fund. For purposes of voting
with respect to the Reorganization, the Class A, Class B and Class C shares
of the Acquired Fund will vote together as a single class. See "Voting
Information."
TAX CONSEQUENCES. Prior to completion of the Reorganization, the
Funds will have received an opinion of counsel that, upon the Reorganization
and the transfer of the assets of the Acquired Fund, no gain or loss will be
recognized by the Acquired Fund or its shareholders for federal income tax
purposes. The holding period and aggregate tax basis of the Acquiring Fund
shares received by an Acquired Fund shareholder will be the same as the
holding period and aggregate tax basis of the shares of the Acquired Fund
previously held by such shareholder. In addition, the holding period and tax
basis of the assets of the Acquired Fund in the hands of the Acquiring Fund as
a result of the Reorganization will be the same as in the hands of the
Acquired Fund immediately prior to the Reorganization.
INVESTMENT OBJECTIVES AND POLICIES. The Acquiring Fund and the
Acquired Fund have generally similar investment objectives, policies and
restrictions. The Acquiring Fund is an open-end, non-diversified management
investment company whose investment objective is to provide California
investors with as a high a level of dividend income exempt from federal income
tax and California state personal income tax as is consistent with prudent
investment management and the preservation of capital. The Acquired Fund is
also an open-end, non-diversified management investment company whose
investment objective is to pay its shareholders as high a level of monthly
income exempt from federal income taxes and from California personal income
taxes as is consistent with prudent investing. For a discussion of the
differences between the investment policies of the Acquiring Fund and the
Acquired Fund, see "Comparison of Investment Objectives and Policies."
PURCHASE AND REDEMPTION PROCEDURES. The purchase and redemption
procedures available to shareholders of the Acquiring Fund are virtually
identical to those of the Acquired Fund. Purchase of shares of the Acquiring
Fund and the Acquired Fund may be made through the Funds' distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group, at their respective public offering prices (net asset value
next determined plus any applicable sales charge). Class A shares of both the
Acquiring Fund and the Acquired Fund are sold subject to a maximum initial
sales charge of 4.00% of the public offering price. Class A shares of either
Fund may be purchased at a reduced sales charge or at net asset value,
determined by aggregating the dollar amount of a new purchase and the total
asset value of all Class A shares of Funds offered by Smith Barney held by
such person that are exchangeable with Class A shares of
<PAGE>18
either Fund and applying the (reduced) sales charge applicable to such
aggregate. Purchases of Class A shares of both Funds, which when combined
with current holdings of Class A shares offered with a sales charge equal or
exceed $500,000 in the aggregate, will be made at net asset value with no
sales charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months. Class B and Class C shares of both Funds are sold without
an initial sales charge but are subject to higher ongoing expenses than Class
A shares and are subject to a CDSC payable upon certain redemptions. In
addition, Class Y shares of both Funds are sold without an initial sales
charge or CDSC, and are available only to investors meeting an initial
investment minimum of $5,000,000. As of September 25, 1995 (the "Record
Date"), no Class Y shares of either Fund were outstanding. In addition, the
Acquiring Fund is authorized to issue a fifth class of shares, Class Z shares,
exclusively for sale to tax-exempt employee benefit and retirement plans of
Smith Barney and to certain unit investment trusts sponsored by Smith Barney
or any of its affiliates. As of the Record Date, the Acquiring Fund had not
sold any Class Z shares. The Acquired Fund does not offer Class Z shares.
Class A shares of both the Acquiring and the Acquired Fund may be
redeemed at their respective net asset values per share next determined
without charge, except as set forth in the preceding paragraph. Class B
shares of both Funds may be redeemed at their net asset value per share,
subject to a maximum CDSC of 4.50% of the lower of original cost or redemption
proceeds, declining by 0.50% the first year after purchase and by 1.00% each
year thereafter to zero. Class C shares of both Funds may be redeemed at
their net asset value per share, subject to a CDSC of 1.00% if such shares are
redeemed during the first 12 months following their purchase. Shares of both
Funds held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other shares may
be redeemed through a Smith Barney Financial Consultant, Introducing Broker or
dealer in the selling group or by forwarding a written request for redemption
to The Shareholder Services Group, Inc. ("TSSG" or the "transfer agent"), a
subsidiary of First Data Corporation. See "Redemption of Shares" in the
accompanying Prospectus of the Acquiring Fund.
EXCHANGE PRIVILEGES. The exchange privileges available to
shareholders of the Acquiring Fund are virtually identical to those available
to shareholders of the Acquired Fund. Shareholders of both the Acquired Fund
and the Acquiring Fund may exchange at net asset value all or a portion of
their shares for shares of the same class in certain other funds of the Smith
Barney Mutual Funds. Any exchange will be a taxable event for which a
shareholder may have to recognize a gain or a loss under federal income tax
provisions. No initial sales charge is imposed on the shares being acquired
in an exchange, and no CDSC is imposed on the shares being disposed of in the
exchange. A sales charge differential, however, may apply to exchanges of
Class A shares with other Smith Barney Mutual Funds. For purposes of
computing the CDSC that may be payable upon a disposition, the Class B and
Class C shares acquired in the exchange will be deemed
<PAGE>19
to have been purchased on the same date as the Class B and Class C shares that
were exchanged therefor. Class B shares of the Funds that are exchanged for
Class B shares of other Smith Barney Mutual Funds imposing a higher CDSC will
be subject to the higher applicable CDSC. See "Exchange Privilege" in the
accompanying Prospectus of the Acquiring Fund.
DIVIDENDS. The Acquiring Fund declares dividends from its net
investment income (that is, income other than its net realized long- and
short-term capital gains) monthly, and pays dividends on the last Friday of
each calendar month to shareholders of record as of the preceding Tuesday.
Distributions of net realized long- and short-term capital gains, if any, are
declared and paid annually after the end of the fiscal year in which they have
been earned. Similarly, dividends of substantially all of the Acquired Fund's
net investment income are declared and paid monthly and any realized capital
gains are declared and distributed annually. With respect to both Funds,
unless a shareholder otherwise instructs, dividends and capital gains
distributions will be reinvested automatically in additional shares of the
same class at net asset value, subject to no sales charge or CDSC. The
distribution option currently in effect for a shareholder of the Acquired Fund
will remain in effect after the Reorganization. After the Reorganization,
however, the former Acquired Fund shareholders may change their distribution
option at any time by contacting a Smith Barney Financial Consultant. See
"Dividends and Distributions" in the accompanying Prospectus of the Acquiring
Fund.
SHAREHOLDER VOTING RIGHTS. The Acquiring Fund and Smith Barney Muni
Funds are both registered with the SEC as open-end, investment companies. The
Acquiring Fund is a Maryland corporation having a Board of Directors. The
Acquired Fund is a separate series of Smith Barney Muni Funds, a Massachusetts
business trust having a Board of Trustees. Shareholders of both Funds have
similar voting rights. Neither Fund holds a meeting of shareholders annually,
and there is normally no meeting of shareholders held for the purpose of
electing Directors/Trustees unless and until such time as less than two-thirds
of the Directors or a majority of the Trustees holding office, as the case may
be, have been elected by shareholders. At that time, the Directors/Trustees
in each Fund then in office will call a shareholders' meeting for the election
of Directors/Trustees.
In addition, under the laws of the Commonwealth of Massachusetts,
shareholders of the Acquired Fund do not have appraisal rights in connection
with a combination or acquisition of the assets of the Fund by another entity.
Shareholders of the Acquired Fund may, however, redeem their shares at net
asset value (subject to any applicable CDSC) prior to the date of the
Reorganization.
For purposes of voting with respect to the Reorganization, the Class
A, Class B and Class C shares of the Acquired Fund will vote together as a
single class. See "Information on Shareholders' Rights -- Voting Rights."
<PAGE>20
RISK FACTORS
Due to the similarities of investment objectives and policies of the
Acquiring Fund and the Acquired Fund, the investment risks are substantially
similar. Such risks are generally those typically associated with municipal
securities, primarily those of California issuers. The following is a summary
of certain risk factors associated with investing in shares of the Acquiring
Fund, certain of which are also applicable to the Acquired Fund. This summary
is qualified in its entirety by the accompanying Prospectus of the Acquiring
Fund. In addition, certain risks associated with various investment
strategies utilized by the Acquiring Fund are described herein under
"Comparison of Investment Objectives and Policies."
The Funds are more susceptible to factors adversely affecting
issuers of California municipal securities than is a municipal bond fund that
does not emphasize these issuers. Certain California Constitutional
amendments, legislative measures, executive orders, administrative regulations
and voter initiatives could result in certain adverse consequences affecting
California municipal securities. For instance, certain provisions of the
California Constitution and statutes that limit the taxing and spending
authority of Californian governmental entities may impair the ability of
issuers of some California municipal securities to maintain debt service on
their obligations.
Each Fund is classified as a non-diversified investment company
under the 1940 Act, which means that the Fund is not limited by the 1940 Act
in the proportion of its assets that it may invest in the obligations of a
single issuer. A Fund's assumption of large positions in the obligations of a
small number of issuers may cause the Fund's share price to fluctuate to a
greater extent than that of a diversified company as a result of changes in
the financial condition or in the market's assessment of the issuers.
There are several risks in connection with the use of certain
portfolio strategies by the Acquiring Fund, such as the use of when-issued
securities, municipal bond index futures contracts and put and call options on
interest rate futures as hedging devices, municipal leases and securities
lending. Certain of these risks are also applicable in connection with the
use of certain portfolio strategies by the Acquired Fund. See "Comparison
of Investment Objectives."
REASONS FOR THE REORGANIZATION
The Board of Trustees of the Smith Barney Muni Funds has determined
that it is advantageous to combine the Acquired Fund with the Acquiring Fund.
The Funds have generally similar investment objectives and policies and have
the same investment adviser, distributor and transfer agent. In reaching this
conclusion, the Board considered a number of factors as described below.
<PAGE>21
Among the factors considered by the Board of Trustees of Smith
Barney Muni Funds was the 1993 transaction pursuant to which Travelers Group
Inc. (formerly Primerica Corporation) acquired certain assets of Lehman
Brothers Inc. (formerly Shearson Lehman Brothers Inc.), including its retail
brokerage and domestic asset management business. As a result of this
transaction, Smith Barney became the sponsor of two separate and totally
distinct families of mutual funds, each with, among other things, differing
pricing structures, classes of shares, exchange privileges, sweep functions
and types of funds. The Board was advised that, with the completion of the
merger of back-office brokerage operations and the implementation of a uniform
pricing and class structure on November 7, 1994, significant consolidation of
the two mutual fund groups had been made feasible and desirable. The Board
was further informed that the next step in this process would be to eliminate
the duplication of funds within the consolidated Smith Barney fund complex.
The Board of Trustees of Smith Barney Muni Funds was presented with
information that indicated that investors have been and will continue to be
confused in the face of similar California municipal bond funds managed by the
same investment adviser (although the Acquired Fund and the Acquiring Fund
have a different portfolio manager, i.e., the individual primarily responsible
for each Fund's day-to-day investment decisions). In particular, the Board
was presented with information to the effect that, with two different funds,
Smith Barney was confronted with certain operational and shareholder services
issues, including (i) dilution of the firm's money management and research
expertise due to the splitting of attention between the two highly similar
funds; and (ii) investor confusion associated with offering similar funds that
provide differing yields. The Board also considered that no sales charges
would be imposed in effecting the Reorganization and the advantages of
eliminating duplication inherent in marketing two funds with similar
investment objectives.
Information regarding the operating expenses of the Acquired Fund
reflecting expenses for the fiscal year ended March 31, 1995, and information
regarding the operating expenses of the Acquiring Fund reflecting expenses for
the fiscal year ended February 28, 1995, is included under the caption "Fee
Tables" in this Prospectus/Proxy Statement. Based upon these levels of
expenses, and assuming the same level of assets of the combined fund after the
Reorganization as on March 31, 1995, it is estimated that Class A, Class B and
Class C shareholders of the Acquired Fund should experience a 0.05%, 0.04% and
0.05% increase, respectively, in total operating expenses, resulting from an
increase of 0.05% in management fees paid to the Manager and, in the case of
Class B shares, an accompanying 0.01% decrease in other operating expenses.
At its June 7, 1995 meeting, the Board of Directors of the Acquired
Fund was presented by the Manager with more current information, reflecting
operating expenses as of April 30, 1995, which took into account the effects
of various changes in operating expenses applicable to the Funds, such as
changes in certain transfer agency expenses. The Board was shown pro forma
financial information which indicated that, assuming the same level of assets
for the combined fund after the Reorganization as on April 30, 1995, it is
estimated that Class A,
<PAGE>22
Class B and Class C shareholders of the Acquired Fund should experience a
0.02% increase in total operating expenses, resulting from an increase of
0.05% in management fees paid to the Manager accompanied by a decrease of
0.03% in certain other operating expenses. The pro forma total
operating expenses considered by the Board are identical to the pro
forma total operating expenses included under the caption "Fee Tables"
in this Prospectus/Proxy Statement. However, the Board considered, among
other things, the impact of the increased operating expenses on the Acquired
Fund's shareholders, the nature and quality of services provided to
shareholders, including performance, the impact of economies of scale and
comparative fee structures. Further, the Board was presented with information
illustrating that the pro forma management fee to be paid by the combined fund
following the Reorganization would be lower than the average management fee
paid by California municipal funds included in a survey using data prepared by
Lipper Analytical Services, Inc. (the "Lipper California Muni Average") with
respect to front-end load shares (which are comparable to Class A shares of
the Funds) as of March 31, 1995 (without giving effect to management fee
waivers and expense reimbursements), and that the pro forma total operating
expenses of the combined fund following the Reorganization would be only 0.01%
higher than the Lipper California Muni Average, and would be lower than the
Lipper California Muni Average before giving effect to fee waivers and expense
reimbursements. The pro forma fees, the Board was also informed, would be
more in line with fees paid by comparable funds. Further, the Board was shown
pro forma financial information which indicated that, assuming the same level
of assets for the combined fund after the Reorganization, the aggregate total
management fees paid by the combined fund to the Manager would be
approximately $166,000 less than would otherwise be paid annually to the
Manager by the Acquiring Fund and the Acquired Fund had the Reorganization and
the proposed decrease in the Acquiring Fund's management fee not taken place.
The Board also considered, among other things, the terms and conditions of the
Reorganization and the comparative investment performance of the Funds. In
addition, the Board was advised that the Reorganization would be effected as a
tax-free reorganization.
The Board of Trustees of Smith Barney Muni Funds was informed that
the Reorganization was one of a number of proposed reorganizations involving
Smith Barney Muni Funds and other municipal bond funds within the Smith Barney
mutual fund complex. In connection with these reorganizations, it has been
proposed that the surviving fund's management fee be either increased or
decreased, as the case may be, to 0.50% of such Fund's average daily net
assets. The Board members were informed that the pro forma total operating
expenses for the combined fund would be consistent with the reorganizations
involving the other series of Smith Barney Muni Funds. Based in part on this
discussion of the ongoing consolidation of the Smith Barney mutual fund
complex, the Board of Trustees of Smith Barney Muni Funds approved, subject to
shareholder approval, a new investment management agreement for the Acquired
Fund. The new investment management agreement, which is otherwise
substantively identical to the Acquired Fund's current investment management
agreement, would provide for an increase in management fees from 0.45% to
0.50% of the Acquired Fund's average daily net assets. To save unnecessary
proxy expenses to the Acquired Fund, however, the Board of Trustees has
determined first to seek shareholder approval of the Reorganization, as
approval thereof would obviate the need for a second solicitation of
shareholder votes to approve the proposed investment management agreement.
Effective on November 17, 1995 (the anticipated date of the Reorganization),
the Board of Directors of the Acquiring Fund approved a management fee of
0.50% of the Acquiring Fund's average daily net assets, representing a
decrease from the Acquiring Fund's current fee of 0.55%. No shareholder
approval is necessary to effectuate this reduced management fee.
In light of the foregoing, the Board of Trustees of Smith Barney
Muni Funds, including the Independent Trustees, has determined that it is in
the best interests of the Acquired Fund and its shareholders to combine with
the Acquiring Fund. The Board of Trustees has also determined that a
combination of the Acquired Fund and the Acquiring Fund would not result in a
dilution of the interests of the Acquired Fund's shareholders.
<PAGE>23
The Board of Directors of the Acquiring Fund has also determined
that it is advantageous to the Acquiring Fund to acquire the assets of the
Acquired Fund. The Board of Directors was presented with information that
indicated that investors will continue to be confused in the face of similar
California municipal bond funds managed by the same adviser. The Board was
presented with information to the effect that, with two different funds, Smith
Barney experienced (i) dilution of the firm's money management and research
expertise due to the splitting of attention between the two highly similar
funds; and (ii) client confusion associated with offering similar funds that
provide differing yields. In addition, among other factors, the Board of
Directors considered the proposed decrease in management fee rates as well as
pro forma financial information provided by the Manager which indicated that
the Reorganization should result in a decrease in the expense ratio on shares
of the Acquiring Fund. The Board of Directors also considered the terms and
conditions of the Reorganization and representations that the Reorganization
would be effected as a tax-free reorganization. Accordingly, the Board of
Directors, including a majority of the independent Directors, has determined
that the Reorganization is in the best interests of the Acquiring Fund's
shareholders and that the interests of the Acquiring Fund's shareholders would
not be diluted as a result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
PLAN OF REORGANIZATION. The following summary of the Plan is
qualified in its entirety by reference to the Plan (Exhibit A hereto). The
Plan provides that the Acquiring Fund will acquire all or substantially all of
the assets of the Acquired Fund in exchange for shares of the Acquiring Fund
and the assumption by the Acquiring Fund of scheduled liabilities of the
Acquired Fund on November 17, 1995 or such later date as may be agreed upon by
the parties (the "Closing Date").
Prior to the Closing Date, the Acquired Fund will endeavor to
discharge all of its known liabilities and obligations. The Acquiring Fund
will not assume any liabilities or obligations other than those reflected on
an unaudited statement of assets and liabilities of the Acquired Fund prepared
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m., New York City time, on the Closing Date. The number of full and
fractional Class A, Class B and Class C shares of the Acquiring Fund to be
issued to the Acquired Fund shareholders will be determined on the basis of
the Acquiring Fund's and the Acquired Fund's relative net asset value per
Class A, Class B and Class C shares, respectively. The net asset value per
share of each class will be determined by dividing assets, less liabilities,
by the total number of outstanding shares of the relevant class.
The Acquired Fund and the Acquiring Fund will utilize the procedures
set forth in the Prospectus of the Acquiring Fund to determine the value of
their respective portfolio securities and to determine the aggregate value of
each Fund's portfolio. The
<PAGE>24
method of valuation employed will be consistent with the requirements set
forth in the Prospectus of the Acquiring Fund, Rule 22c-1 under the 1940 Act
and the interpretation of such rule by the SEC's Division of Investment
Management.
At or prior to the Closing Date, the Acquired Fund will, and the
Acquiring Fund may, declare a dividend or dividends which, together with all
previous such dividends, will have the effect of distributing to their
respective shareholders all taxable income for the taxable period ending on or
prior to the Closing Date (computed without regard to any deduction for
dividends paid). In addition, the Acquired Fund's dividend will include its
net capital gains realized in the taxable year ending on or prior to the
Closing Date (after reductions for any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, the
Acquired Fund will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date the full and fractional shares
of the Acquiring Fund received by the Acquired Fund. Such liquidation and
distribution will be accomplished by the establishment of accounts in the
names of the Acquired Fund's shareholders on the share records of the
Acquiring Fund's transfer agent. Each account will represent the respective
pro rata number of full and fractional shares of the Acquiring Fund due to
each of the Acquired Fund's shareholders. After such distribution and the
winding up of its affairs, the Acquired Fund will be terminated.
The consummation of the Reorganization is subject to the conditions
set forth in the Plan. Notwithstanding approval of the Acquired Fund's
shareholders, the Plan may be terminated at any time at or prior to the
Closing Date (i) by mutual agreement of Smith Barney Muni Funds on behalf of
the Acquired Fund and the Acquiring Fund, (ii) by Smith Barney Muni Funds on
behalf of the Acquired Fund in the event that the Acquiring Fund shall, or the
Acquiring Fund in the event that Smith Barney Muni Funds shall, materially
breach any representation, warranty or agreement contained in the Plan to be
performed at or prior to the Closing Date; or (iii) by Smith Barney Muni Funds
on behalf of the Acquired Fund or by the Acquiring Fund if a condition to the
Plan expressed to be precedent to the obligations of the terminating party has
not been met and it reasonably appears that it will not or cannot be met.
Approval of the Plan will require the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding shares of the
Acquired Fund, which is the lesser of: (i) 67% of the voting securities of the
Acquired Fund present at the Meeting, if the holders of more than 50% of the
outstanding voting securities of the Acquired Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities of the
Acquired Fund. If the Reorganization is not approved by shareholders of the
Acquired Fund, the Board of Trustees of Smith Barney Muni Funds will consider
courses of action available to it, including re-submitting the Reorganization
proposal to shareholders.
<PAGE>25
Alternatively, the Board may choose to submit to shareholders a proposal,
already approved by Trustees, to adopt a new investment management agreement
that provides for an increase in the management fee currently payable by the
Acquired Fund to the Manager from 0.45% to 0.50% of the Acquired Fund's
average daily net assets. The new investment management agreement would
otherwise be substantively identical to the investment management agreement
currently in effect between the Acquired Fund and the Manager.
DESCRIPTION OF THE ACQUIRING FUND'S SHARES. Full and fractional
shares of common stock of the Acquiring Fund will be issued to the Acquired
Fund in accordance with the procedures detailed in the Plan and as described
in the Acquiring Fund's Prospectus. Generally, the Acquiring Fund does not
issue share certificates to shareholders unless a specific request is
submitted to the Acquiring Fund's transfer agent. See "Information on
Shareholders' Rights" and the Prospectus of the Acquiring Fund for additional
information with respect to the shares of the Acquiring Fund.
FEDERAL INCOME TAX CONSEQUENCES. The exchange of assets of the
Acquired Fund for shares of the Acquiring Fund is intended to qualify for
federal income tax purposes as a tax-free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"). As a condition
to the closing of the Reorganization, the Acquiring Fund and Smith Barney Muni
Funds on behalf of the Acquired Fund will receive an opinion from Willkie Farr
& Gallagher, counsel to the Acquiring Fund, to the effect that, on the basis
of the existing provisions of the Code, U.S. Treasury regulations issued
thereunder, current administrative rules, pronouncements and court decisions,
for federal income tax purposes, upon consummation of the Reorganization:
(1) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for the Acquiring Fund's shares and the assumption by
the Acquiring Fund of scheduled liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C)
of the Code, and the Acquiring Fund and the Acquired Fund are each a
"party to a reorganization" within the meaning of Section 368(b) of the
Code;
(2) no gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Acquired Fund in exchange for the
Acquiring Fund's shares and the assumption of scheduled liabilities of
the Acquired Fund;
(3) no gain or loss will be recognized by the Acquired Fund upon
the transfer of the Acquired Fund's assets to the Acquiring Fund in
exchange for the Acquiring Fund's shares and the assumption of scheduled
liabilities of the Acquired Fund or upon the distribution (whether actual
or constructive) of the Acquiring Fund's shares to the Acquired Fund's
shareholders;
<PAGE>26
(4) no gain or loss will be recognized by shareholders of the
Acquired Fund upon the exchange of their shares of the Acquired Fund for
shares of the Acquiring Fund;
(5) the aggregate tax basis for shares of the Acquiring Fund
received by each shareholder of the Acquired Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of shares of
the Acquired Fund surrendered therefor, and the holding period of shares
of the Acquiring Fund to be received by each shareholder of the Acquired
Fund will include the period during which shares of the Acquired Fund
exchanged therefor were held by such shareholder (provided shares of the
Acquired Fund were held as capital assets on the date of the
Reorganization); and
(6) the tax basis to the Acquiring Fund of the Acquired Fund's
assets acquired by the Acquiring Fund will be the same as the tax basis
of such assets to the Acquired Fund immediately prior to the
Reorganization, and the holding period of the assets of the Acquired Fund
in the hands of the Acquiring Fund will include the period during which
those assets were held by the Acquired Fund.
Shareholders of the Acquired Fund should consult their tax advisors
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion only relates to the
federal income tax consequences of the Reorganization, shareholders of the
Acquired Fund should also consult their tax advisors as to state and local tax
consequences, if any, of the Reorganization.
<PAGE>27
CAPITALIZATION. The following table shows the capitalization of the
Acquiring Fund and the Acquired Fund as of September 25, 1995, and on a pro
forma basis as of that date, giving effect to the proposed acquisition of
assets at net asset value.
<TABLE>
<CAPTION>
Smith Barney Muni Funds - Smith Barney California Pro Forma for
California Portfolio Municipals Fund Inc. Reorganization
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
(In thousands, except per share values)
Class A Shares
Net assets . . . . . . . . . . . . . . . . . $156,500 $409,968 $566,468
Net asset value per share . . . . . . . . . . $ 12.50 $ 15.77 $ 15.77
Shares outstanding . . . . . . . . . . . . . 12,516 26,003 35,924
Class B Shares
Net assets . . . . . . . . . . . . . . . . . $ 893 $139,129 $140,022
Net asset value per share . . . . . . . . . . $ 12.50 $ 15.76 $ 15.76
Shares outstanding . . . . . . . . . . . . . 71 8,828 8,884
Class C Shares
Net assets . . . . . . . . . . . . . . . . . $ 6,534 $ 2,548 $ 9,082
Net asset value per share . . . . . . . . . . $ 12.49 $ 15.76 $ 15.76
Shares outstanding . . . . . . . . . . . . . 523 162 576
Class Y Shares
Net assets . . . . . . . . . . . . . . . . . $0 $0 $0
Net asset value per share . . . . . . . . . . $0 $0 $0
Shares outstanding . . . . . . . . . . . . . 0 0 0
Class Z Shares
Net assets . . . . . . . . . . . . . . . . . N/A $0 $0
Net asset value per share . . . . . . . . . . N/A $0 $0
Shares outstanding . . . . . . . . . . . . . N/A 0 0
</TABLE>
As of the Record Date, there were 12,516,255 outstanding Class A
shares, 71,418 outstanding Class B shares, 523,023 outstanding Class C shares
and no outstanding Class Y shares of the Acquired Fund, and 26,002,880
<PAGE>28
outstanding Class A shares, 8,828,440 outstanding Class B shares,
161,718 outstanding Class C shares and no outstanding Class Y shares or
Class Z shares of the Acquiring Fund. As of the Record Date, the officers and
Trustees of Smith Barney Muni Funds beneficially owned as a group less than 1%
of the outstanding shares of each class of the Acquired Fund. To the best
knowledge of the Trustees of Smith Barney Muni Funds, as of the Record Date,
no shareholder or "group" (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")), except as set forth in
the table below, owned beneficially or of record more than 5% of the
outstanding shares of a class of the Acquired Fund. As of the Record Date,
the officers and Directors of the Acquiring Fund beneficially owned as a group
less than 1% of the outstanding shares of each class of the Acquiring Fund.
Except as set forth in the table below, to the best knowledge of the Directors
of the Acquiring Fund, as of the Record Date, no shareholder or "group" (as
that term is used in Section 13(d) of the Exchange Act) owned beneficially or
of record more than 5% of the outstanding shares of a class of the Acquiring
Fund.
<TABLE>
<CAPTION>
Percentage of
Class Owned
of Record
or Beneficially
Upon
Name and Fund Consummation of
the Address and Class As of the Record Date Reorganization
<S> <C> <C> <C>
William C. Lochmoeller TTEE Acquired Fund Class B 16.21% *
FBO The Lochmoeller Family Trust U/A/D
07/29/80
1270 Mesa Road
San Marino, CA 91108
Joan Barnett TTEE Acquired Fund Class B 13.47 *
Barnett 1995 Trust UAD 6/12/95
FBO Joan Barnett
3917 Alta Mesa Drive
Studio City, CA 91604
Patricia S. Gonzalez Acquired Fund Class B 11.78 *
204 Upland Court
Redwood City, CA 94062
<PAGE>29
Acquired Fund Class B 11.65 *
Jane C. Higgins,
Successor TTEE
FBO Donald R. Higgins & Janet C. Higgins
Revocable Trust A
U/A/D 06/10/85
3119 Clairidge Way
Sacramento, CA 95821
Steven H. Pettit TTEE Acquired Fund Class B 8.71 *
FBO the Tina & Tom Pettit
Irrev. Trust DTD 04/13/95
4839 Meadow Ridge Road
Santa Ysabel, CA 92070
Roberto Kelly Acquired Fund Class B 5.90 *
Irwin Weiner Sports Enterprises Inc.
19 Bradhurst Avenue
Hawthorne, NY 10532
Vivian Gilbert Strell Acquired Fund Class B 5.44 *
Laurie Gilbert and Samuel Gilbert JTWROS
7008 Lipmann Street
San Diego, CA 92122
John Nisser Acquired Fund Class C 5.15 3.71%
16229 Woodruff Avenue
Bellflower, CA 90706
R. Philip Hammond TTEE Acquiring Fund Class C 15.85 4.45
F/B/O Philip Hammond &
Vivienne Hammond Trust V-3
UAD 12/12/84
P.O. Box 1735
Santa Monica, CA 90406
Edward Bavaria and Acquiring Fund Class C 7.97 2.24%
Elizabeth J. Bavaria JTWROS
9 Rockingham Drive
Newport Beach, CA 92660
Otto Kahn and Irene Chan Kahn JTWROS Acquiring Fund Class C 7.95 2.23
9846 Lesterford Avenue
Downey, CA 90240
<PAGE>30
Aldo Borin TTEE FBO Acquiring Fund Class C 5.77 1.62
The Frank J. Borin Sr. Trust
U/A/D 10/15/90
10050 Old Redwood Highway
Penngrove, CA 94951
<FN>
____________
* Less than 1.00%
</TABLE>
INFORMATION ABOUT THE ACQUIRING FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MARKET CONDITIONS AND
PORTFOLIO REVIEW (THROUGH FEBRUARY 28, 1995).
Despite the difficult investment environment of the year ended
February 28, 1995, the Fund performed well, providing investors in Class A
shares with a total return of 2.46% and Class B shares with a total return of
1.89%. These return numbers resulted in a first quarter ranking for both
Class A (#2 of 83 funds) and Class B (#6 of 83 funds) shares by Lipper
Analytical Services, Inc., an independent mutual fund performance tracking
organization, for the twelve months ended February 28, 1995. Reflecting the
improvement in the municipal market that began late in 1994, Class C shares, a
newly-available class of shares, earned a total return of 11.72% for the
period between November 14, 1994 and February 28, 1995.
Market and Economic Overview
The past fiscal year demonstrated that volatility is becoming a
permanent feature of the fixed income landscape. Management believes this is
largely attributable to the development of new technologies, the speed of
communications and the freer movement of capital around the globe. The
municipal market has also been affected by these changes. During most of the
past fiscal year the municipal market experienced a significant rise in
interest rates which negatively impacted performance only to finish the year
with one of the most powerful bond rallies in recent memory.
Management believes the volatility of the municipal market over the
period was the result of a marketplace that initially assumed that the
superior economic growth in both the U.S. and overseas would create
inflationary problems for all the bond markets. Anticipation proved much
worse than reality, however, as the Federal Reserve moved both aggressively
and early to stave off this threat, thereby producing an inflation index below
3% for 1994. As the market gradually came to the conclusion that an elusive
"soft landing" was economically possible, its reaction was swift and forceful,
producing a powerful bond rally during the last several months of 1994.
<PAGE>31
In early December 1994, Orange County, California filed for
bankruptcy protection under Chapter 9 of the federal bankruptcy code because
of losses sustained by its investment pool. The investment pool consists of
deposits from Orange County itself, agencies within Orange County (such as
Orange County Sanitation District Authority and Orange County Transportation
Authority) and various local communities. The pool suffered substantial
losses through the use of leverage and derivative investments.
At the end of this fiscal reporting period, approximately 8% of the
Fund was invested in securities issued by various agencies located within
Orange County. However, none of these holdings are direct obligations of the
county itself, and more than half are either insured or backed by guaranteed
investment contracts. In addition, another 5% of the Fund was invested in a
San Joaquin Transportation corridor bond, whose issuer is a participant in
Orange County's investment pool.
Orange County is currently trying to negotiate a settlement with its
pool participants, and the Fund anticipates that one will be reached by early
June. The Fund believes that the bankruptcy proceedings will not have a
material impact on the ability of these issuers to make scheduled interest and
principal payments and therefore will have little, if any, effect on the Fund.
Nevertheless, management is actively monitoring the Orange County proceedings.
Investment Strategy and Portfolio Structure
In seeking to achieve the Fund's investment objective of providing
California investors with as high a level of dividend income exempt from
federal income tax and California state personal income tax as is
consistent with prudent investment management and the preservation of capital,
management's long-term investment strategy is to provide investors with a very
competitive yield, and then produce the best total return management can,
whatever the market conditions. Management's current strategy has been to
take advantage of last autumn's bond decline by extending the average life of
the portfolio and purchasing more discount securities (bonds that are selling
below their redemption value). Discount securities typically have a dual
advantage in rising markets. First, they tend to be one of the best
performing asset classes as rates decline. Second, they tend to provide much
better call protection, which lowers the risk of having bonds prematurely
called away. This strategy greatly enhanced the performance of the Fund in
the recent bond rally, and it will continue to be management's strategy until
management sees inflation re-emerge (although this does not appear to be an
imminent possibility).
In terms of credit quality, management has focused primarily on
increasing the percentage of the Fund's AA- and AAA-rated holdings, the two
highest rating categories available. At the end of this fiscal year, nearly
70% of the portfolio was invested in AA- and AAA-rated securities. Management
believes these securities offer the Fund's shareholders the best value.
Management concentrated the portfolio in essential service revenue bonds and
debt issued by local communities for redevelopment projects and various
<PAGE>32
civic improvements. These types of bonds provide the Fund with competitive
yields and a high degree of liquidity, which makes it easier to navigate the
Fund through turbulent market periods.
Management's Update (through July 31, 1995).
The increases last year in short-term rates by the Federal Reserve
Board are clearly slowing the economy's expansion from its faster pace of last
fall. The question now on the minds of economists and investors is whether
this is merely a pause in economic activity or indicative of longer-term
economic weakness. Management does not believe that forthcoming economic data
will show conclusive evidence of a recession and instead is working under the
assumption that the economy will experience a small pause and then steady
growth with moderate inflation.
The municipal market had a spectacular rally during the first half
of 1995, and the Fund was positioned to take full advantage of it. A
significant percentage of the portfolio was invested in high-quality discount
coupons, which allowed the Fund to maximize its net asset value during a
rapidly declining interest-rate environment. Management's goal is to use
market strength to gradually increase coupons, shorten maturities and take a
more conservative approach to the market until these interest-rate levels
prove they can hold.
However, some uncertainties surround the market. Among these are
the many flat-tax proposals being championed by members of both political
parties. Real legislative action is still probably several years away and
must be revenue neutral to make any economic sense -- a very difficult
balancing act to accomplish. These discussions have caused periodic weakness
in the municipal market during the past months and will no doubt continue to
cause periodic weakness over the next few years, which management will view as
an opportunity to invest at levels that represent real value to the Fund's
shareholders.
A defining moment for the municipal market was Orange County's
filing for bankruptcy in December 1994, which immediately cast a pall on the
entire market. Its impact on the broader market since then has been minimal
but has been considerably stronger on the securities of Orange County itself.
A positive development in the Orange County bankruptcy is the expected vote by
the California Legislature on a comprehensive program, backed by the county
and many of its constituencies, that would provide key elements of the
county's debt repayment plan. Anything that demonstrates a commitment to
repaying its debt is good for Orange County and the municipal market as a
whole. Management will continue to monitor the situation closely.
The Fund has not participated in any of the recent debt offerings by
Orange County. Currently, approximately 9.42% of the portfolio is invested in
securities issued by
<PAGE>33
various agencies located within Orange County. None of these holdings,
however, are direct obligations of the county itself, and 90% are either
insured or backed by guaranteed-investment contracts. In addition, another
5.37% of the portfolio is invested in a San Joaquin Transportation corridor
bond, whose issuer is a participant in Orange County's investment pool.
Management believes that the negotiations surrounding Orange County's debt
obligations will not have a material effect on the ability of these issuers to
make scheduled interest and principal payments, and therefore will have
little, if any, effect on the Fund. At July 31, 1995, 93.2% of the portfolio
was invested in securities rated investment grade (BBB/Baa and higher) by
either Standard & Poor's or Moody's. The majority of the Fund's assets were
invested in essential-service revenue bonds and debt issued by local
communities for redevelopment projects and various civic improvements. The
average maturity of the Fund was 19.7 years. As stated earlier, management
intends to gradually increase coupons, shorten the average maturity of the
portfolio and assume a more conservative stance.
<PAGE>34
<TABLE>
<CAPTION>
Smith Barney California Municipals Fund Inc.
Historical Performance Class A Shares (unaudited)
Year Ended Net Asset Value Capital Gains Dividends Paid Return of Total Return*
February 28 Beginning Ending Paid Capital
<S> <C> <C> <C> <C> <C> <C>
1986 $13.94 $16.16 __ $1.21 -- 25.80%
1987 $16.16 $16.54 $0.33 $1.14 __ 12.13%
1988 $16.54 $15.49 $0.07 $1.09 -- 1.09%
1989 $15.49 $15.33 $0.03 $1.12 -- 6.67%
1990 $15.33 $15.61 -- $1.07 -- 9.02%
1991 $15.61 $15.66 $0.12 $1.07 -- 8.29%
1992 $15.66 $15.78 $0.27 $1.05 -- 9.50%
1993 $15.78 $16.70 $0.29 $0.97 $0.04 14.76%
1994 $16.70 $16.15 $0.65 $0.84 -- 5.92%
1995 $16.15 $15.40 $0.19 $0.89 -- 2.46%
Total $1.95 $10.45 $0.04
Cumulative Total Return - (3/1/85 through 2/28/95) 144.89%
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the front-
end sales charge (maximum 4.00%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
<PAGE>35
<TABLE>
<CAPTION>
Average Annual Total Return** Class A Shares
<S> <C> <C> <C> <C>
Without Sales Charge With Sales Charge***
With Without With Without
Fee Waiver Fee Waiver Fee Waiver Fee Waiver
and Expense and Expense and Expense and Expense
Reimbursement Reimbursement Reimbursement Reimbursement
Year Ended 2/28/95 N/A 2.46% N/A (1.64%)
Five Years Ended
2/28/95 N/A 8.11% N/A 7.23%
Ten Years Ended
2/28/95 9.37% 8.56% 8.92% 8.16%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value. The Acquiring Fund
waived investment advisory and sub-investment advisory and administration
fees from April 1984 to February 1986 and reimbursed expenses from April
1984 to February 1985. A shareholder's actual return for the period
during which waivers and reimbursements were in effect would be the
higher of the two numbers shown.
*** Average annual total return figures shown assume the deduction of the
maximum 4.00% sales charge.
Note: On November 6, 1992, existing shares of the Fund were designated
Class A shares. Class A shares are subject to a maximum 4.00% front-end
sales charge and service fee of 0.15% of the value of the average daily
net assets attributable to that class. The Acquiring Fund's average
annual rates of return would have been lower had service fees been in
effect prior to November 6, 1992.
</TABLE>
<PAGE>36
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF SMITH BARNEY CALIFORNIA
MUNICIPALS FUND INC. VS. LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE AND LEHMAN
BROTHERS MUNICIPAL BOND INDEX*
FEBRUARY 28, 1985 - FEBRUARY 28, 1995
Description of Mountain Chart -- Class A
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on
February 28, 1985 in Class A shares of the Acquiring Fund as compared with the
growth of a $10,000 investment in the Lipper California Municipal Fund Average
and the Lehman Brothers Municipal Bond Index. The plot points used to draw
the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000 Investment in
Growth of $10,000 Investment in the the
Month Invested in Class A Lipper California Lehman Brothers
Ended Shares of the Fund Municipal Fund Average Municipal Bond Index
<S> <C> <C> <C>
02/85 $ 9,600 $10,000 $10,000
03/85 $ 9,688 $10,066 $10,086
06/85 $10,413 $10,846 $10,932
09/85 $10,331 $10,713 $10,768
12/85 $11,104 $11,497 $11,639
03/86 $12,158 $12,531 $12,817
06/86 $12,022 $12,462 $12,738
09/86 $12,545 $13,056 $13,422
12/86 $13,108 $13,599 $13,886
03/87 $13,464 $13,957 $14,222
06/87 $12,701 $13,145 $13,835
09/87 $12,311 $12,690 $13,492
12/87 $12,973 $13,340 $14,095
03/88 $13,377 $13,731 $14,579
06/88 $13,681 $14,016 $14,861
09/88 $14,088 $14,413 $15,241
12/88 $14,533 $14,806 $15,524
03/89 $14,607 $14,919 $15,627
06/89 $15,431 $15,775 $16,553
09/89 $15,444 $15,729 $16,564
12/89 $15,918 $16,256 $17,201
03/90 $15,950 $16,301 $17,277
06/90 $16,304 $16,672 $17,681
09/90 $16,248 $16,562 $17,691
12/90 $17,007 $17,316 $18,455
03/91 $17,233 $17,620 $18,870
06/91 $17,551 $17,988 $19,274
09/91 $18,311 $18,702 $20,024
</TABLE>
<PAGE>37
<TABLE>
<S> <C> <C> <C>
12/91 $18,962 $19,256 $20,696
03/92 $18,882 $19,306 $20,758
06/92 $19,699 $20,058 $21,546
09/92 $20,025 $20,485 $22,120
12/92 $20,480 $20,877 $22,523
03/93 $21,258 $21,735 $23,358
06/93 $22,001 $22,468 $24,123
09/93 $22,672 $23,275 $24,938
12/93 $23,066 $23,500 $25,288
03/94 $22,004 $22,113 $23,899
06/94 $22,220 $22,175 $24,164
09/94 $22,346 $22,282 $24,329
12/94 $21,528 $21,735 $23,980
02/95 $23,510 $23,203 $25,384
<FN>
* Illustration of $10,000 invested in Class A shares on February 28, 1985
assuming deduction of the maximum 4.00% sales charge at the time of
investment and reinvestment of dividends and capital gains at net asset
value through February 28, 1995.
Lipper California Municipal Fund Average - The Lipper California Municipal
Fund Average is composed of an average of the Fund's peer group of mutual
funds (83 as of February 28, 1995) investing in California municipal bonds.
Lehman Brothers Municipal Bond Index - The Lehman Brothers Municipal Bond
Index is a weighted composite which is comprised of more than 15,000 bonds
issued within the last 5 years, having a minimum credit rating of at least
Baa and a maturity of at least 2 years, excluding all bonds subject to the
Alternative Minimum Tax and bonds with floating or zero coupons.
Index information is available at month-end only; therefore the closest
month-end to inception date of the class has been used.
Note: All figures cited here and on the previous page represent past
performance of Class A shares and do not guarantee future results.
</TABLE>
<PAGE>38
<TABLE>
<CAPTION>
Smith Barney California Municipals Fund Inc.
<S> <C> <C> <C> <C> <C> <C>
Historical Performance Class B Shares (unaudited)
Year Ended Net Asset Value Capital Gains Dividends Return of
February 28 Beginning Ending Paid Paid Capital Total Return*
11/6/92-2/28/93 $15.84 $16.70 $0.29 $0.28 $0.01 9.27%
1994 $16.70 $16.15 $0.65 $0.76 -- 5.40%
1995 $16.15 $15.40 $0.19 $0.80 -- 1.89%
Total $1.13 $1.84 $0.01
Cumulative Total Return (11/6/92 through 2/28/95) 17.35%
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the CDSC.
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return** Class B Shares
<S> <C> <C>
Without CDSC With CDSC***
Year Ended 2/28/95 1.89% (2.40)%
Inception 11/6/92 through 2/28/95 7.15% 5.99%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital
gains at net asset value.
*** Average annual total return figures assume the deduction of the maximum
applicable CDSC
which is described in the prospectus.
Note: The Fund began offering Class B shares on November 6, 1992. Class
B shares are subject to a maximum 4.50% CDSC and service and distribution
fees of 0.15% and 0.50%, respectively, of the value of the average daily
net assets attributable to that class.
</TABLE>
<PAGE>39
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. VS.
LIPPER CALIFORNIA MUNICIPAL FUND AVERAGE AND
LEHMAN BROTHERS MUNICIPAL BOND INDEX*
NOVEMBER 6, 1992 - FEBRUARY 10, 1995
Description of Mountain Chart -- Class B
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on
November 6, 1992 in Class B shares of the Acquiring Fund as compared with the
growth of a $10,000 investment in the Lipper California Municipal Fund Average
and the Lehman Brothers Municipal Bond Index. The plot points used to draw
the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000 Investment in
Growth of $10,000 Investment in the the
Month Invested in Class B Lipper California Lehman Brothers
Ended Shares of the Fund Municipal Fund Average Municipal Bond Index
<S> <C> <C> <C>
10/31/92 - $10,000 $10,000
11/06/92 $10,000 - -
11/92 $10,174 $10,270 $10,179
12/92 $10,338 $10,406 $10,283
03/93 $10,718 $10,833 $10,664
06/93 $11,080 $11,199 $11,013
09/93 $11,403 $11,601 $11,385
12/93 $11,588 $11,713 $11,545
03/94 $11,039 $11,022 $10,911
06/94 $11,133 $11,053 $11,032
09/94 $11,181 $11,106 $11,108
12/94 $10,757 $10,834 $10,948
02/95 $11,735** $11,565 $11,589
02/95 $11,443***
</TABLE>
* Illustration of $10,000 invested in Class B shares on March 28, 1988
assuming deduction of the maximum CDSC at the time of investment and
reinvestment of dividends and capital gains at net asset value through
July 31, 1994.
** Value does not assume deduction of applicable CDSC.
*** Value assumes deduction of applicable CDSC (assuming deduction on
February 28, 1995).
Lipper California Municipal Fund Average - The Lipper California Municipal
Fund Average is composed of an average of the Fund's peer group of mutual
funds (83 as of February 28, 1995) investing in California municipal bonds.
Lehman Brothers Municipal Bond Index - The Lehman Brothers Municipal Bond
Index is a weighted composite which is comprised of more than 15,000 bonds
issued within the last 5 years, having a minimum
<PAGE>40
credit rating of at least Baa and a maturity of at least 2 years, excluding
all bonds subject to the Alternative Minimum Tax and bonds with floating or
zero coupons.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
Note: All figures cited here and on the following pages represent past
performance of Class B shares and do not guarantee future results.
<PAGE>41
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Historical Performance Class C Shares (unaudited)
Year Ended Net Asset Value Capital Dividends Total
July 31 Beginning Ending Gains Paid Paid Return*
<S> <C> <C> <C> <C> <C>
11/14/94-2/28/95 $14.19 $15.40 $0.19 $0.23 11.72%
Total $0.19 $0.23
Cumulative Total Return (11/14/94 through 2/28/95) 11.72%
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions
at net asset value and do not assume deduction of the CDSC.
</TABLE>
<TABLE>
<CAPTION>
Aggregate Total Return** -- Class C Shares
Without CDSC With CDSC
Actual Actual***
<S> <C> <C>
Inception 11/14/94 through 2/28/95 11.72% 10.72%
<FN>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the maximum
applicable CDSC.
Note: The Fund began offering Class C shares on November 14,
1994. Class C shares are subject to a maximum 1.00%
CDSC and annual service and distribution fees of 0.15%
and 0.55%, respectively, of the value of the average
daily net assets attributable to that class.
</TABLE>
Performance information is not available for Class Y shares of the
Acquiring Fund because, as of the Record Date, no Class Y shares of the
Acquiring Fund had been sold.
<PAGE>42
INFORMATION ABOUT THE ACQUIRED FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF MARKET CONDITIONS AND
PORTFOLIO REVIEW (THROUGH MARCH 31, 1995).
Market and Economic Overview
Since management's last report to shareholders in November 1994, the
fixed-income markets, and municipal bonds in particular, have enjoyed a
powerful rally. Municipal bond yields have declined more than a full
percentage point, as evidenced by the drop in the average yield on The Bond
Buyer's weekly 25-Bond Revenue Index of 30-year municipal bonds from a high of
7.37% on November 17, 1994 to 6.29% on March 31, 1995. This was substantially
better than the performance of the benchmark 30-year Treasury bond, which
experienced a decline in yield of 70 basis points from 8.13% to 7.43% during
the same time frame.
The vastly improved bond markets reflect a growing consensus that
inflation will remain under control, and the Federal Reserve Board will be
successful in engineering a "soft landing" by slowing the economy down to a
more sustainable, non-inflationary rate of growth. The seven increases in the
federal funds rate (the rate banks charge each other for overnight loans),
orchestrated by the Federal Reserve Board since February 1994, appear to be
slowing the pace of economic growth. Recent economic reports show a slower
rate of increase in employment, producer prices, and retail prices, and retail
sales. Industrial production and capacity utilization were also lower than
expected, signalling a possible slowdown in the country's strong manufacturing
sector. These generally favorable economic fundamentals are more than
offsetting concerns about the substantial decline in the value of the dollar
relative to the Japanese yen and German mark on the foreign exchange markets.
Late in April, several tax-reform proposals which recommend a flat
federal income tax rate began to receive increased attention in the national
financial press and from municipal bond market participants. Adoption of a
flat tax would diminish the advantages of tax exemption for municipal bonds.
Although the various plans being circulated are only proposals, the publicity
surrounding them has recently caused some investors to back away from the
municipal bond market. In management's opinion it is much too early in the
process to predict what changes in the tax laws, if any, will actually take
place, but tax reform will certainly be a major topic of political debate over
the next few years. Many observers believe that the more radical proposals
for changes in the way taxes are collected have little chance for enactment.
Absent these tax-reform concerns, municipals would probably continue
to be strong performers relative to Treasuries and other taxable investments
due to the low supply of new issues. Not only did last year's spike in
interest rates sharply reduce refinancing
<PAGE>43
activity in the municipal market, but voter pressure on states and
municipalities to rein in spending and cut taxes, or at least avoid tax
increases, has also resulted in a roughly 30% decline in new-money financing.
In addition, the universe of existing municipal bonds is shrinking. In 1995,
an estimated $230 billion of older, high-coupon issues will mature or be
called as they reach their first optional call dates. With estimates of new-
issue volume at less than $150 billion, the net reduction in municipal debt
outstanding could approach $100 billion this year, contracting the market by
about eight percent. Ordinarily, a reduction in supply of this magnitude would
be expected to provide a powerful boost for municipal bond values as it did
earlier this year. Uncertainties about various tax proposals, however, will
probably keep municipals from trading any better than their normal
relationship to taxable investment alternatives.
Management would also like to briefly discuss the Orange County,
California financial crisis that forced both the county and its investment
pool to declare bankruptcy late in 1994. The seeds of this situation were
sown in the declining interest-rate environment of prior years. As short-term
interest rates plummeted through late 1993, some market participants, such as
Orange County's investment pool manager, turned to leverage or derivatives as
a way of boosting yields. Leverage is simply the process of borrowing in the
short-term market and investing in longer-term bonds in order to take
advantage of the difference in yield between the two sectors. Derivatives are
securities that have a rate of return that is derived from an underlying asset
or market index. In many cases, the use of derivatives had the same effect as
leverage by allowing investors to magnify returns, but without actually
borrowing money. When short-term rates rebounded, many of these portfolios
suffered serious damage, with Orange County the most prominent example due to
its size and the severity of its losses. Leverage, rather than the use of
derivatives, caused the bulk of the harm that occurred in this situation.
Fortunately, the extent of the problems facing the county and other
participants in its investment pool appear to be virtually unique. While
certain other municipalities experienced losses as a result of higher interest
rates, none of these losses appear to be of sufficient magnitude to create the
risk of default or bankruptcy. However, should Orange County default on
upcoming repayments of short-term notes -- and its disclosed plans for dealing
with this crisis have so far demonstrated a less than forthright willingness
to pay -- there could be serious repercussions for other California local
government issuers and possibly the entire municipal market. In any case, the
California Portfolio did not hold bonds issued by Orange County, and only one
issue held by the California Portfolio (that was not insured or otherwise
credit enhanced) was identified as a pool participant. This solid-waste
system issue represents less than one percent of the Portfolio's assets and is
secured by a separate, ongoing revenue stream that should not be encumbered
because revenue bond payments are not subject to the automatic stay of a
bankruptcy.
<PAGE>44
The California Economy
Economic conditions in California are stronger than they have been
in four years. Nevertheless California was the only state to experience a
rating reduction from the two major rating agencies in 1994. Moody's lowered
its rating from Aa to A1 and Standard & Poor's reduced its rating from A+ to
A. Rating agencies look at both a state's economy and its budget; and
expenditures for social services, although more realistic than in previous
years, are still high in California's current budget proposal.
California Portfolio
The California Portfolio had a total return of 6.47% (Class A
shares) for the fiscal year. That was well above the 5.94% average total
return for all California municipal bond funds over the same period, as
reported by Lipper Analytical Services.
Long-term performance of the Portfolio is also excellent relative to
its peers. The Portfolio's five-year cumulative total return (excluding sales
charge) of 48.62% (Class A shares) substantially outperformed the average
cumulative total return of 44.09% for all California municipal bond funds in
the Lipper survey for the period ended March 31, 1995. It is also noteworthy
that this strong performance over the last five years has been achieved with
the need for only minimal capital gains distributions, an important
consideration for investors interested in after-tax income.
While management has a generally positive outlook for the fixed-
income markets, the size of the rally experienced so far would seem to leave
little room for disappointment, and any sign of a rebound in economic activity
is likely to result in a return to higher interest rates. Management also
believes that the unique supply and demand characteristics of the municipal
market and tax-reform uncertainties will tend to exaggerate price swings
relative to taxable investments.
In light of this viewpoint, management is maintaining a balanced
approach to structuring the interest-rate sensitivity of the Portfolio by
investing in a combination of both long and short effective maturities. Most
long-term municipal bonds are callable prior to their stated maturity date.
When a bond has a coupon higher than prevailing market yields, its maturity is
effectively shortened to the call date for trading purposes because of the
possibility that the issuer will exercise its option to replace the bond with
lower-cost debt. Management is retaining high-coupon bonds that trade well
above their face value for the defensiveness of their shorter effective
maturities and the above-market level of income they provide. However,
management is also focusing on eliminating bonds with shorter call dates when
they are trading near face value. Such bonds have unfavorable performance
characteristics because they retain the downside risk of their longer maturity
if rates should rise, but their appreciation potential is limited by the
shorter call date if interest rates decline.
<PAGE>45
Management is replacing such issues with bonds that have similar stated
maturities but greater call protection.
Although this strategy sacrifices some of the current income being
generated by the Fund, it enhances long-term performance potential if interest
rates continue to decline without adding to downside risk if interest rates
rise. Management believes that positioning the Fund in this manner is the
best way to achieve its objective of the highest tax-free income consistent
with prudent investment risk.
Management's Update (through September 13, 1995).
The fixed-income markets have been rallying in recent weeks in
response to economic reports pointing to slower growth and lower inflation.
This rally has pushed the yield on the benchmark 30-year Treasury bond to the
low end of the 6.5% to 7% range, where it has been trading over the last
several months. After significantly underperforming Treasuries during the
strong rally earlier in the year, long-term municipals have kept pace with 30-
year Treasuries as reflected in the movement in the yield of The Bond Buyer's
25 Revenue Bond Index to 6.16% from its recent peak of 6.44% reached in mid-
August. However, municipal bonds are still quite cheap relative to Treasuries
with long-term single A issues providing over 90% of the yield available on
long-term Treasuries. The primary reason for this historically high
taxable/tax-exempt yield ratio is investor concern over the potential impact
of various highly publicized "flat tax" proposals discussed in management's
last report to shareholders. At these levels management believes that all but
the most radical tax reform proposals have been more than fully discounted,
and that long-term municipals represent excellent value.
While inflation remains quite subdued, and management does not
expect it to accelerate meaningfully from current levels, in management's
opinion, any sign of a rebound in economic activity is likely to result in a
move to higher interest rates over the near term. Management intends to
retain most of the Portfolio's more defensive high-coupon issues for income
purposes but will have a bias toward putting new cash flows to work in non-
callable and lower-coupon bonds in what it believes will be a positive
environment for fixed-income investments over the longer term.
Update on Orange County
A positive development in the Orange County bankruptcy is the
expected vote by the California Legislature on a comprehensive program, backed
by the county and many of its constituencies, that would provide key elements
of the county's debt repayment plan. Anything that demonstrates a commitment
to repaying its debt is good for Orange County and the municipal market as a
whole. Management will continue to monitor the situation closely. The
California Portfolio did not hold any bonds issued by Orange County.
<PAGE>46
The California Economy
The California economy has hit its trough and has now started to
make incremental improvements from a very deep recession. California is
currently rated A1 by Moody's and A (with a stable outlook) from Standard &
Poor's.
<PAGE>47
Smith Barney Muni Funds -- California Portfolio
<TABLE>
<CAPTION>
Historical Performance Class A Shares
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
<S> <C> <C> <C> <C> <C>
3/31/95 $12.27 $12.28 $0.75 $0.00 6.47%
3/31/94 12.78 12.27 0.77 0.03 2.15
3/31/93 12.05 12.78 0.78 0.00 12.93
3/31/92 11.62 12.05 0.80 0.00 11.11
3/31/91 11.47 11.62 0.84 0.00 8.90
3/31/90 11.17 11.47 0.85 0.00 10.44
3/31/89 10.96 11.17 0.86 0.00 10.07
Inception* - 3/31/88 12.50 10.96 0.88 0.00 (5.79)
Total $6.53 $0.03
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class B Shares
Net Asset Value
<S> <C> <C> <C> <C> <C>
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
Inception* - 3/31/95 $11.52 $12.29 $0.28 $0.00 9.18%
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class C Shares
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
<S> <C> <C> <C> <C> <C>
3/31/95 $12.26 $12.28 $0.66 $0.00 5.80%
3/31/94 12.77 12.26 0.68 0.03 1.45
Inception* - 3/31/93 12.46 12.77 0.18 0.00 3.95
Total $1.52 $0.03
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital
gains, if any, annually.
<PAGE>48
Smith Barney Muni Funds -- California Portfolio
<TABLE>
<CAPTION>
Average Annual Total Return
<S> <C> <C> <C>
Without Sales Charge(1)
Class A Class B Class C
Year Ended 3/31/95 6.47% N/A 5.80%
Five Years Ended 3/31/95 8.24 N/A N/A
Inception* through 3/31/95 6.88 9.18 5.02
<CAPTION>
With Sales Charge(2)
Class A Class B Class C
Year Ended 3/31/95 2.22% N/A 4.80%
Five Years Ended 3/31/95 7.36 N/A N/A
Inception* through 3/31/95 6.33 4.68% 5.02
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return
<S> <C>
Without Sales Charge(1)
Class A (Inception* through 3/31/95) 70.16%
Class B (Inception* through 3/31/95) 9.18
Class C (Inception* through 3/31/95) 11.57
<FN>
(1) Assumes reinvestment of all dividends and capital gain distributions at
net asset value and does not reflect deduction of the applicable sales
charge with respect to Class A shares or the applicable CDSC with
respect to Class B and Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at
net asset value. In addition, Class A shares reflect the deduction of
the maximum initial sales charge of 4.00%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed less
than one year from initial purchase. This CDSC declines by 0.50% the
first year after purchase and by 1.00% per year thereafter until no CDSC
is incurred. Class C shares reflect the deduction of a 1.00% CDSC which
applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, Class B and Class C shares are April 3,
1987, November 11, 1994 and January 5, 1993, respectively.
</TABLE>
<PAGE>49
Growth of $10,000 Invested in
Class A Shares of California Portfolio vs.
Lehman Long Bond Index*
(unaudited)
April 1987 - March 1995
Description of Mountain Chart - Class A
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on April
3, 1987 in Class A shares of the Acquired Fund as compared with the growth of
a $10,000 investment in the Lehman Long Bond Index. The plot points used to
draw the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Investment in Growth of $10,000 Investment in
Month Ended March 31 Class A Shares Lehman Long Bond Index
<S> <C> <C>
April 3, 1987 9,600.61 10,000.00
1985 9,394.40 10,165.60
1989 10,307.00 11,126.60
1990 11,350.40 12,337.77
1991 12,324.80 13,298.21
1992 13,657.00 14,805.68
1993 15,383.50 16,967.65
1994 15,677.10 17,156.89
1995 16,666.70 18,706.04
<FN>
* Hypothetical illustration of $10,000 invested in Class A shares at
inception on April 3, 1987, assuming deduction of the maximum 4.00% sales
charge at the time of investment and reinvestment of dividends (after
deduction of applicable sales charges, if any) and capital gains (at net
asset value) through March 31, 1995. The index is unmanaged and is not
subject to the same management and trading expenses of a mutual fund.
The performance of the Portfolio's other classes may be greater or less
than the Class A shares' performance indicated on this chart, depending
on whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
</TABLE>
Performance information is not available for Class Y shares of the
Acquired Fund because, as of the Record Date, no Class Y shares of the
Acquired Fund had been sold.
<PAGE>50
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing investment objectives, policies
and restrictions of the Acquiring Fund and the Acquired Fund is based upon and
qualified in its entirety by the disclosure in the prospectuses of the
Acquiring Fund and the Acquired Fund with respect to the Funds' respective
investment objectives, policies and restrictions. For a full discussion of
these issues as they relate to the Acquiring Fund, refer to the Prospectus of
the Acquiring Fund, which accompanies this Prospectus/Proxy Statement, under
the caption "Investment Objective and Management Policies," and for a
discussion of these issues as they relate to the Acquired Fund, refer to the
Prospectus of the Acquired Fund under the caption "Investment Objectives and
Management Policies."
INVESTMENT OBJECTIVE. The Acquiring Fund and the Acquired Fund have
generally similar investment objectives. The Acquiring Fund seeks to provide
California investors with as high a level of dividend income exempt from
federal income tax and California state personal income tax as is consistent
with prudent investment management and the preservation of capital. The
Acquired Fund seeks to provide as high level of monthly income exempt from
federal income taxes and from California personal income taxes as is
consistent with prudent investing. There can be no assurance that either Fund
will be able to achieve its investment objective. Both the Acquiring Fund's
and the Acquired Fund's investment objectives are considered fundamental
policies which cannot be changed without the affirmative vote of a majority,
as defined in the 1940 Act, of the outstanding voting securities of the
respective Fund, which is the lesser of: (i) 67% of the voting securities of
the Fund present at a meeting of shareholders, if the holders of more than 50%
of the outstanding voting securities of such Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities of such
Fund.
PRIMARY INVESTMENTS. The Acquiring Fund operates subject to an
investment policy providing that, under normal market conditions, it will
invest at least 80% of its net assets in California municipal securities,
which pay interest which is excluded from gross income for federal income tax
purposes and which is exempt from California state personal income tax. Such
obligations are issued to raise money for a variety of public projects, such
as health facilities, housing, airports, schools, highways and bridges. The
Acquiring Fund may invest up to 20% of its net assets in municipal securities
of non-California municipal issuers, the interest on which is excluded from
gross income for federal income tax purposes (not including the possible
applicability of the federal alternative minimum tax), but which is subject to
California state personal income tax. When the Manager believes that market
conditions warrant adoption of a temporary defensive investment posture, the
Acquiring Fund may invest without limit in non-California municipal issuers
and in temporary investments as described below. Similarly, the Acquired Fund
operates subject to a fundamental policy that under normal market conditions
it will seek to invest 100% of its assets, and will invest not less than 80%
of its assets, in municipal
<PAGE>51
obligations the interest on which is exempt from federal income taxes (other
than the alternative minimum tax) and not less than 65% of its assets in
municipal obligations the interest on which is also exempt from California
personal income taxes in the opinion of bond counsel to the issuers. The
Acquired Fund may invest up to 20% of its assets in taxable fixed income
securities, but only in obligations issued or guaranteed by the full faith and
credit of the United States ("U.S. government securities"), and may invest
more than 20% of its assets in U.S. government securities during periods when
in the Manager's opinion a temporary defensive posture is warranted, including
any period when the Acquired Fund's monies available for investment exceed
California's municipal obligations available for purchase that meet the
Acquired Fund's rating, maturity and other investment criteria.
The Acquiring Fund generally will invest at least 80% of its total
assets in investment grade debt obligations rated no lower than Baa, MIG 3 or
Prime-1 by Moody's Investors Services, Inc. ("Moody's") or BBB, SP-2 or A-1 by
Standard & Poor's Corporation ("S&P"), or in unrated obligations of comparable
quality. Unrated obligations will be considered to be of investment grade if
deemed by the Manager to be comparable in quality to instruments so rated, or
if other outstanding obligations of the issuers thereof are rated Baa or
better by Moody's or BBB or better by S&P. The balance of the Acquiring
Fund's assets may be invested in securities rated as low as C by Moody's or D
by S&P, or comparable unrated securities. (These securities are sometimes
referred to as junk bonds.) Securities in the fourth highest rating category,
though considered to be investment grade, have speculative characteristics.
Securities rated as low as D are extremely speculative and are in actual
default of interest and/or principal payments.
Low-rated and comparable unrated securities will likely have some
quality and protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk exposures to
adverse conditions; and are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the securities. While the market values of low-rated and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than the market values of higher-rated securities, the market value of certain
low-rated and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in general economic conditions
than higher-rated securities. In addition, low-rated securities and
comparable unrated securities generally present a higher degree of credit
risk. Issuers of low-rated and comparable unrated securities are often highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their debt obligations during an
economic downturn or during sustained periods of rising interest rates may be
impaired. The risk of loss due to default by such issuers is significantly
greater because low-rated and comparable unrated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. Fixed income securities, including low-rated securities and
comparable unrated securities, frequently have call or buy-back features that
permit their issuers to call or
<PAGE>52
repurchase the securities from the holders, such as the Acquiring Fund. If an
issuer exercises these rights during periods of declining interest rates, the
Acquiring Fund may have to replace the security with a lower yielding
security, thus resulting in a decreased return to the Acquiring Fund.
Municipal bonds purchased by the Acquired Fund must, at the time of
purchase, be investment grade municipal bonds and at least two-thirds of the
Acquired Fund's municipal bonds must be rated in the category of A or better.
Investment grade bonds are those rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P or have an equivalent rating by any nationally recognized
statistical rating organization; pre-refunded bonds escrowed by U.S. Treasury
obligations will be considered AAA rated even though the issuer does not
obtain a new rating. Up to one-third of the assets of the Acquired Fund may
be invested in municipal bonds rated Baa or BBB (this grade, while regarded as
having an adequate capacity to pay interest and repay principal, is considered
to be of medium quality and has speculative characteristics; in addition,
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than is the
case with higher grade bonds) or in unrated municipal bonds if, based upon
credit analysis by the Manager, it is believed that such securities are at
least of comparable quality to those securities in which the Acquired Fund may
invest. After the Acquired Fund purchases a municipal bond, the issuer may
cease to be rated or its rating may be reduced below the minimum required for
purchase. Such an event would not require the elimination of the issue from
the Acquired Fund's portfolio but the Manager will consider such an event in
determining whether the Acquired Fund should continue to hold the security.
The Acquired Fund's short-term municipal obligations will be limited to high
grade obligations (obligations that are secured by the full faith and credit
of the United States or rated MIG1 or MIG2, VMIG1 or VMIG2 or Prime-1 or Aa or
better by Moody's or SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or have
an equivalent rating by any nationally recognized statistical rating
organization or obligations determined by the Manager to be equivalent).
Among the types of short-term instruments in which the Acquired Fund may
invest are floating or variable rate term demand instruments, tax-exempt
commercial paper (generally having a maturity of less than nine months), and
other types of notes generally having maturities of less than three years,
such as Tax Anticipation Notes, Revenue Anticipation Notes, Tax and Revenue
Anticipation Notes and Bond Anticipation Notes. Demand instruments usually
have an indicated maturity of more than one year, but contain a demand feature
that enables the holder to redeem the investment on no more than 30 days'
notice; variable rate demand instruments provide for automatic establishment
of a new interest rate on set dates; floating rate demand instruments provide
for automatic adjustment of their interest rates whenever some other specified
interest rate changes (e.g., the prime rate). The Acquired Fund may purchase
participation interests ("Participations") in variable rate tax-exempt
securities (such as Industrial Development Bonds) owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank that the Manager has determined meets the prescribed
quality standards for the
<PAGE>53
Acquired Fund. Participations will be purchased only if management believes
interest income on such Participations will be tax-exempt when distributed as
dividends to shareholders.
Each Fund's average weighted maturity will vary from time to time
based on the judgment of the Manager. The Acquiring Fund intends to focus on
intermediate- and long-term obligations, that is, obligations with remaining
maturities at the time of purchase of between three and twenty years. The
average maturity of the Acquired Fund's bonds will typically range between
five and thirty years.
The Acquiring Fund may invest without limit in municipal leases,
which generally are participations in intermediate- and short-term debt
obligations issued by municipalities consisting of leases or installment
purchase contracts for property or equipment. Although lease obligations do
not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily
backed by the municipality's covenant to budget for, appropriate and make the
payments due under the lease obligation. However, certain lease obligations
contain non-appropriation clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. In addition
to the non-appropriation risk, these securities represent a relatively new
type of financing that has not yet developed the depth of marketability
associated with more conventional bonds. Although non-appropriation lease
obligations are often secured by the underlying property, disposition of the
property in the event of foreclosure might prove difficult. There is no
limitation on the percentage of the Acquiring Fund's assets that may be
invested in municipal lease obligations. The Acquired Fund does not have an
expressed position with respect to investing in municipal leases.
Each Fund may invest without limits in private activity bonds.
Interest income on certain types of private activity bonds issued after August
7, 1986 to finance non-governmental activities is a specific tax preference
item for purposes of the federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be subject to a federal
alternative minimum tax to the extent that a Fund's dividends are derived from
interest on those bonds. Dividends derived from interest income on California
municipal securities are a component of the "current earnings" adjustment item
for purposes of the federal corporate alternative minimum tax. The Acquiring
Fund may invest without limit in debt obligations that are repayable out of
revenue streams generated from economically related projects or facilities or
debt obligations whose issuers are located in the same state. Sizable
investments in such obligations could involve an increased risk to the
Acquiring Fund should any of the related projects or facilities experience
financial difficulties.
Each Fund is classified as a non-diversified investment company
under the 1940 Act, which means that the Fund is not limited by the 1940 Act
in the proportion of its
<PAGE>54
assets that it may invest in the obligations of a single issuer. Each Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Code, which will relieve the Fund of
any liability for federal income tax and California state franchise tax to the
extent its earnings are distributed to shareholders. To so qualify, among
other requirements, each Fund will limit its investments so that, at the close
of each quarter of the taxable year, (a) not more than 25% of the market value
of such Fund's total assets will be invested in the securities of a single
issuer and (b) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer.
California Municipal Securities. The two principal classifications
of California municipal securities are "general obligation bonds" and "revenue
bonds." General obligation bonds are secured by the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special
excise tax or other specific revenue source, but not from the general taxing
power. Sizeable investments in such obligations could involve an increased
risk to the Fund should any of such related facilities experience financial
difficulties. In addition, certain types of private activity bonds issued by
or on behalf of public authorities to obtain funds for privately operated
facilities are included in the term California municipal securities, provided
the interest paid thereon qualifies as excluded from gross income for federal
income tax purposes and as exempt from California state personal income tax.
Private activity bonds are in most cases revenue bonds and generally do not
carry the pledge of the credit of the issuing municipality.
In attempting to achieve its investment objective, the Funds may
employ, among others, the following portfolio strategies:
When-Issued Securities. New issues of California municipal
securities (and other tax-exempt obligations) frequently are offered on a
when-issued basis, which means that delivery and payment for such securities
normally take place within 45 days after the date of the commitment to
purchase. Each Fund will not accrue income with respect to a when-issued
security prior to its stated delivery date. When-issued securities may
decline or appreciate in value before their actual delivery to a Fund. Each
Fund will establish a segregated account with the Fund's custodian consisting
of cash, U.S. government securities or other high grade debt obligations in an
amount equal to the purchase price of the Fund's when-issued commitments. A
Fund generally will make commitments to purchase California municipal
securities (and other tax-exempt obligations) on a when-issued basis only with
the intention of actually acquiring the securities, but the Fund may sell such
securities before the delivery date if it is deemed advisable.
<PAGE>55
Temporary Investments. Under normal market conditions, the
Acquiring Fund may hold up to 20% of its total assets in cash or money market
instruments, including taxable money market instruments ("Temporary
Investments"). In addition, when the Manager believes that market conditions
warrant, including when acceptable California municipal securities are
unavailable, the Acquiring Fund may take a temporary defensive posture and
invest without limitation in Temporary Investments. Securities eligible for
short-term investment by the Acquiring Fund under such circumstances are tax-
exempt notes of municipal issuers having, at the time of purchase, a rating
within the three highest grades of Moody's or S&P or, if not rated, having an
issue of outstanding debt securities rated within the three highest grades of
Moody's or S&P, and certain taxable short-term instruments having quality
characteristics comparable to those for tax-exempt investments. Since the
commencement of its operations, the Acquiring Fund has not found it necessary
to invest in taxable Temporary Investments and it is not expected that such
action will be necessary. Similarly, the Acquired Fund may invest up to 20%
of its assets in taxable fixed income securities, but only in U.S. government
securities, and may invest more than 20% of its assets in U.S. government
securities during periods when in the Manager's opinion a temporary defensive
posture is warranted, including any period when the Acquired Fund's monies
available for investments exceed California's municipal obligations available
for purchase that meet the Acquired Fund's rating, maturity and other
investment criteria. To the extent a Fund holds Temporary Investments, it may
not achieve its investment objective.
Financial Futures and Options Transactions. The Acquiring Fund may
enter into financial futures contracts and invest in options on financial
futures contracts that are traded on a domestic exchange or board of trade.
Such investments, if any, by the Acquiring Fund will be made solely for the
purpose of hedging against the changes in the value of its portfolio
securities due to anticipated changes in interest rates and market conditions
and where the transactions are economically appropriate to the reduction of
risks inherent in the management of the Acquiring Fund. The futures contracts
or options on futures contracts that may be entered into by the Acquiring Fund
will be restricted to those that are either based on a municipal bond index or
related to debt securities, the prices of which are anticipated by the Manager
to correlate with the prices of the California municipal securities owned or
to be purchased by the Acquiring Fund. Regulations of the Commodity Futures
Trading Commission applicable to the Acquiring Fund (and the Acquired Fund)
require that its transactions in financial futures contracts and options on
financial futures contracts be engaged in for bona fide hedging purposes, or
if the Fund enters into futures contracts for speculative purposes, that the
aggregate initial margin deposits and premiums paid by the Fund will not
exceed 5% of the market value of its assets. In addition, the Acquiring
Fund's ability to trade in financial futures contracts and options on
financial futures contracts may be limited to some extent by the requirements
of the Code, applicable to a regulated investment company, that are described
in the accompanying Prospectus of the Acquiring Fund under "Dividends,
Distributions and Taxes."
<PAGE>56
The Acquired Fund may also invest in municipal bond index futures
contracts (currently traded on the Chicago Board of Trade) or in listed
contracts based on U.S. government securities as a hedging policy in pursuit
of its investment objective; provided that immediately thereafter not more
than 33-1/3% of its net assets would be hedged or the amount of margin
deposits on the Acquired Fund's net assets would not exceed 5% of the value of
its total assets. Since any income would be taxable, it is anticipated that
such investments would be made only in those circumstances when the Manager
anticipates the possibility of an extreme change in interest rates or in
market conditions but does not wish to liquidate the Acquired Fund's
securities.
Lending of Portfolio Securities. The Acquiring Fund has the ability
to lend securities from its portfolio to brokers, dealers and other financial
organizations. Such loans, if and when made, may not exceed 20% of the
Acquiring Fund's total assets, taken at value. Loans of portfolio securities
by the Fund will be collateralized by cash, letters of credit or U.S.
government securities which are maintained at all times in an amount equal to
at least 100% of the current market value (determined by marking to market
daily) of the loaned securities. The Acquired Fund does not have an expressed
policy regarding lending of portfolio securities. The risks in lending
portfolio securities consist of possible delays in receiving additional
collateral or in recovery of the securities or possible loss of rights in
collateral should the borrower fail financially. Loans will not be made
unless, in the judgment of the Manager, the consideration to be earned from
such loans would justify the risk.
Illiquid Securities. The Acquired Fund will not invest more than
10% of its net assets in illiquid securities, including those that are not
readily marketable or for which there is no established market. The Acquiring
Fund adheres to an operating policy of not investing more than 15% of its net
assets in illiquid securities.
INVESTMENT RESTRICTIONS. Each Fund has adopted the following
investment restrictions for the protection of shareholders. These
restrictions may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the voting securities of the Fund.
1. The Acquiring Fund may not issue senior securities, as defined
in the 1940 Act and the rules and orders thereunder, except insofar as the
Acquiring Fund may be deemed to have issued senior securities by reason
of borrowing money or purchasing securities on a when-issued or delayed-
delivery basis, purchasing or selling futures contracts and options on futures
contracts and other similar instruments, and issuing separate classes of
shares. The Acquired Fund does not have a similar investment restriction.
2. The Acquiring Fund may not invest more than 25% of its total
assets in securities of issuers in the same industry. For purposes of this
limitation, U.S. government
<PAGE>57
securities and securities of state or municipal governments and their
political subdivisions are not considered to be issued by members of any
industry. Similarly, the Acquired Fund may not invest more than 25% of its
total assets taken at market value in any one industry, except that municipal
obligations and securities of the U.S. government, its agencies and
instrumentalities, and California municipal obligations are not considered an
industry for purposes of this limitation.
3. Neither Fund may borrow money, except that a Fund may borrow
from banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise require the untimely
disposition of securities, in an amount not exceeding 10% of the value of the
respective Fund's total assets (including, in the case of the Acquiring Fund,
the amount borrowed) valued at market less liabilities (not including the
amount borrowed) at the time the borrowing is made. Whenever borrowings
exceed 5% of the value of a Fund's total assets, such Fund will not make any
additional investments. The Acquired Fund is further prohibited from
mortgaging or pledging its assets, except to secure borrowing permitted by the
previous sentence.
4. Neither Fund may make loans. For the Acquiring Fund, this
restriction does not apply to the purchase of the debt obligations in which
the Fund may invest consistent with its investment objective and policies,
repurchase agreements, and loans of its portfolio securities. For the
Acquired Fund, this restriction does not apply to the purchase of bonds or
other evidences of indebtedness, the entry into repurchase agreements or
deposits with banks, including the Acquired Fund's custodian.
5. The Acquiring Fund may not engage in the business of
underwriting securities issued by other persons, except to the extent that the
Acquiring Fund may technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of portfolio securities.
Similarly, the Acquired Fund may not underwrite the securities of other
issuers.
6. The Acquiring Fund may not purchase or sell real estate, real
estate mortgages, real estate investment trust ("REIT") securities,
commodities or commodity contracts, but this shall not prevent the Acquiring
Fund from investing in securities of issuers engaged in the real estate
business and securities which are secured by real estate or interests therein,
holding or selling real estate received in connection with securities it
holds, or trading in futures contracts and options on futures contracts. The
Acquired Fund may not purchase or hold any real estate, except that it may
invest in securities secured by real estate or interests therein or issued by
persons (other than REITs) which deal in real estate or interests therein, and
may not purchase or sell commodities and commodity contracts, except that it
may invest in or sell municipal bond futures index contracts, provided
immediately thereafter not more than 33-1/3% of its net assets would be hedged
or the amount of margin
<PAGE>58
deposits on the Acquired Fund's existing futures contracts would not exceed 5%
of the value of its total assets.
7. Neither Fund may purchase any securities on margin (except, in
the case of the Acquiring Fund, for such short-term credits as are necessary
for the clearance of purchases and sales of portfolio securities) or sell any
securities short (except, in the case of the Acquiring Fund, against the box).
For purposes of this restriction, the deposit or payment by the Acquiring Fund
of initial maintenance margin in connection with futures contracts and related
options and options on securities is not considered to be the purchase of a
security on margin.
8. The Acquired Fund will not invest more than 10% of its net
assets in illiquid securities, including those that are not readily marketable
or for which there is no established market. The Acquiring Fund may not
purchase or otherwise acquire any security if, as a result, more than 15% of
its net assets would be invested in securities that are illiquid. This is not
a fundamental investment restriction with respect to the Acquiring Fund and
may be changed by the Acquiring Fund's Board of Directors at any time.
9. The Acquired Fund may not write or purchase put, call, straddle
or spread options. The Acquiring Fund may not engage in the purchase or sale
of put, call, straddle or spread options or in the writing of such options,
except that the Fund may purchase and sell options on interest rate futures
contracts. This is not a fundamental investment restriction with respect to
the Acquiring Fund and may be changed by the Acquiring Fund's Board of
Directors at any time.
Other Non-Fundamental Investment Restrictions
1. The Acquiring Fund may not invest more than 5% of the value of
its total assets in the securities of issuers having a record, including
predecessors, of less than three years of continuous operation, except U.S.
government securities. This is not a fundamental investment restriction and
may be changed by the Acquiring Fund's Board of Directors at any time. For
purposes of this restriction, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and originators of
underlying assets. Similarly, as a matter of operating policy, the Acquired
Fund will not invest more than 5% of its assets in unseasoned issuers,
including their predecessors, which have been in operation for less than three
years.
2. The Acquiring Fund may not invest in companies for the purpose
of exercising control. This is not a fundamental investment restriction and
may be changed by the Acquiring Fund's Board of Directors at any time. The
Acquired Fund does not have a similar investment restriction.
<PAGE>59
3. The Acquiring Fund may not invest in securities of other
investment companies, except as they may be acquired as part of a merger,
consolidation or acquisition of assets. This is not a fundamental investment
restriction and may be changed by the Acquiring Fund's Board of Directors at
any time. The Acquired Fund does not have a similar investment restriction.
4. The Acquired Fund, as a matter of operating policy, will not
purchase oil, gas, or other mineral leases, rights or royalty contracts or
exploration or development programs, except that the Acquired Fund may invest
in the securities of issuers which operate, invest in, or sponsor such
programs. The Acquiring Fund may not purchase or sell oil and gas interests.
This is not a fundamental investment restriction with respect to the Acquiring
Fund and may be changed by the Acquiring Fund's Board of Directors at any
time.
INFORMATION ON SHAREHOLDERS' RIGHTS
General. The Acquiring Fund and Smith Barney Muni Funds are open-
end, management investment companies registered under the 1940 Act, which
continuously offer to sell shares at their current net asset value. The
Acquiring Fund is a Maryland corporation which was incorporated on February
17, 1984 and is governed by its Articles of Incorporation, By-Laws and Board
of Directors. The Acquired Fund is a series of Smith Barney Muni Funds, which
was organized on August 14, 1985 under the laws of the Commonwealth of
Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." Smith Barney Muni Funds is governed by its Declaration of
Trust, By-Laws and Trustees. Each Fund is also governed by applicable state
and federal law. The Acquiring Fund has an authorized capital of 500,000,000
shares of common stock with a par value of $.01 per share. The beneficial
interest in the Acquired Fund is divided into shares, all with a par value of
$.001 per share. The number of authorized shares of Smith Barney Muni Funds
that may be issued is unlimited. The Trustees of Smith Barney Muni Funds have
authorized the issuance of twenty series of shares, each representing shares
in one of twenty separate portfolios, and may authorize the issuance of
additional series of shares in the future. In both the Acquiring Fund and the
Acquired Fund, Class A shares, Class B shares and Class C shares represent
interests in the assets of the Fund and have identical voting, dividend,
liquidation and other rights on the same terms and conditions except that
expenses related to the distribution of each class of shares are borne solely
by each class and each class of shares has exclusive voting rights with
respect to provisions of each Fund's Rule 12b-1 distribution plan which
pertains to a particular class. Notwithstanding the foregoing, Class B shares
of either Fund will convert automatically to Class A shares of such Fund,
based upon relative net asset value, eight years after the date of the
original purchase of such shares. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain
portion of Class B shares that
<PAGE>60
have been acquired through reinvestment of dividends and distributions will be
converted to Class A shares of the respective Fund at that time.
Directors/Trustees. The By-Laws of the Acquiring Fund provide that
Directors shall be elected by written ballot at any meeting of shareholders
held for that purpose, and the term of office of each director shall be from
the time of his or her election and qualification until his or her successor
shall have been elected and shall have qualified or until his death,
resignation or removal, or as otherwise provided by law. The Declaration of
Trust of Smith Barney Muni Funds provides that the term of office of each
Trustee shall be from the time of his or her election until the termination of
the Trust or until such Trustee sooner dies, resigns or is removed. Any
Director of the Acquiring Fund may be removed by the vote of at least a
majority of votes then entitled to be cast for the election of Directors. A
Trustee of Smith Barney Muni Funds may be removed with cause by written
instrument, signed by at least two-thirds of the remaining Trustees.
Vacancies on the Boards of either the Acquiring Fund or Smith Barney Muni
Funds may be filled by the Directors or Trustees, as the case may be,
remaining in office. A meeting of shareholders will be required for the
purpose of electing additional Directors or Trustees whenever fewer than two-
thirds of the Directors of the Acquiring Fund or a majority of the Trustees of
Smith Barney Muni Funds then in office were elected by shareholders.
Voting Rights. Neither the Acquiring Fund nor the Acquired Fund
holds a meeting of shareholders annually, and there normally is no meeting of
shareholders for the purpose of electing Directors/Trustees unless and until
such time as less than two-thirds of the Directors or a majority of the
Trustees holding office have been elected by shareholders. A meeting of
shareholders of the Acquired Fund or the Acquiring Fund, for any purpose, must
be called upon the written request of shareholders holding at least 25% of
such Fund's outstanding shares, except that a meeting of shareholders of the
Acquiring Fund for the purpose of removal of a Director must be called upon
the written request of shareholders holding at least 10% of the Acquiring
Fund's outstanding shares. On each matter submitted to a vote of the
shareholders of the Acquired Fund or the Acquiring Fund, each shareholder is
entitled to one vote for each whole share owned and a proportionate,
fractional vote for each fractional share outstanding in the shareholder's
name on the Fund's books. With respect to the Acquiring Fund, a majority of
the votes cast on an action at a shareholder meeting at which a quorum is
present shall decide any questions except when a different vote is required or
permitted by any provision of the 1940 Act or other applicable law or as may
otherwise be set forth in the Acquiring Fund's organizational documents, or in
cases where the vote is submitted to the holders of one or more but not all
classes, a majority of the votes cast of the particular class affected by the
matter shall decide such matter. With respect to matters relating to Smith
Barney Muni Funds requiring a majority shareholder vote as described in the
Declaration of Trust, a majority of shares represented in person or by proxy
and entitled to vote at a meeting of shareholders at which a quorum is present
shall decide such matter. In cases where the vote is submitted to the holders
of one or more but not all
<PAGE>61
series or classes, a majority of the outstanding shares of the particular
series or class affected by the matter shall decide such matter.
Liquidation or Dissolution. In the event of the liquidation or
termination of any of the portfolios of Smith Barney Muni Funds or the
liquidation or dissolution of the Acquiring Fund, the shareholders of the
respective Fund are entitled to receive, when, and as declared by the Trustees
or Directors, as the case may be, the excess of the assets over the
liabilities belonging to the liquidated or terminated portfolio of Smith
Barney Muni Funds or the liquidated or dissolved Acquiring Fund, as the case
may be. The assets so distributed to shareholders of Smith Barney Muni Funds
will be distributed among the shareholders in proportion to the number of
shares of the particular class held by them and recorded on the books of the
liquidated or terminated portfolio of the Smith Barney Muni Funds. The assets
so distributed to shareholders of the Acquiring Fund will be distributed among
the shareholders in proportion to the number of shares of the particular class
held by them and recorded on the books of the Acquiring Fund.
Liability of Directors/Trustees. The Articles of Incorporation of
the Acquiring Fund provide that the Directors and officers shall not be liable
for monetary damages as a Director or officer, except to the extent such
exemption is not permitted by law. The Acquiring Fund's By-Laws further
provide that the Acquiring Fund shall indemnify each Director and officer to
the fullest extent permitted by Maryland General Corporation Law. Under the
Declaration of Trust and By-Laws of the Smith Barney Muni Funds, a Trustee
will be personally liable only for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee. The Declaration of Trust further provides
that Trustees and officers will be indemnified for the expenses of litigation
against them unless it is determined that the person did not act in good faith
in the reasonable belief that the person's actions were in or not opposed to
the best interest of the Smith Barney Muni Funds or the person's conduct is
determined to constitute willful misfeasance, bad faith, gross negligence or
reckless disregard of the person's duties.
Rights of Inspection. Maryland law permits any shareholder of the
Acquiring Fund or any agent of such shareholder to inspect and copy during the
Acquiring Fund's usual business hours the Acquiring Fund's By-Laws, minutes of
shareholder proceedings, annual statements of the Acquiring Fund's affairs and
voting trust agreements on file at its principal office. Shareholders of
Smith Barney Muni Funds have the same inspection rights as are permitted
shareholders of a Massachusetts corporation under Massachusetts corporate law.
Currently, each shareholder of a Massachusetts corporation is permitted to
inspect the records, accounts and books of a corporation for any legitimate
business purpose.
Shareholder Liability. Under Maryland law, the Acquiring Fund's
shareholders do not have personal liability for the Acquiring Fund's corporate
acts and
<PAGE>62
obligations. Shares of the Acquiring Fund issued to the shareholders of the
Acquired Fund in the Reorganization will be fully paid and nonassessable when
issued, transferable without restrictions and will have no preemptive rights.
Under Massachusetts law, shareholders of the Acquired Fund may, under certain
circumstances, be held personally liable for the obligations of the Acquired
Fund. Smith Barney Muni Funds' Declaration of Trust, however, disclaims
shareholder liability for acts or obligations of the Acquired Fund and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Fund. The Declaration of Trust
also provides indemnification out of the property of the Acquired Fund for all
losses and expenses of any shareholder held personally liable for the
obligations of the Acquired Fund.
The foregoing is only a summary of certain characteristics of the
operations of the Acquiring Fund and the Acquired Fund. The foregoing is not
a complete description of the documents cited. Shareholders should refer to
the provisions of the corporate documents or trust documents and state laws
governing each Fund for a more thorough description.
ADDITIONAL INFORMATION ABOUT
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
AND
SMITH BARNEY MUNI FUNDS
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. Information about the
Acquiring Fund is incorporated herein by reference from its current Prospectus
dated April 29, 1995, as supplemented by Prospectus Supplements dated May 25,
1995, July 11, 1995, July 15, 1995 and July 20, 1995 and its Statement of
Additional Information dated April 29, 1995 as supplemented on July 11, 1995.
A copy of such Prospectus accompanies this Prospectus/Proxy Statement and a
copy of the Statement of Additional Information is available upon request and
without charge by writing to the Acquiring Fund at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling (800) 224-7523.
SMITH BARNEY MUNI FUNDS. Information about the Acquired Fund is
incorporated by reference from its current Prospectus dated November 7, 1994,
as supplemented by a Prospectus Supplement dated July 26, 1995, and Smith
Barney Muni Fund's Statement of Additional Information dated July 31, 1995.
A copy of such Prospectus and Statement of Additional Information is available
upon request and without charge by writing to the Acquired Fund at the address
listed on the cover page of this Prospectus/Proxy Statement or by calling
(800) 224- 7523.
<PAGE>63
Both the Acquiring Fund and Smith Barney Muni Funds are subject to
the informational requirements of the Exchange Act and in accordance therewith
file reports and other information including proxy material, reports and
charter documents with the SEC. These materials can be inspected and copies
obtained at the Public Reference Facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the New York Regional Office of
the SEC at 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can also be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services, SEC,
Washington, D.C. 20549 at prescribed rates.
OTHER BUSINESS
The Trustees of Smith Barney Muni Funds do not intend to present any
other business at the Meeting. If, however, any other matters are properly
brought before the Meeting, the persons named in the accompanying form of
proxy will vote thereon in accordance with their judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of Smith Barney Muni Funds to
be used at the Special Meeting of Shareholders of the Acquired Fund to be held
at 3:30 p.m. on November 14, 1995, at 388 Greenwich Street, New York, New York
10013 and at any adjournment or adjournments thereof. This Prospectus/Proxy
Statement, along with a Notice of the Meeting and a proxy card, is first being
mailed to shareholders of the Acquired Fund on or about October 26, 1995.
Only shareholders of record as of the close of business on the Record Date
will be entitled to notice of, and to vote at, the Meeting or any adjournment
thereof. The holders of one-third of the shares of the Acquired Fund
outstanding at the close of business on the Record Date present in person or
represented by proxy will constitute a quorum for the Meeting. For purposes
of determining a quorum for transacting business at the Meeting, abstentions
and broker "non-votes" (that is, proxies from brokers or nominees indicating
that such persons have not received instructions from the beneficial owner or
other persons entitled to vote shares on a particular matter with respect to
which the brokers or nominees do not have discretionary power) will be treated
as shares that are present but which have not been voted. For this reason,
abstentions and broker non-votes will have the effect of a "no" vote for
purposes of obtaining the requisite approval of the Plan. If the enclosed
form of proxy is properly executed and returned in time to be voted at the
Meeting, the proxies named therein will vote the shares represented by the
proxy in accordance with the instructions marked thereon. Unmarked proxies
will be voted FOR approval of the proposed Reorganization and FOR approval of
any other matters deemed appropriate. A proxy may be revoked at any time on
or before the Meeting by written notice to the
<PAGE>64
Secretary of the Acquired Fund, Christina T. Sydor, Esq., 388 Greenwich
Street, New York, New York 10013. Unless revoked, all valid proxies will be
voted in accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding shares of the
Acquired Fund, which is the lesser of: (i) 67% of the voting securities of the
Acquired Fund present at the Meeting, if the holders of more than 50% of the
outstanding voting securities of the Acquired Fund are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities of the
Acquired Fund. Shareholders of Class A, Class B and Class C shares of the
Acquired Fund will vote together as a single class. Shareholders of the
Acquired Fund are entitled to one vote for each share. Fractional shares are
entitled to proportional voting rights.
Proxy solicitations will be made primarily by mail, but proxy
solicitations also may be made by telephone, telegraph or personal interviews
conducted by officers and employees of Smith Barney and its affiliates and/or
by TSSG. In addition, Applied Mailing Systems, Inc., an affiliate of TSSG
("Applied Mailing"), or an agent of Applied Mailing, may call shareholders to
ask if they would be willing to have their votes recorded by telephone. The
latter telephone voting procedure is designed to authenticate the shareholder's
identity by asking the shareholder to provide his or her social security
number (in the case of an individual) or taxpayer identification number (in
the case of an entity). The shareholder's telephone vote will be recorded and
a confirmation will be sent to the shareholder to ensure that the vote has
been taken in accordance with the shareholder's instructions. Although a
shareholder's vote may be taken by telephone, each shareholder will receive a
copy of this Prospectus/Proxy Statement and may vote by mail using the
enclosed proxy card. The Acquired Fund has been advised by Massachusetts
counsel that this telephonic voting system complies with Massachusetts law.
The aggregate cost of solicitation of the shareholders of the Acquired Fund is
expected to be approximately $4,350. Expenses of the Reorganization,
including the costs of the proxy solicitation and the preparation of
enclosures to the Prospectus/Proxy Statement, reimbursement of expenses of
forwarding solicitation material to beneficial owners of shares of the
Acquired Fund and expenses incurred in connection with the preparation of this
Prospectus/Proxy Statement will be borne by the Acquiring Fund and the
Acquired Fund in proportion to their assets.
In the event a quorum necessary for a shareholders meeting is not
present or that sufficient votes to approve the Reorganization are not
received by November 14, 1995, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the
information to be
<PAGE>65
provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at
the Meeting. The persons named as proxies will vote upon a decision to
adjourn the Meeting.
The votes of the shareholders of the Acquiring Fund are not being
solicited by this Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The statement of assets and liabilities of the Acquired Fund,
including the schedule of investments, as of March 31, 1995, the related
statement of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended and the
financial highlights for each of the years in the five-year period then ended,
have been incorporated by reference into this Prospectus/Proxy Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent accountants,
given on the authority of such firm as experts in accounting and auditing.
The statement of assets and liabilities of the Acquiring Fund, including the
schedule of investments, as of February 28, 1995, the related statement of
operations for the year then ended, the statements of changes in net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the ten-year period then ended, have been
incorporated by reference into this Prospectus/Proxy Statement in reliance
upon the report of Coopers & Lybrand L.L.P., independent accountants, and upon
the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the
Acquiring Fund will be passed upon by Willkie Farr & Gallagher, One Citicorp
Center, 153 East 53rd Street, New York, New York 10022. In rendering such
opinion, Willkie Farr & Gallagher may rely on an opinion of Venable, Baetjer
and Howard, LLP as to certain matters under Maryland law.
THE BOARD OF TRUSTEES OF THE SMITH BARNEY MUNI FUNDS, INCLUDING THE
INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS APPROVAL OF THE PLAN, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR
OF APPROVAL OF THE PLAN.
<PAGE>66
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this 23rd day of October, 1995, by and between Smith Barney California
Municipals Fund Inc., a Maryland corporation with its principal place of
business at 388 Greenwich Street, New York, New York 10013 (the "Acquiring
Fund"), and Smith Barney Muni Funds, a Massachusetts business trust, with its
principal place of business at 388 Greenwich Street, New York, New York 10013,
on behalf of its California Portfolio (the "Acquired Fund").
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of
the United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of all or
substantially all of the assets of the Acquired Fund in exchange for Class A,
Class B and Class C shares of common stock of the Acquiring Fund
(collectively, the "Acquiring Fund Shares" and each, an "Acquiring Fund
Share") and the assumption by the Acquiring Fund of scheduled liabilities of
the Acquired Fund and the distribution, after the Closing Date herein referred
to, of Acquiring Fund Shares to the shareholders of the Acquired Fund in
liquidation of the Acquired Fund and termination of the Acquired Fund, all
upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquiring Fund and Smith Barney Muni Funds are
registered investment companies of the management type and the Acquired Fund
owns securities that generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Acquiring Fund is authorized to issue shares of common
stock and Smith Barney Muni Funds is authorized to issue shares of beneficial
interest in respect of its sub-trusts;
WHEREAS, the Board of Trustees of Smith Barney Muni Funds has
determined that the exchange of all or substantially all of the assets and
scheduled liabilities of the Acquired Fund for Acquiring Fund Shares and the
assumption of such liabilities by the Acquiring Fund is in the best interests
of the Acquired Fund's shareholders and that the interests of the existing
shareholders of the Acquired Fund would not be diluted as a result of this
transaction;
WHEREAS, the Board of Directors of the Acquiring Fund has determined
that the exchange of all or substantially all the assets and scheduled
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption
of such liabilities by the Acquiring Fund is in the best interests of the
Acquiring Fund's shareholders and that the interests of the
<PAGE>67
existing shareholders of the Acquiring Fund would not be diluted as a result
of this transaction.
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter set forth, the parties hereto covenant
and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ACQUIRING FUND
SHARES AND ASSUMPTION OF SCHEDULED LIABILITIES OF THE ACQUIRED FUND AND
LIQUIDATION AND TERMINATION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on
the basis of the representations and warranties contained herein, Smith Barney
Muni Funds agrees on behalf of the Acquired Fund to transfer the Acquired
Fund's assets as set forth in paragraph 1.2 to the Acquiring Fund, and the
Acquiring Fund agrees in exchange therefor: (i) to deliver to the Acquired
Fund the number of Class A Acquiring Fund Shares, including fractional Class A
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets attributable to its Class A shares, computed in the manner and as
of the time and date set forth in paragraph 2.1, by the net asset value of one
Class A Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; (ii) to deliver to the Acquired Fund the
number of Class B Acquiring Fund Shares, including fractional Class B
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets attributable to its Class B shares, computed in the manner and as
of the time and date set forth in paragraph 2.1, by the net asset value of one
Class B Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; (iii) to deliver to the Acquired Fund the
number of Class C Acquiring Fund Shares, including fractional Class C
Acquiring Fund Shares, determined by dividing the value of the Acquired Fund's
net assets attributable to its Class C shares, computed in the manner and as
of the time and date set forth in paragraph 2.1, by the net asset value of one
Class C Acquiring Fund Share, computed in the manner and as of the time and
date set forth in paragraph 2.2; and (iv) to assume scheduled liabilities of
the Acquired Fund, as set forth in paragraph 1.3. Such transactions shall
take place at the closing provided for in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired Fund to be acquired by the
Acquiring Fund shall consist of all or substantially all property, including,
without limitation, all cash, securities and dividends or interest receivables
which are owned by the Acquired Fund and any deferred or prepaid expenses
shown as an asset on the books of the Acquired Fund on the closing date
provided in paragraph 3.1 (the "Closing Date").
(b) The Acquired Fund has provided the Acquiring Fund with a
list of all of the Acquired Fund's assets as of the date of execution of this
Agreement. The
<PAGE>68
Acquired Fund reserves the right to sell any of these securities but will not,
without the prior approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest. The Acquiring Fund will, within a reasonable time prior
to the Closing Date, furnish the Acquired Fund with a statement of the
Acquiring Fund's investment objectives, policies and restrictions and a list
of the securities, if any, on the Acquired Fund's list referred to in the
first sentence of this paragraph which do not conform to the Acquiring Fund's
investment objectives, policies and restrictions. In the event that the
Acquired Fund holds any investments which the Acquiring Fund may not hold, the
Acquired Fund will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the portfolios of the Acquired Fund and the
Acquiring Fund, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Acquired Fund, if requested by the Acquiring Fund, will
dispose of and/or reinvest a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
1.3. The Acquired Fund will endeavor to discharge all the Acquired
Fund's known liabilities and obligations prior to the Closing Date. The
Acquiring Fund shall assume all liabilities, expenses, costs, charges and
reserves reflected on an unaudited Statement of Assets and Liabilities of the
Acquired Fund prepared by Smith Barney Mutual Fund Management Inc. (the
"Manager"), as adviser of the Acquired Fund, as of the Valuation Date (as
defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Acquired Fund reflected in
that unaudited Statement of Assets and Liabilities and shall not assume any
other liabilities, whether absolute or contingent, not reflected thereon.
1.4. As provided in paragraph 3.3, as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), the Acquired Fund
will liquidate and distribute pro rata to the Acquired Fund's shareholders of
record determined as of the close of business on the Closing Date (the
"Acquired Fund Shareholders"), the Acquiring Fund Shares it receives pursuant
to paragraph 1.1. Shareholders of Class A, Class B and Class C of the
Acquired Fund shall receive Class A, Class B and Class C shares,
respectively, of the Acquiring Fund. Such liquidation and distribution will
be accomplished by the transfer of the Acquiring Fund Shares then credited to
the account of the Acquired Fund on the books of the Acquiring Fund to open
accounts on the share records of the Acquiring Fund in the name of the
Acquired Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Acquired Fund will simultaneously be cancelled on the books of
the Acquired Fund, although any outstanding share certificates representing
interests in the Acquired Fund will represent a number of Acquiring Fund
Shares after the Closing Date as determined in accordance with paragraph 1.1.
The Acquiring Fund shall not issue certificates representing the Acquiring
Fund Shares in connection with such exchange.
<PAGE>69
1.5. Ownership of Acquiring Fund Shares will be shown on the books
of the Acquiring Fund's transfer agent. Acquiring Fund Shares will be issued
in the manner described in the Acquiring Fund's current prospectus and
statement of additional information.
1.6. Any transfer taxes payable upon issuance of the Acquiring Fund
Shares in a name other than the registered holder of the Acquired Fund Shares
on the books of the Acquired Fund as of that time shall, as a condition of
such issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7. Any reporting responsibility of the Acquired Fund is and shall
remain the responsibility of the Acquired Fund up to and including the Closing
Date and such later dates on which the Acquired Fund is terminated.
1.8. The Acquired Fund shall, following the Closing Date and the
making of all distributions pursuant to paragraph 1.4, be terminated under the
laws of the Commonwealth of Massachusetts and in accordance with its governing
documents.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") on
the Closing Date (such time and date being hereinafter called the "Valuation
Date"), using the valuation procedures set forth in the Acquiring Fund's then
current prospectus or statement of additional information.
2.2. The net asset value of Acquiring Fund Shares shall be the net
asset value per share computed as of the close of regular trading on the NYSE
on the Valuation Date, using the valuation procedures set forth in the
Acquiring Fund's then current prospectus or statement of additional
information.
2.3. All computations of value shall be made by the Manager in
accordance with its regular practice as pricing agent for the Acquired Fund
and the Acquiring Fund, respectively.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be November 17, 1995, or such later
date as the parties may agree to in writing. All acts taking place at the
Closing shall be deemed to take place simultaneously as of the close of
business on the Closing Date unless otherwise provided. The Closing shall be
held as of 5:00 p.m. at the offices of Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013, or at such other time and/or place as the
parties may agree.
<PAGE>70
3.2. In the event that on the Valuation Date (a) the NYSE or
another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereon shall be
restricted or (b) trading or the reporting of trading on the NYSE or elsewhere
shall be disrupted so that accurate appraisal of the value of the net assets
of the Acquiring Fund or the Acquired Fund is impracticable, the Closing Date
shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
3.3. Smith Barney Muni Funds shall deliver on behalf of the
Acquired Fund at the Closing a list of the names and addresses of the Acquired
Fund's Shareholders and the number and percentage ownership of outstanding
shares owned by each such shareholder immediately prior to the Closing,
certified on behalf of the Acquired Fund by the Chairman of the Board or the
President of Smith Barney Muni Funds. The Acquiring Fund shall issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited to
the Acquired Fund's account on the Closing Date to the Secretary of Smith
Barney Muni Funds, or provide evidence satisfactory to Smith Barney Muni Funds
that such Acquiring Fund Shares have been credited to the Acquired Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts or other documents as such other party or its
counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. Smith Barney Muni Funds and the Acquired Fund represent and
warrant to the Acquiring Fund as follows:
(a) The Acquired Fund is a portfolio of Smith Barney Muni Funds,
which is a business trust, duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts;
(b) Smith Barney Muni Funds is a registered investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), is in full force and effect;
(c) Smith Barney Muni Funds is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Declaration of Trust or By-laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which Smith Barney Muni Funds or the
Acquired Fund is a party or by which it is bound;
<PAGE>71
(d) Smith Barney Muni Funds has no material contracts or other
commitments (other than this Agreement) which will be terminated with
liability to the Acquired Fund prior to the Closing Date;
(e) No litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to Smith
Barney Muni Fund's knowledge threatened against Smith Barney Muni Funds with
respect to the Acquired Fund or any of the Acquired Fund's properties or
assets (other than that previously disclosed to the other party to the
Agreement) which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business. Smith Barney
Muni Funds or the Acquired Fund know of no facts which might form the basis
for the institution of such proceedings and is not party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects the Acquired Fund's business or the
ability of Smith Barney Muni Funds on behalf of the Acquired Fund to
consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the Acquired Fund
for each of the seven fiscal years ended March 31, 1995 and for the period
from April 3, 1987 (commencement of operations) to March 31, 1988 have been
audited by KPMG Peat Marwick LLP, independent accountants, and are in
accordance with generally accepted accounting principles consistently applied,
and such statements (copies of which have been furnished to the Acquiring
Fund) fairly reflect the financial condition of the Acquired Fund as of such
dates, and there are no known contingent liabilities of the Acquired Fund as
of such dates not disclosed therein;
(g) The Acquired Fund will file its final federal and other tax
returns for the period ending on the Closing Date in accordance with the Code.
At the Closing Date, all federal and other tax returns and reports of the
Acquired Fund required by law then to have been filed prior to the Closing
Date shall have been filed, and all federal and other taxes shown as due on
such returns shall have been paid so far as due, or provision shall have been
made for the payment thereof and, to the best of the Acquired Fund's
knowledge, no such return is currently under audit and no assessment has been
asserted with respect to such returns;
(h) For the most recent fiscal year of its operation, the Acquired
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company;
(i) All issued and outstanding shares of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable. All of the issued and outstanding shares of the
Acquired Fund will, at the time of Closing, be held by the persons and in the
amounts set forth in the records of the transfer agent as
<PAGE>72
provided in paragraph 3.3. The Acquired Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any shares of
the Acquired Fund, nor is there outstanding any security convertible into any
shares of the Acquired Fund (other than Class B shares of the Acquired Fund
which, under certain circumstances, are convertible into Class A shares of the
Acquired Fund);
(j) At the Closing Date, the Acquired Fund will have good and
marketable title to its assets to be transferred to the Acquiring Fund
pursuant to paragraph 1.2 and full right, power and authority to sell, assign,
transfer and deliver such assets hereunder and, upon delivery and payment for
such assets, the Acquiring Fund will acquire good and marketable title
thereto, subject to no restrictions on the full transfer thereof, including
such restrictions as might arise under the Securities Act of 1933, as amended
(the "1933 Act"), other than as disclosed to the Acquiring Fund;
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action on the part of the Smith Barney
Muni Funds' Board of Trustees, and subject to the approval of the Acquired
Fund's shareholders, this Agreement, assuming due authorization, execution and
delivery by the Acquiring Fund, will constitute a valid and binding obligation
of the Acquired Fund, enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
(l) The information to be furnished by the Acquired Fund for use in
no-action letters, applications for exemptive orders, registration statements,
proxy materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto; and
(m) The proxy statement of the Acquired Fund (the "Proxy
Statement") to be included in the Registration Statement referred to in
paragraph 5.7 (other than information therein that relates to the Acquiring
Fund) will, on the effective date of the Registration Statement and on the
Closing Date, not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such statements
were made, not misleading.
4.2. The Acquiring Fund represents and warrants to the Smith Barney
Muni Funds and to the Acquired Fund as follows:
(a) The Acquiring Fund is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland;
<PAGE>73
(b) The Acquiring Fund is a registered investment company
classified as a management company of the open-end type and its registration
with the Commission as an investment company under the 1940 Act is in full
force and effect;
(c) The current prospectus and statement of additional information
of the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not materially misleading;
(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets;
(e) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Articles of Incorporation or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking with respect to the Acquiring
Fund to which the Acquiring Fund is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against the Acquiring Fund or any of the Acquiring Fund's properties or
assets. The Acquiring Fund knows of no facts which might form the basis for
the institution of such proceedings and the Acquiring Fund is not a party to
or subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects the Acquiring Fund's
business or ability to consummate the transactions contemplated herein;
(g) The Statement of Assets and Liabilities of the Acquiring Fund
for the ten fiscal years ended February 28, 1995 have been audited by Coopers
& Lybrand L.L.P., independent accountants, and are in accordance with
generally accepted accounting principles consistently applied, and such
statements (copies of which have been furnished to the Acquired Fund) fairly
reflect the financial condition of the Acquiring Fund as of such dates, and
there are no known contingent liabilities of the Acquiring Fund as of such
dates not disclosed therein;
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to have been filed by such
date shall have been filed, and all federal and other taxes shown as due on
said returns and reports shall have been paid so far as due, or provision
shall have been made for the payment thereof and, to the best of the Acquiring
Fund's knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
<PAGE>74
(i) For the most recent fiscal year of its operation, the Acquiring
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company and the Acquiring Fund intends
to do so in the future;
(j) At the date hereof, all issued and outstanding shares of the
Acquiring Fund are, and at the Closing Date will be, duly and validly issued
and outstanding, fully paid and non-assessable. The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for or
purchase any shares of the Acquiring Fund, nor is there outstanding any
security convertible into shares of the Acquiring Fund (other than Class B
shares of the Acquiring Fund which, under certain circumstances, are
convertible into Class A shares of the Acquiring Fund);
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action, if any, on the part of the
Acquiring Fund's Board of Directors, and this Agreement, assuming due
authorization, execution and delivery by the Acquired Fund, constitutes a
valid and binding obligation of the Acquiring Fund, enforceable in accordance
with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights and to general equity principles;
(l) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to
the terms of this Agreement, will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly issued
Acquiring Fund Shares, and will be fully paid and non-assessable with no
personal liability attaching to the ownership thereof;
(m) The information to be furnished by the Acquiring Fund for use
in no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
(n) The Proxy Statement to be included in the Registration
Statement (only insofar as it relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements were made,
not misleading; and
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act
and such of the state
<PAGE>75
Blue Sky or securities laws as it may deem appropriate in order to continue
the Acquiring Fund's operations after the Closing Date.
5. COVENANTS OF THE ACQUIRED FUND, SMITH BARNEY MUNI FUNDS AND THE ACQUIRING
FUND
5.1. The Acquiring Fund and Smith Barney Muni Funds on behalf of
the Acquired Fund each will operate its business in the ordinary course
between the date hereof and the Closing Date. It is understood that such
ordinary course of business will include the declaration and payment of
customary dividends and distributions and any other dividends and
distributions deemed advisable, in each case payable either in cash or in
additional shares.
5.2. The Acquired Fund will call a meeting of its shareholders to
consider and act upon this Agreement and to take all other action necessary to
obtain approval of the transactions contemplated herein.
5.3. The Acquired Fund covenants that the Acquiring Fund Shares to
be issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this
Agreement.
5.4. The Acquired Fund will assist the Acquiring Fund in obtaining
such information as the Acquiring Fund reasonably requests concerning the
beneficial ownership of the Acquired Fund's shares.
5.5. Subject to the provisions of this Agreement, the Acquiring
Fund and Smith Barney Muni Funds on behalf of the Acquired Fund, each will
take, or cause to be taken, all action, and do or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6. As promptly as practicable, but in any case within sixty days
after the Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in
such form as is reasonably satisfactory to the Acquiring Fund, a statement of
the earnings and profits of the Acquired Fund for federal income tax purposes
which will be carried over to the Acquiring Fund as a result of Section 381 of
the Code and which will be certified by the Chairman of the Board or President
and the Treasurer of Smith Barney Muni Funds.
5.7. The Acquired Fund will provide the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus (the
"Prospectus") which will include the Proxy Statement, referred to in paragraph
4.1(m), all to be included in a Registration Statement on Form N-14 of the
Acquiring Fund (the "Registration Statement"),
<PAGE>76
in compliance with the 1933 Act, the Securities Exchange Act of 1934 (the
"1934 Act") and the 1940 Act in connection with the meeting of the Acquired
Fund's shareholders to consider approval of this Agreement and the
transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH BARNEY MUNI FUNDS IN RESPECT
OF THE ACQUIRED FUND
The obligations of Smith Barney Muni Funds on behalf of the Acquired
Fund to consummate the transactions provided for herein shall be subject, at
its election, to the performance by the Acquiring Fund of all of the
obligations to be performed by them hereunder on or before the Closing Date
and, in addition thereto, the following further conditions:
6.1. All representations and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;
6.2. The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its Chairman of the Board, President or
Vice President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to the Acquired Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquiring Fund made in
this Agreement are true and correct in all material respects at and as of the
Closing Date, except as they may be affected by the transactions contemplated
by this Agreement; and
6.3. The Acquired Fund shall have received on the Closing Date a
favorable opinion from Willkie Farr & Gallagher, counsel to the Acquiring
Fund, dated as of the Closing Date, in a form reasonably satisfactory to
Christina T. Sydor, Esq., Secretary of the Acquired Fund, covering the
following points:
That (a) the Acquiring Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland; (b) the Acquiring Fund
is an open-end management investment company registered under the 1940
Act; (c) this Agreement, the Reorganization provided for hereunder and
the execution of this Agreement have been duly authorized and approved by
all requisite action of the Acquiring Fund, and this Agreement has been
duly executed and delivered by the Acquiring Fund and, assuming due
authorization by Smith Barney Muni Funds on behalf of the Acquired Fund,
is a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms against the assets of the Acquiring Fund,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general
<PAGE>77
equity principles; and (d) the Acquiring Fund Shares to be issued to the
Acquired Fund for distribution to its shareholders pursuant to this Agreement
have been, to the extent of the number of Acquiring Fund Shares of the
particular class authorized to be issued by the Acquiring Fund in its Articles
of Incorporation and then unissued, duly authorized and, subject to the
receipt by the Acquiring Fund of consideration equal to the respective net
asset values thereof (but in no event less than the par value thereof), such
Acquiring Fund Shares, when issued in accordance with this Agreement, will be
validly issued and fully paid and non-assessable.
Such opinion may state that it is solely for the benefit of Smith
Barney Muni Funds, its Trustees and its officers. Such counsel may rely, as
to matters governed by the laws of the State of Maryland, on an opinion of
Maryland counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by
Smith Barney Muni Funds and the Acquired Fund of all the obligations to be
performed by them hereunder on or before the Closing Date and, in addition
thereto, the following conditions:
7.1. All representations and warranties of Smith Barney Muni Funds
and the Acquired Fund contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the Closing
Date with the same force and effect as if made on and as of the Closing Date;
7.2. Smith Barney Muni Funds on behalf of the Acquired Fund shall
have delivered to the Acquiring Fund a statement of the Acquired Fund's assets
and liabilities, together with a list of the Acquired Fund's portfolio
securities showing the tax basis of such securities by lot and the holding
periods of such securities, as of the Closing Date, certified by the Treasurer
or Assistant Treasurer of Smith Barney Muni Funds;
7.3. Smith Barney Muni Funds on behalf of the Acquired Fund shall
have delivered to the Acquiring Fund on the Closing Date a certificate
executed in its name by its Chairman of the Board, President or Vice President
and its Treasurer or Assistant Treasurer, in form and substance satisfactory
to the Acquiring Fund and dated as of the Closing Date, to the effect that the
representations and warranties of Smith Barney Muni Funds and the Acquired
Fund made in this Agreement are true and correct in all material respects at
and as of the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement; and
<PAGE>78
7.4. The Acquiring Fund shall have received on the Closing Date a
favorable opinion of Sullivan & Cromwell, counsel to the Acquired Fund, in a
form satisfactory to Christina T. Sydor, Esq., Secretary of the Acquiring
Fund, covering the following points:
That (a) the Acquired Fund is a series of Smith Barney Muni Funds, which
is a business trust duly organized and validly existing under the laws of
the Commonwealth of Massachusetts; (b) Smith Barney Muni Funds is an
open-end management investment company registered under the 1940 Act; and
(c) this Agreement, the Reorganization provided for hereunder and the
execution of this Agreement have been duly authorized and approved by all
requisite action of Smith Barney Muni Funds, and this Agreement has been
duly executed and delivered by Smith Barney Muni Funds and, assuming due
authorization, execution and delivery by the Acquiring Fund, is a valid
and binding obligation of Smith Barney Muni Funds with respect to the
Acquired Fund enforceable in accordance with its terms against the assets
of the Acquired Fund, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
Such opinion may state that it is solely for the benefit of the
Acquiring Fund, its Directors and its officers. Such counsel may rely, as to
matters governed by the laws of the Commonwealth of Massachusetts, on an
opinion of Massachusetts counsel.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND, SMITH
BARNEY MUNI FUNDS AND THE ACQUIRING FUND
If any of the conditions set forth below do not exist on or before
the Closing Date with respect to the Acquiring Fund, or Smith Barney Muni
Funds on behalf of the Acquired Fund, the other party to this Agreement shall,
at its option, not be required to consummate the transactions contemplated by
this Agreement:
8.1. This Agreement and the transactions contemplated herein shall
have been approved by the requisite vote of the holders of the outstanding
shares of the Acquired Fund in accordance with the provisions of Smith Barney
Muni Fund's Declaration of Trust and By-laws and certified copies of the votes
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund
nor Smith Barney Muni Funds on behalf of the Acquired Fund may waive the
conditions set forth in this paragraph 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or
<PAGE>79
obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders
and permits of federal, state and local regulatory authorities (including
those of the Commission and of state Blue Sky and securities authorities,
including "no-action" positions of and exemptive orders from such federal and
state authorities) deemed necessary by the Acquiring Fund or the Acquired Fund
to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain
any such consent, order or permit would not involve a risk of a material
adverse effect on the assets or properties of the Acquiring Fund or the
Acquired Fund, provided that either party hereto may for itself waive any of
such conditions;
8.4. The Registration Statement shall have become effective under
the 1933 Act and no stop orders suspending the effectiveness thereof shall
have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or be
pending, threatened or contemplated under the 1933 Act;
8.5. The Acquired Fund shall have declared and paid a dividend or
dividends on the outstanding shares of the Acquired Fund which, together with
all previous such dividends, shall have the effect of distributing to the
shareholders of the Acquired Fund all of the investment company taxable income
of the Acquired Fund for all taxable years ending on or prior to the Closing
Date. The dividend declared and paid by the Acquired Fund shall also include
all of such fund's net capital gain realized in all taxable years ending on or
prior to the Closing Date (after reduction for any capital loss carryforward);
8.6. The parties shall have received a favorable opinion of Willkie
Farr & Gallagher, addressed to the Acquiring Fund and Smith Barney Muni Funds
in respect of the Acquired Fund and satisfactory to Christina T. Sydor, Esq.,
as Secretary of each of the Funds, substantially to the effect that for
federal income tax purposes:
(a) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for Acquiring Fund Shares and the assumption by the
Acquiring Fund of scheduled liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C)
of the Code, and the Acquiring Fund and the Acquired Fund are each a
"party to a reorganization" within the meaning of Section 368(b) of the
Code; (b) no gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Acquired Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of
scheduled liabilities of the Acquired Fund; (c) no gain or loss will be
recognized by the Acquired Fund upon the transfer of the Acquired Fund's
assets to the Acquiring Fund in exchange for Acquiring Fund Shares and
the assumption by the Acquiring Fund of scheduled liabilities of the
Acquired
<PAGE>80
Fund or upon the distribution (whether actual or constructive) of Acquiring
Fund Shares to Acquired Fund's shareholders; (d) no gain or loss will be
recognized by shareholders of the Acquired Fund upon the exchange of their
Acquired Fund shares for the Acquiring Fund Shares; (e) the aggregate tax
basis for Acquiring Fund Shares received by each of the Acquired Fund's
shareholders pursuant to the Reorganization will be the same as the aggregate
tax basis of the Acquired Fund shares held by such shareholder immediately
prior to the Reorganization, and the holding period of Acquiring Fund Shares
to be received by each Acquired Fund shareholder will include the period
during which the Acquired Fund shares exchanged therefor were held by such
shareholder (provided that the Acquired Fund shares were held as capital
assets on the date of the Reorganization); and (f) the tax basis to the
Acquiring Fund of the Acquired Fund's assets acquired by the Acquiring Fund
will be the same as the tax basis of such assets to the Acquired Fund
immediately prior to the Reorganization, and the holding period of the assets
of the Acquired Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Acquired Fund.
Notwithstanding anything herein to the contrary, neither the
Acquiring Fund nor Smith Barney Muni Funds on behalf of the Acquired Fund may
waive the conditions set forth in this paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1. The Acquiring Fund represents and warrants to Smith Barney
Muni Funds on behalf of the Acquired Fund, and Smith Barney Muni Funds on
behalf of the Acquired Fund represents and warrants to the Acquiring Fund,
that there are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
9.2. (a) Except as may be otherwise provided herein, Smith
Barney Inc., the distributor of the Acquiring Fund and the Acquired Fund,
shall be liable for the expenses incurred in connection with entering into and
carrying out the provisions of this Agreement, including the expenses of: (i)
counsel and independent accountants associated with the Reorganization; (ii)
printing and mailing the Prospectus/Proxy Statement and soliciting proxies in
connection with the meeting of shareholders of the Acquired Fund referred to
in paragraph 5.2 hereof; (iii) any special pricing fees associated with the
valuation of the Acquired Fund's or the Acquiring Fund's portfolio on the
Closing Date; (iv) expenses associated with preparing this Agreement and
preparing and filing the Registration Statement under the 1933 Act covering
the Acquiring Fund Shares to be issued in the Reorganization; (v) registration
or qualification fees and expenses of preparing and filing such forms, if any,
necessary under applicable state securities laws to qualify the Acquiring Fund
Shares to be issued in connection with the Reorganization. The Acquired Fund
shall be liable for: (x) all
<PAGE>81
fees and expenses related to the liquidation and termination of the Acquired
Fund; and (y) fees and expenses of the Acquired Fund's custodian and transfer
agent incurred in connection with the Reorganization. The Acquiring Fund
shall be liable for any fees and expenses of the Acquiring Fund's custodian
and transfer agent incurred in connection with the Reorganization.
(b) Consistent with the provisions of paragraph 1.3, the Acquired
Fund, prior to the Closing, shall pay for or include in the unaudited
Statement of Assets and Liabilities prepared pursuant to paragraph 1.3 all of
its known and reasonably estimated expenses associated with the transactions
contemplated by this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that no party has made any
representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
10.2. The representations, warranties and covenants contained in
this Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any time prior to the
Closing Date by: (i) the mutual agreement of Smith Barney Muni Funds on
behalf of the Acquired Fund and the Acquiring Fund; (ii) Smith Barney Muni
Funds on behalf of the Acquired Fund in the event that the Acquiring Fund
shall, or the Acquiring Fund in the event that Smith Barney Muni Funds or the
Acquired Fund shall, materially breach any representation, warranty or
agreement contained herein to be performed at or prior to the Closing Date; or
(iii) Smith Barney Muni Funds on behalf of the Acquired Fund or by the
Acquiring Fund if a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably
appears that it will not or cannot be met.
11.2. In the event of any such termination, there shall be no
liability for damages on the part of either Smith Barney Muni Funds on behalf
of the Acquired Fund or the Acquiring Fund or their respective Trustees,
Directors or officers to the other party, but each shall bear the expenses
incurred by it incidental to the preparation and carrying out of this
Agreement as provided in paragraph 9.
<PAGE>82
12. AMENDMENTS; WAIVERS
12.1. This Agreement may be amended, modified or supplemented in
such manner as may be mutually agreed upon in writing by the authorized
officers of Smith Barney Muni Funds and the Acquiring Fund; provided, however,
that following the meeting of the Acquired Fund shareholders called by the
Acquired Fund pursuant to paragraph 5.2 of this Agreement, no such amendment
may have the effect of changing the provisions for determining the number of
Acquiring Fund Shares to be issued to the Acquired Fund's shareholders under
this Agreement to the detriment of such shareholders without their further
approval.
12.2. At any time prior to the Closing Date either party hereto
may by written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by hand
delivery, prepaid telegraph, telecopy or certified mail addressed to Smith
Barney Muni Funds, 388 Greenwich Street, 26th Floor, New York, New York 10013,
Attention: Jessica Bibliowicz; or to Smith Barney California Municipals Fund
Inc., 388 Greenwich Street, 26th Floor, New York, New York 10013, Attention:
Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF
LIABILITY
14.1. The article and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
14.4. This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment
or transfer hereof or of any rights or obligations hereunder shall be made by
any party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer
<PAGE>83
upon or give any person, firm, corporation or other entity, other than the
parties hereto and their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
14.5. It is expressly agreed that the obligations of Smith
Barney Muni Funds in respect of the Acquired Fund shall not be binding upon
any Trustees, shareholders, nominees, officers, agents or employees
personally, but bind only the trust property of Smith Barney Muni Funds as
provided in the Declaration of Trust of Smith Barney Muni Funds. The
execution and delivery of this Agreement have been authorized by the Trustees
of Smith Barney Muni Funds and this Agreement has been executed by authorized
officers of Smith Barney Muni Funds, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such
officers shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of Smith Barney Muni Funds as provided in Smith Barney Muni Funds'
Declaration of Trust.
<PAGE>84
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its Chairman of the Board, President or Vice
President and attested by its Secretary or Assistant Secretary.
Attest: SMITH BARNEY MUNI FUNDS
on behalf of CALIFORNIA PORTFOLIO
/s/ Christina T. Sydor By: /s/ Jessica Bibliowicz
Name: Christina T. Sydor Name: Jessica Bibliowicz
Title: Secretary Title: President
Attest: SMITH BARNEY CALIFORNIA MUNICIPALS
FUND INC.
/s/ Christina T. Sydor By: /s/ Heath B. McLendon
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
