Registration No. 2-89548
811-3970
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
X
Pre-Effective Amendment No.
Post-Effective Amendment No. 23
X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 24
X
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(212) 723-9218
Christina T. Sydor
Secretary
Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
__X_ immediately upon filing pursuant to Rule 485(b)
_____ on _________________ pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)
_____ on ________________ pursuant to Rule 485(a)
_________________________________________________________________
___________________
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. Registrant's Rule
24f-2 Notice for the fiscal year ended February 29, 1996 was
filed on April 25, 1996 under Accession # 740871-96-1.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A
Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Financial Highlights Financial Highlights
4. General Description of Cover Page; Prospectus Summary;
Registrant Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund Management of the Fund;
Distributor; Additional
Information; Annual Report
6. Capital Stock and Other Investment Objective and
Securities Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Purchase of Shares; Valuation
Offered of Shares; Redemption of
Shares; Exchange Privilege;
Minimum Account Size;
Distributor; Additional
Information
8. Redemption or Repurchase Purchase of Shares; Redemption
of Shares; Exchange Privilege
9. Legal Proceedings Not Applicable
Part B
Item No. Statement Of Additional
Information Caption
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Distributor; Additional
Information
13. Investment Objective and Investment Objective and
Policies Management Policies
14. Management of the Fund Management of the Fund
15. Control Persons and Management of the Fund
Principal Holders of Securities
16. Investment Advisory and Management of the Fund;
Other Services Distributor
17. Brokerage Allocation Investment Objective and
Management Policies;
Distributor
18. Capital Stock and Other Investment Objective and
Securities Management Policies; Purchase
of Shares; Redemption of
Shares; Taxes
19. Purchase, Redemption and Purchase of Shares; Redemption
Pricing of Securities of Shares; Distributor;
Being Offered Valuation of Shares; Exchange
Privilege
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Performance Data
Data
23. Financial Statements Financial Statements
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART A
<PAGE>
SMITH BARNEY
California
Municipals
Fund Inc.
June 3, 1996
PROSPECTUS
BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS
June 3, 1996
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney California Municipals Fund Inc. (the "Fund") is a
non-diversi-
fied municipal fund that seeks to provide California investors
with as high a
level of dividend income exempt from Federal income tax and
California state
personal income tax as is consistent with prudent investment
management and
preservation of capital.
This Prospectus concisely sets forth certain information about
the Fund,
including sales charges, distribution and service fees and
expenses, that pro-
spective investors will find helpful in making an investment
decision. Invest-
ors are encouraged to read this Prospectus carefully and retain
it for future
reference.
Additional information about the Fund is contained in a
Statement of Addi-
tional Information dated June 3, 1996, as amended or supplemented
from time to
time, that is available upon request and without charge by
calling or writing
the Fund at the telephone number or address set forth above or by
contacting a
Smith Barney Financial Consultant. The Statement of Additional
Information has
been filed with the Securities and Exchange Commission (the
"SEC") and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS 11
- ---------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
- ---------------------------------------------------
CALIFORNIA MUNICIPAL SECURITIES 22
- ---------------------------------------------------
VALUATION OF SHARES 23
- ---------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 23
- ---------------------------------------------------
PURCHASE OF SHARES 26
- ---------------------------------------------------
EXCHANGE PRIVILEGE 34
- ---------------------------------------------------
REDEMPTION OF SHARES 37
- ---------------------------------------------------
MINIMUM ACCOUNT SIZE 40
- ---------------------------------------------------
PERFORMANCE 41
- ---------------------------------------------------
MANAGEMENT OF THE FUND 42
- ---------------------------------------------------
DISTRIBUTOR 43
- ---------------------------------------------------
ADDITIONAL INFORMATION 44
- ---------------------------------------------------
</TABLE>
No person has been authorized to give any information or to
make
any representations in connection with this offering other than
those contained in this Prospectus and, if given or made, such
other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Pro-
spectus does not constitute an offer by the Fund or the
Distributor
to sell or a solicitation of an offer to buy any of the
securities
offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer or solicitation in such jurisdic-
tion.
2
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed
information
appearing elsewhere in this Prospectus and in the Statement of
Additional
Information. Cross references in this summary are to headings in
the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, non-diversified,
management
investment company that seeks to provide California investors
with as high a
level of dividend income exempt from Federal income taxes and
California state
personal income tax as is consistent with prudent investment
management and the
preservation of capital. Its investments consist primarily of
intermediate- and
long-term investment-grade municipal securities issued by the
State of Califor-
nia, local governments in the State of California and certain
other municipal
issuers such as the Commonwealth of Puerto Rico ("California
Municipal Securi-
ties") that pay interest which is excluded from gross income for
Federal income
tax purposes and exempt from California state personal income
taxes. Intermedi-
ate- and long-term securities have remaining maturities at the
time of purchase
of three to in excess of twenty years. See "Investment Objective
and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes
of shares
("Classes") to investors designed to provide them with the
flexibility of
selecting an investment best suited to their needs. The general
public is
offered three Classes of shares: Class A shares, Class B shares
and Class C
shares, which differ principally in terms of sales charges and
rate of expenses
to which they are subject. A fourth Class of shares, Class Y
shares, is offered
only to investors meeting an initial investment minimum of
$5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus
an initial
sales charge of up to 4.00% of the purchase price and are subject
to an annual
service fee of 0.15% of the average daily net assets of the
Class. The initial
sales charge may be reduced or waived for certain purchases.
Purchases of Class
A shares which, when combined with current holdings of Class A
shares offered
with a sales charge, equal or exceed $500,000 in the aggregate
will be made at
net asset value with no initial sales charge, but will be subject
to a contin-
gent deferred sales charge ("CDSC") of 1.00% on redemptions made
within 12
months of purchase. See "Prospectus Summary--Reduced or No
Initial Sales
Charge."
3
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares. Class B shares are offered at net asset value
subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50%
the first year
after purchase and by 1.00% each year thereafter to zero. This
CDSC may be
waived for certain redemptions. Class B shares are subject to an
annual service
fee of 0.15% and an annual distribution fee of 0.50% of the
average daily net
assets of the Class. The Class B shares' distribution fee may
cause that Class
to have higher expenses and pay lower dividends than Class A
shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically
to Class A shares, based on relative net asset value, eight years
after the
date of the original purchase. Upon conversion, these shares will
no longer be
subject to an annual distribution fee. In addition, a certain
portion of Class
B shares that have been acquired through the reinvestment of
dividends and
distributions ("Class B Dividend Shares") will be converted at
that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with
no initial
sales charge. They are subject to an annual service fee of 0.15%
and an annual
distribution fee of 0.55% of the average daily net assets of the
Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of
purchase. This CDSC may be waived for certain redemptions. The
Class C shares'
distribution fee may cause that Class to have higher expenses and
pay lower
dividends than Class A and Class B shares. Purchases of Fund
shares which, when
combined with current holdings of Class C shares of the Fund,
equal or exceed
$500,000 in the aggregate should be made in Class A shares at net
asset value
with no sales charge, and will be subject to a CDSC of 1.00% on
redemptions
made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors
meeting an
initial investment minimum of $5,000,000. Class Y shares are sold
at net asset
value with no initial sales charge or CDSC. They are not subject
to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors
should consider
the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of
shares is more
beneficial to an investor depends on the amount and intended
duration of his or
her investment. Shareholders who are planning to establish a
program of regu
4
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
lar investment may wish to consider Class A shares; as the
investment accumu-
lates shareholders may qualify for reduced sales charges and the
shares are
subject to lower ongoing expenses over the term of the
investment. As an alter-
native, Class B and Class C shares are sold without any initial
sales charge so
the entire purchase price is immediately invested in the Fund.
Any investment
return on these additional invested amounts may partially or
wholly offset the
higher annual expenses of these Classes. Because the Fund's
future return can-
not be predicted, however, there can be no assurance that this
would be the
case.
Finally, investors should consider the effect of the CDSC
period and any con-
version rights of the Classes in the context of their own
investment time
frame. For example, while Class C shares have a shorter CDSC
period than Class
B shares, they do not have a conversion feature, and therefore,
are subject to
an ongoing distribution fee. Thus, Class B shares may be more
attractive than
Class C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class
Y shares
which are not subject to an initial sales charge, CDSC or service
or distribu-
tion fees. The maximum purchase amount for Class A shares is
$4,999,999, Class
B shares is $249,999 and Class C shares is $499,999. There is no
maximum pur-
chase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on
Class A
shares may be waived for certain eligible purchasers, and the
entire purchase
price will be immediately invested in the Fund. In addition,
Class A share pur-
chases which, when combined with current holdings of Class A
shares offered
with a sales charge, equal or exceed $500,000 in the aggregate
will be made at
net asset value with no initial sales charge, but will be subject
to a CDSC of
1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate
investment may be met by adding the purchase to the net asset
value of all
Class A shares held in certain other funds sponsored by Smith
Barney, Inc.
("Smith Barney") listed under "Exchange Privilege." Class A share
purchases may
also be eligible for a reduced initial sales charge. See
"Purchase of Shares."
Smith Barney Financial Consultants may receive different
compensation for
selling different classes of shares. Investors should understand
that the pur-
pose of the CDSC on the Class B and Class C shares is the same as
that of the
initial sales charge on the Class A shares.
5
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
See "Purchase of Shares" and "Management of the Fund" for a
complete descrip-
tion of the sales charges and service and distribution fees for
each Class of
shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Ex-
change Privilege" for other differences between the Classes of
shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's
distributor,
Smith Barney, a broker that clears securities transactions
through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an
investment dealer in
the selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C
shares may open
an account by making an initial investment of at least $1,000.
Investors in
Class Y shares may open an account for an initial investment of
$5,000,000.
Subsequent investments of at least $50 may be made for all
Classes. The minimum
investment for Class A, Class B and Class C shares and the
subsequent invest-
ment for all Classes through the Systematic Investment Plan
described below is
$50. There is no minimum investment requirement for Class A
shares for
unitholders who invest distributions from a unit investment trust
("UIT") spon-
sored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a
Systematic Investment
Plan under which they may authorize the automatic placement of a
purchase order
each month or quarter for Fund shares in an amount of at least
$50. See "Pur-
chase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New
York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of
Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc.
("SBMFM")
serves as the Fund's investment adviser and administrator. SBMFM
provides
investment advisory and management services to investment
companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith
Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Travelers Group
Inc. ("Travelers"), a diversified financial services holding
company engaged
through its subsidiaries principally in four business segments:
Investment
Services, Consumer Finance Services, Life Insurance Services and
Property &
Casualty Insurance Services. See "Management of the Fund."
6
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares
of the same
Class of certain other Smith Barney Mutual Funds at the
respective net asset
values next determined, plus any applicable sales charge
differential. See "Ex-
change Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day
generally is
quoted daily in the financial section of most newspapers and is
also available
from Smith Barney Financial Consultants. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income
are generally
paid on the last Friday of each calendar month to shareholders of
record as of
three business days prior thereto. Distributions of net realized
long- and
short-term capital gains, if any, are declared and paid annually
after the end
of the fiscal year in which they were earned. See "Dividends,
Distributions and
Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on
shares of any
Class will be reinvested automatically in additional shares of
the same Class
at current net asset value unless otherwise specified by an
investor. Shares
acquired by dividend and distribution reinvestments will not be
subject to any
sales charge or CDSC. Class B shares acquired through dividend
and distribution
reinvestments will become eligible for conversion to Class A
shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance
that the Fund
will achieve its investment objective. Assets of the Fund may be
invested in
the municipal securities of non-California municipal issuers.
Dividends paid by
the Fund which are derived from interest attributable to
California Municipal
Securities will be excluded from gross income for Federal income
tax purposes
and exempt from California state personal income taxes (but not
from California
state franchise tax or California state corporate income tax).
Dividends
derived from interest on obligations of non-California municipal
issuers will
be exempt from Federal income taxes, but may be subject to
California state
personal income taxes. Dividends derived from certain municipal
securities (in-
cluding California Municipal Securities), however, may be a
specific tax item
for Federal alternative minimum tax purposes. The Fund may invest
without limit
in securities subject to the Federal alternative minimum tax. See
"Investment
Objective and Management Policies" and "Dividends, Distributions
and Taxes."
7
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
The Fund is more susceptible to factors adversely affecting
issuers of Cali-
fornia municipal securities than is a municipal bond fund that
does not empha-
size these issuers. See "California Municipal Securities" in the
Prospectus and
"Special Considerations Relating to California Municipal
Securities" in the
Statement of Additional Information for further details about the
risks of
investing in California obligations.
The Fund is classified as a non-diversified investment company
under the
Investment Company Act of 1940, as amended (the "1940 Act"),
which means that
the Fund is not limited by the 1940 Act in the proportion of its
assets that it
may invest in the obligations of a single issuer. The Fund's
assumption of
large positions in the obligations of a small number of issuers
may cause the
Fund's share price to fluctuate to a greater extent than that of
a diversified
company as a result of changes in the financial condition or in
the market's
assessment of the issuers. See "Investment Objective and
Management Policies."
The Fund generally will invest at least 80% of its assets in
securities rated
investment grade, and may invest the remainder of its assets in
securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's")
or D by Stan-
dard & Poor's Corporation ("S&P"), or in unrated obligations of
comparable
quality. Securities in the fourth highest rating category, though
considered to
be investment grade, have speculative characteristics. Securities
rated as low
as D are extremely speculative and are in actual default of
interest and/or
principal payments.
There are several risks in connection with the use of certain
portfolio
strategies by the Fund, such as the use of when-issued
securities, municipal
bond index futures contracts and put and call options on interest
rate futures
as hedging devices, municipal leases and securities lending. See
"Investment
Objective and Management Policies--Certain Portfolio Strategies."
8
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs
and expenses an
investor will incur either directly or indirectly as a
shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be
incurred at the
time of purchase or redemption and, unless otherwise noted, the
Fund's operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B
CLASS C CLASS Y
- -----------------------------------------------------------------
- -------------
<S> <C> <C>
<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00% None
None None
Maximum CDSC
(as a percentage of original cost or redemp-
tion proceeds, whichever is lower) None* 4.50%
1.00% None
- -----------------------------------------------------------------
- -------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.50% 0.50%
0.50% 0.50%
12b-1 fees** 0.15 0.65
0.70 None
Other expenses*** 0.11 0.14
0.19 0.11
- -----------------------------------------------------------------
- -------------
TOTAL FUND OPERATING EXPENSES 0.76% 1.29%
1.39% 0.61%
- -----------------------------------------------------------------
- -------------
</TABLE>
* Purchases of Class A shares which, when combined with current
holdings of
Class A shares offered with a sales charge, equal or exceed
$500,000 in the
aggregate, will be made at net asset value with no sales
charge, but will
be subject to a CDSC of 1.00% on redemptions made within 12
months.
** Upon conversion of Class B shares to Class A shares, such
shares will no
longer be subject to a distribution fee. Class C shares do
not have a
conversion feature and, therefore, are subject to an ongoing
distribution
fee. As a result, long-term shareholders of Class C shares
may pay more
than the economic equivalent of the maximum front-end sales
charge
permitted by the National Association of Securities Dealers,
Inc.
*** For Class Y shares, "Other expenses" have been estimated
based on expenses
incurred by Class A shares because no Class Y shares have
been sold as of
February 29, 1996.
The sales charge and CDSC set forth in the above table are the
maximum
charges imposed on purchases or redemptions of Fund shares and
investors may
actually pay lower or no charges depending on the amount
purchased and, in the
case of Class B, Class C and certain Class A shares, the length
of time the
shares are held. See "Purchase of Shares" and "Redemption of
Shares." Smith
Barney receives an annual 12b-1 fee of 0.15% of the value of
average daily net
assets of Class A shares. Smith Barney also receives, with
respect to Class B
shares, an annual 12b-1 fee of 0.65% of the value of average
daily net
9
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PROSPECTUS SUMMARY (CONTINUED)
assets of that Class, consisting of a 0.50% distribution fee and
a 0.15% serv-
ice fee. For Class C shares, Smith Barney receives an annual 12b-
1 fee of 0.70%
of the value of average daily net assets of the Class, consisting
of a 0.55%
distribution fee and a 0.15% service fee. "Other expenses" in the
above table
include fees for shareholder services, custodial fees, legal and
accounting
fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor
in understand-
ing the various costs that an investor in the Fund will bear
directly or indi-
rectly. The example assumes payment by the Fund of operating
expenses at the
levels set forth in the table above. See "Purchase of Shares,"
"Redemption of
Shares" and "Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5
YEARS 10 YEARS*
- -----------------------------------------------------------------
- -------------
<S> <C> <C> <C>
<C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A $47 $63
$81 $130
Class B 58 71
81 141
Class C 24 44
76 167
Class Y 6 20
34 76
An investor would pay the following expenses
on the same investment, assuming the same
annual return and
no redemption:
Class A 47 63
81 130
Class B 13 41
71 141
Class C 14 44
76 167
Class Y 6 20
34 76
- -----------------------------------------------------------------
- -------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A
shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare
expense levels
of funds with different fee structures over varying investment
periods. To
facilitate such comparison, all funds are required to utilize a
5.00% annual
return assumption. However, the Fund's actual return will vary
and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED
A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN
THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended February 29,
1996 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon
appears in the Fund's Annual Report dated February 29, 1996. The
information
for the fiscal years ended February 28, 1986 through February 28,
1995 has been
audited by Coopers & Lybrand L.L.P. The information set out below
should be
read in conjunction with the financial statements and related
notes that also
appear in the Fund's Annual Report, which is incorporated by
reference into the
Statement of Additional Information. As of February 29, 1996, no
Class Y shares
were outstanding and, accordingly, no comparable information is
available at
this time for that class.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH YEAR:
<TABLE>
<CAPTION>
CLASS A SHARES 1996# 1995 1994#
1993* 1992
- -----------------------------------------------------------------
- ---------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF
YEAR $15.40 $16.15 $16.70
$15.78 $15.66
- -----------------------------------------------------------------
- ---------------
INCOME FROM OPERATIONS:
Net investment income 0.85 0.89 0.86
0.97 1.04
Net realized and unrealized
gain (loss) 0.93 (0.56) 0.08
1.25 0.40
- -----------------------------------------------------------------
- ---------------
Total Income From Operations 1.78 0.33 0.94
2.22 1.44
- -----------------------------------------------------------------
- ---------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.84) (0.87) (0.83)
(0.97) (1.05)
In excess of net investment
income -- (0.02) (0.01)
- -- --
Net realized gains (0.03) (0.19) (0.65)
(0.29) (0.27)
Capital -- -- --
(0.04) --
- -----------------------------------------------------------------
- ---------------
TOTAL DISTRIBUTIONS (0.87) (1.08) (1.49)
(1.30) (1.32)
- -----------------------------------------------------------------
- ---------------
NET ASSET VALUE, END OF YEAR $16.31 $15.40 $16.15
$16.70 $15.78
- -----------------------------------------------------------------
- ---------------
TOTAL RETURN++ 11.93% 2.46% 5.92%
14.76% 9.50%
- -----------------------------------------------------------------
- ---------------
NET ASSETS, END OF YEAR
(000S) $582,324 $401,743 $425,181
$423,504 $364,809
- -----------------------------------------------------------------
- ---------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.76% 0.80% 0.80%
0.70% 0.65%
Net investment income 5.26 5.76 5.20
6.04 6.54
- -----------------------------------------------------------------
- ---------------
PORTFOLIO TURNOVER RATE 44% 59% 76%
72% 86%
- -----------------------------------------------------------------
- ---------------
</TABLE>
* The Fund commenced operations on April 9, 1984. On November 6,
1992, the
Fund commenced selling Class B shares. Any shares in existence
prior to
November 6, 1992 were designated Class A shares.
# Per share amounts have been calculated using the monthly
average shares
method, which more appropriately presents the per share data
for the period
since the use of the undistributed net investment income
method does not
accord with results of operations.
++ Total return represents the aggregate total return for the
period and does
not reflect any applicable sales charge.
11
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH YEAR:
<TABLE>
<CAPTION>
CLASS A SHARES 1991 1990 1989
1988 1987
- -----------------------------------------------------------------
- ---------------
<S> <C> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF
YEAR $ 15.61 $ 15.33 $ 15.49 $
16.54 $ 16.16
- -----------------------------------------------------------------
- ---------------
INCOME FROM OPERATIONS:
Net investment income 1.07 1.09 1.12
1.09 1.14
Net realized and unrealized
gain (loss) 0.17 0.26 (0.13)
(0.98) 0.71
- -----------------------------------------------------------------
- ---------------
Total Income From Operations 1.24 1.35 0.99
0.11 1.85
- -----------------------------------------------------------------
- ---------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.07) (1.07) (1.12)
(1.09) (1.14)
In excess of net investment
income -- -- --
- -- --
Net realized gains (0.12) -- (0.03)
(0.07) (0.33)
Capital -- -- --
- -- --
- -----------------------------------------------------------------
- ---------------
TOTAL DISTRIBUTIONS (1.19) (1.07) (1.15)
(1.16) (1.47)
- -----------------------------------------------------------------
- ---------------
NET ASSET VALUE, END OF YEAR $15.66 $15.61 $15.33
$15.49 $16.54
- -----------------------------------------------------------------
- ---------------
TOTAL RETURN++ 8.29% 9.02% 6.67%
1.09% 12.13%
- -----------------------------------------------------------------
- ---------------
NET ASSETS, END OF YEAR
(000S) $334,599 $328,938 $313,059
$156,464 $207,872
- -----------------------------------------------------------------
- ---------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.65% 0.72% 0.67%
0.64% 0.67%
Net investment income 6.85% 6.95% 7.19%
7.26% 6.99%
- -----------------------------------------------------------------
- ---------------
PORTFOLIO TURNOVER RATE 53% 35% 27%
22% 16%
- -----------------------------------------------------------------
- ---------------
</TABLE>
++ Total return represents the aggregate total return for the
period and does
not reflect any applicable sales charges.
12
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH YEAR:
<TABLE>
<CAPTION>
CLASS B SHARES 1996# 1995 1994
1993(1)
- -----------------------------------------------------------------
- -----------
<S> <C> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF YEAR $15.40 $16.15 $16.70
$15.84
- -----------------------------------------------------------------
- -----------
INCOME FROM OPERATIONS:
Net investment income 0.75 0.81 0.77
0.29
Net realized and unrealized gain
(loss) 0.96 (0.57) 0.09
1.15
- -----------------------------------------------------------------
- -----------
Total Income From Operations 1.71 0.24 0.86
1.44
- -----------------------------------------------------------------
- -----------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.78) (0.75)
(0.28)
In excess of net investment income -- (0.02) (0.01)
- --
Net realized gains (0.03) (0.19) (0.65)
(0.29)
Capital -- -- --
(0.01)
- -----------------------------------------------------------------
- -----------
TOTAL DISTRIBUTIONS (0.79) (0.99) (1.41)
(0.58)
- -----------------------------------------------------------------
- -----------
NET ASSET VALUE, END OF YEAR $16.32 $15.40 $16.15
$16.70
- -----------------------------------------------------------------
- -----------
TOTAL RETURN++ 11.39% 1.89% 5.40%
9.27%++
- -----------------------------------------------------------------
- -----------
NET ASSETS, END OF YEAR (IN 000'S) $153,044 $127,888 $107,740
$37,924
- -----------------------------------------------------------------
- -----------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.29% 1.32% 1.33%
1.30%+
Net investment income 4.71 5.25 4.67
5.44+
- -----------------------------------------------------------------
- -----------
PORTFOLIO TURNOVER RATE 44% 59% 76%
72%
- -----------------------------------------------------------------
- -----------
</TABLE>
(1) For the period from November 6, 1992 (inception date) to
February 28,
1993.
++Total return is not annualized, as it may not be
representative of the total
return for the year.
+ Annualized.
# Per share amounts have been calculated using the monthly
average shares
method, which more appropriately presents the per share data
for the period
since the use of the undistributed net investment income
method does not
accord with results of operations.
13
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT
EACH YEAR:
<TABLE>
<CAPTION>
CLASS C SHARES 1996# 1995(1)
- ------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $ 15.40 $14.19
- ------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.78 0.24
Net realized and unrealized gain 0.92 1.39(3)
- ------------------------------------------------------
Total Income From Operations 1.70 1.63
- ------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.23)
In excess of net investment income -- (0.00)*
Net realized gains (0.03) (0.19)
- ------------------------------------------------------
TOTAL DISTRIBUTIONS (0.79) (0.42)
- ------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 16.31 $15.40
- ------------------------------------------------------
TOTAL RETURN(2) 11.30% 11.72%++
- ------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $10,809 $ 762
- ------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.39% 1.37%+
Net investment income 4.44 5.19%+
- ------------------------------------------------------
PORTFOLIO TURNOVER RATE 44% 59%
- ------------------------------------------------------
</TABLE>
(1) For the period from November 14, 1994 (inception date) to
February 28,
1995.
# Per share amounts have been calculated using the monthly
average shares
method, which more appropriately presents the per share data
for the period
since the use of the undistributed net investment income
method does not
accord with the results of operations.
+ Annualized.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be
representative of the total
return for the year.
(2) Total return represents the aggregate total return for the
period and does
not reflect any applicable sales charge.
(3) The amount shown may not accord with in aggregate gains and
losses of port-
folio securities due to timing of sales and the redemptions
of Fund shares.
14
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is to provide California
investors with
as high a level of dividend income exempt from Federal income
taxes and Cali-
fornia state personal income tax as is consistent with prudent
investment man-
agement and the preservation of capital. This investment
objective may not be
changed without the approval of the holders of a majority of the
Fund's out-
standing shares. There can be no assurance that the Fund's
investment objective
will be achieved.
The Fund will operate subject to an investment policy providing
that, under
normal market conditions, the Fund will invest at least 80% of
its net assets
in California Municipal Securities, which pay interest which is
excluded from
gross income for Federal income tax purposes and which is exempt
from Califor-
nia state personal income tax. The Fund may invest up to 20% of
its net assets
in municipal securities of non-California municipal issuers, the
interest on
which is excluded from gross income for Federal income tax
purposes (not
including the possible applicability of a Federal alternative
minimum tax), but
which is subject to California state personal income tax. When
SBMFM believes
that market conditions warrant adoption of a temporary defensive
investment
posture, the Fund may invest without limit in non-California
municipal issuers
and in "Temporary Investments" as described below.
The Fund generally will invest at least 80% of its total assets
in investment
grade debt obligations rated no lower than Baa, MIG 3 or Prime-1
by Moody's or
BBB, SP-2 or A-1 by S&P, or in unrated obligations of comparable
quality.
Unrated obligations will be considered to be of investment grade
if deemed by
SBMFM to be comparable in quality to instruments so rated, or if
other out-
standing obligations of the issuers thereof are rated Baa or
better by Moody's
or BBB or better by S&P. The balance of the Fund's assets may be
invested in
securities rated as low as C by Moody's or D by S&P, or
comparable unrated
securities, which 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 specu-
lative and are in actual default of interest and/or principal
payments. A
description of the rating systems of Moody's and S&P is contained
in the State-
ment of Additional Information.
The Fund's average weighted maturity will vary from time to
time based on the
judgment of SBMFM. The Fund intends to focus on intermediate- and
long-term
obligations, that is, obligations with remaining maturities at
the time of pur-
chase of three to in excess of twenty years.
15
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The value of debt securities varies inversely to changes in the
direction of
interest rates. When interest rates rise, the value of debt
securities gener-
ally falls, and when interest rates fall, the value of debt
securities gener-
ally rises.
Low and Comparable Unrated Securities.While the market values
of low-rated
and comparable unrated securities tend to react less to
fluctuations in inter-
est rate levels than the market values of higher-rated
securities, the market
values of certain low-rated and comparable unrated municipal
securities also
tend to be more sensitive than higher-rated securities to short-
term corporate
and industry developments and changes in economic conditions
(including reces-
sion) in specific regions or localities or among specific types
of issuers. In
addition, low-rated securities and comparable unrated securities
generally
present a higher degree of credit risk. During an economic
downturn or a pro-
longed period of rising interest rates, the ability of issuers of
low-rated and
comparable unrated securities to service their payment
obligations, meet pro-
jected goals or obtain additional financing may be impaired. The
risk of loss
due to default by such issuers is significantly greater because
low-rated and
comparable unrated securities generally are unsecured and
frequently are subor-
dinated to the prior payment of senior indebtedness. The Fund may
incur addi-
tional expenses to the extent it is required to seek recovery
upon a default in
payment of principal or interest on its portfolio holdings.
While the market for municipal securities is considered to be
generally ade-
quate, the existence of limited markets for particular low-rated
and comparable
unrated securities may diminish the Fund's ability to (a) obtain
accurate mar-
ket quotations for purposes of valuing such securities and
calculating its net
asset value and (b) sell the securities at fair value either to
meet redemption
requests or to respond to changes in the economy or in the
financial markets.
The market for certain low-rated and comparable unrated
securities has not
fully weathered a major economic recession. Any such recession,
however, would
likely disrupt severely the market for such securities and
adversely affect the
value of the securities and the ability of the issuers of such
securities to
repay principal and pay interest thereon.
Fixed-income securities, including low-rated securities and
comparable
unrated securities, frequently have call or buy-back features
that permit their
issuers to call or repurchase the securities from their holders,
such as the
Fund. If an issuer exercises these rights during periods of
declining interest
rates, the Fund may have to replace the security with a lower
yielding securi-
ty, thus resulting in a decreased return to the Fund.
16
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may invest without limit in "municipal leases," which
generally are
participations in intermediate- and short-term debt obligations
issued by
municipalities consisting of leases or installment purchase
contracts for prop-
erty or equipment. Although lease obligations do not constitute
general obliga-
tions of the municipality for which the municipality's taxing
power is pledged,
a lease obligation is ordinarily backed by the municipality's
covenant to bud-
get for, appropriate and make the payments due under the lease
obligation. How-
ever, certain lease obligations contain "non-appropriation"
clauses which pro-
vide that the municipality has no obligation to make lease or
installment pur-
chase payments in future years unless money is appropriated for
such purpose on
a yearly basis. In addition to the "non-appropriation" risk,
these securities
represent a relatively new type of financing that has not yet
developed the
depth of marketability associated with more conventional bonds.
Although "non-
appropriation" lease obligations are often secured by the
underlying property,
disposition of the property in the event of foreclosure might
prove difficult.
There is no limitation on the percentage of the Fund's assets
that may be
invested in municipal lease obligations. In evaluating municipal
lease obliga-
tions, SBMFM will consider such factors as it deems appropriate,
which may
include: (a) whether the lease can be canceled; (b) the ability
of the lease
obligee to direct the sale of the underlying assets; (c) the
general creditwor-
thiness of the lease obligor; (d) the likelihood that the
municipality will
discontinue appropriating funding for the leased property in the
event such
property is no longer considered essential by the municipality;
(e) the legal
recourse of the lease obligee in the event of such a failure to
appropriate
funding; (f) whether the security is backed by a credit
enhancement such as
insurance; and (g) any limitations which are imposed on the lease
obligor's
ability to utilize substitute property or services rather than
those covered by
the lease obligation.
The Fund may invest without limits in private activity bonds.
Interest income
on certain types of private activity bonds issued after August 7,
1986 to
finance non-governmental activities is a specific tax preference
item for pur-
poses of the Federal individual and corporate alternative minimum
taxes. Indi-
vidual and corporate shareholders may be subject to a Federal
alternative mini-
mum tax to the extent that the Fund's dividends are derived from
interest on
those bonds. Dividends derived from interest income on California
Municipal
Securities are a component of the "current earnings" adjustment
item for pur-
poses of the Federal corporate alternative minimum tax.
17
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund is classified as a non-diversified investment company
under the 1940
Act, which means that the Fund is not limited by the 1940 Act in
the proportion
of its assets that it may invest in the obligations of a single
issuer. The
Fund intends to conduct its operations, however, so as to qualify
as a "regu-
lated investment company" for purposes of the Internal Revenue
Code of 1986, as
amended (the "Code"), which will relieve the Fund of any
liability for Federal
income tax and California state franchise tax to the extent its
earnings are
distributed to shareholders. To so qualify, among other
requirements, the Fund
will limit its investments so that, at the close of each quarter
of the taxable
year, (a) not more than 25% of the market value of the Fund's
total assets will
be invested in the securities of a single issuer and (b) with
respect to 50% of
the market value of its total assets, not more than 5% of the
market value of
its total assets will be invested in the securities of a single
issuer and the
Fund will not own more than 10% of the outstanding voting
securities of a sin-
gle issuer. The Fund's assumption of large positions in the
obligations of a
small number of issuers may cause the Fund's share price to
fluctuate to a
greater extent than that of a diversified company as a result of
changes in the
financial condition or in the market's assessment of the issuers.
The Fund may invest without limit in debt obligations which are
repayable out
of revenue streams generated from economically-related projects
or facilities
or debt obligations whose issuers are located in the same state.
Sizeable
investments in such obligations could involve an increased risk
to the Fund
should any of the related projects or facilities experience
financial difficul-
ties. In addition, the Fund also may invest up to an aggregate of
15% of its
total assets in securities with contractual or other restrictions
on resale and
other instruments which are not readily marketable. The Fund also
is authorized
to borrow an amount of up to 10% of its total assets (including
the amount bor-
rowed) valued at market less liabilities (not including the
amount borrowed) in
order to meet anticipated redemptions and to pledge its assets to
the same
extent in connection with the borrowings.
Further information about the Fund's investment policies,
including a list of
those restrictions on the Fund's investment activities that
cannot be changed
without shareholder approval, appears in the Statement of
Additional
Information.
18
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
CERTAIN PORTFOLIO STRATEGIES
In attempting to achieve its investment objective, the Fund may
employ, among
others, the following portfolio strategies.
When-Issued Securities.New issues of California Municipal
Securities (and
other tax-exempt obligations) frequently are offered on a when-
issued basis,
which means that delivery and payment for such securities
normally take place
within 45 days after the date of the commitment to purchase. The
payment obli-
gation and the interest rate that will be received on when-issued
securities
are fixed at the time the buyer enters into the commitment.
California Munici-
pal Securities, like other investments made by the Fund, may
decline or appre-
ciate in value before their actual delivery to the Fund. Due to
fluctuations in
the value of securities purchased and sold on a when-issued
basis, the yields
obtained on these securities may be higher or lower than the
yields available
in the market on the date when the investments actually are
delivered to the
buyers. The Fund will not accrue income with respect to a when-
issued security
prior to its stated delivery date. The Fund will establish a
segregated account
with the Fund's custodian consisting of cash, obligations issued
or guaranteed
by the United States government or its agencies or
instrumentalities ("U.S.
government securities") or other high grade debt obligations in
an amount equal
to the purchase price of the Fund's when-issued commitments.
Placing securities
rather than cash in the segregated account may have a leveraging
effect on the
Fund's net assets. The Fund generally will make commitments to
purchase Cali-
fornia Municipal Securities (and other tax-exempt obligations) on
a when-issued
basis only with the intention of actually acquiring the
securities, but the
Fund may sell such securities before the delivery date if it is
deemed advis-
able.
Temporary Investments.Under normal market conditions, the Fund
may hold up to
20% of its total assets in cash or money market instruments,
including taxable
money market instruments ("Temporary Investments"). In addition,
when SBMFM
believes that market conditions warrant, including when
acceptable California
Municipal Securities are unavailable, the Fund may take a
temporary defensive
posture and invest without limitation in Temporary Investments.
Securities eli-
gible for short-term investment by the Fund are tax-exempt notes
of municipal
issuers having, at the time of purchase, a rating within the
three highest
grades of Moody's or S&P or, if not rated, having an issue of
outstanding debt
securities rated within the three highest grades of Moody's or
S&P, and certain
taxable short-term instruments having quality characteristics
comparable to
those for tax-exempt investments. To the extent the Fund holds
19
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Temporary Investments, it may not achieve its investment
objective. Since the
commencement of its operations, the Fund has not found it
necessary to invest
in taxable Temporary Investments and it is not expected that such
action will
be necessary.
Financial Futures and Options Transactions. The Fund may enter
into financial
futures contracts and invest in options on financial futures
contracts that are
traded on a domestic exchange or board of trade. Such
investments, if any, by
the Fund will be made solely for the purpose of hedging against
the changes in
the value of its portfolio securities due to anticipated changes
in interest
rates and market conditions and where the transactions are
economically appro-
priate to the reduction of risks inherent in the management of
the Fund. The
futures contracts or options on futures contracts that may be
entered into by
the Fund will be restricted to those that are either based on a
municipal bond
index or related to debt securities, the prices of which are
anticipated by
SBMFM to correlate with the prices of the California Municipal
Securities owned
or to be purchased by the Fund.
In entering into a financial futures contract, the Fund will be
required to
deposit with the broker through which it undertakes the
transaction an amount
of cash or cash equivalents equal to approximately 5% of the
contract amount.
This amount, which is known as "initial margin," is subject to
change by the
exchange or board of trade on which the contract is traded, and
members of the
exchange or board of trade may charge a higher amount. Initial
margin is in the
nature of a performance bond or good faith deposit on the
contract that is
returned to the Fund upon termination of the futures contract,
assuming all
contractual obligations have been satisfied. In accordance with a
process known
as "marking-to-market," subsequent payments, known as "variation
margin," to
and from the broker will be made daily as the price of the index
or securities
underlying the futures contract fluctuates, making the long and
short positions
in the futures contract more or less valuable. At any time prior
to the expira-
tion of a futures contract, the Fund may elect to close the
position by taking
an opposite position, which will operate to terminate the Fund's
existing posi-
tion in the contract.
A financial futures contract provides for the future sale by
one party and
the purchase by the other party of a certain amount of a
specified property at
a specified price, date, time and place. Unlike the direct
investment in a
futures contract, an option on a financial futures contract gives
the purchaser
the right, in return for the premium paid, to assume a position
in the finan-
cial futures con
20
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tract at a specified exercise price at any time prior to the
expiration date of
the option. Upon exercise of an option, the delivery of the
futures position by
the writer of the option to the holder of the option will be
accompanied by
delivery of the accumulated balance in the writer's futures
margin account,
which represents the amount by which the market price of the
futures contract
exceeds, in the case of a call, or is less than, in the case of a
put, the
exercise price of the option on the futures contract. The
potential loss
related to the purchase of an option on financial futures
contracts is limited
to the premium paid for the option (plus transaction costs). The
value of the
option may change daily and that change would be reflected in the
net asset
value of the Fund.
Regulations of the Commodity Futures Trading Commission
applicable to the
Fund require that its transactions in financial futures contracts
and options
on financial futures contracts be engaged in for bona fide
hedging purposes, or
if the Fund enters into futures contracts for speculative
purposes, that the
aggregate initial margin deposits and premiums paid by the Fund
will not exceed
5% of the market value of its assets. In addition, the Fund will,
with respect
to its purchases of financial futures contracts, establish a
segregated account
consisting of cash or cash equivalents in an amount equal to the
total market
value of the futures contracts, less the amount of initial margin
on deposit
for the contracts. The Fund's ability to trade in financial
futures contracts
and options on financial futures contracts may be limited to some
extent by the
requirements of the Code, applicable to a regulated investment
company, that
are described below under "Dividends, Distributions and Taxes."
Lending of Portfolio Securities.The Fund has the ability to
lend securities
from its portfolio to brokers, dealers and other financial
organizations. Such
loans, if and when made, may not exceed 20% of the Fund's total
assets, taken
at value. Loans of portfolio securities by the Fund will be
collateralized by
cash, letters of credit or U.S. government securities which are
maintained at
all times in an amount equal to at least 100% of the current
market value (de-
termined by marking to market daily) of the loaned securities.
The risks in
lending portfolio securities, as with other extensions of secured
credit, con-
sist of possible delays in receiving additional collateral or in
the recovery
of the securities or possible loss of rights in the collateral
should the bor-
rower fail financially. Loans will be made to firms deemed by
SBMFM to be of
good standing and will not be made unless, in the judgment of
SBMFM, the con-
sideration to be earned from such loans would justify the risk.
21
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
CALIFORNIA MUNICIPAL SECURITIES
The interest on California Municipal Securities is, in the
opinion of bond
counsel to the issuers, excluded from gross income for Federal
income tax pur-
poses and exempt from California state personal income tax, and
for that reason
generally is fixed at a lower rate than it would be if it were
subject to such
taxes. Interest income on certain municipal securities (including
California
Municipal Securities) is a specific tax preference item for
purposes of the
Federal individual and corporate alternative minimum taxes.
CLASSIFICATIONS
The two principal classifications of California Municipal
Securities are
"general obligation bonds" and "revenue bonds." General
obligation bonds are
secured by the issuer's pledge of its full faith, credit and
taxing power for
the payment of principal and interest. Revenue bonds are payable
from the reve-
nues derived from a particular facility or class of facilities
or, in some
cases, from the proceeds of a special excise tax or other
specific revenue
source, but not from the general taxing power. Sizeable
investments in such
obligations could involve an increased risk to the Fund should
any of such
related facilities experience financial difficulties. In
addition, certain
types of private activity bonds issued by or on behalf of public
authorities to
obtain funds for privately operated facilities are included in
the term Cali-
fornia Municipal Securities, provided the interest paid thereon
qualifies as
excluded from gross income for Federal income tax purposes and as
exempt from
California state personal income tax. Private activity bonds are
in most cases
revenue bonds and generally do not carry the pledge of the credit
of the issu-
ing municipality.
SPECIAL CONSIDERATIONS
On July 15, 1994, Moody's, citing the State's deteriorating
financial posi-
tion, lowered California's general obligation bond rating from Aa
to A1. On
July 15, 1994, S&P, citing the State's deteriorating financial
position, low-
ered California's general obligations bond ratings from A+ to A.
Investors
should be aware that certain California constitutional
amendments, legislative
measures, executive orders, administrative regulations and voter
initiatives
could result in certain adverse consequences affecting California
Municipal
Securities. For instance, certain provisions of the California
Constitution and
statutes that limit the taxing and spending authority of
California governmen-
tal entities may impair the ability of the issuers of some
California Municipal
Securities to maintain debt service on their obligations. Other
measures
affecting the taxing or
22
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
CALIFORNIA MUNICIPAL SECURITIES (CONTINUED)
spending authority of California or its political subdivisions
may be approved
or enacted in the future. Some of the significant financial
considerations
relating to the Fund's investments in California Municipal
Securities are sum-
marized in the Statement of Additional Information.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the
close of regular
trading on the NYSE, on each day that the NYSE is open, by
dividing the value
of the Fund's net assets attributable to each Class by the total
number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market value
or, in the
absence of a market value with respect to any securities, at fair
value as
determined by or under the direction of the Fund's Board of
Directors. Certain
securities may be valued on the basis of prices provided by
pricing services
approved by the Board of Directors. Short-term investments that
mature in 60
days or less are valued at amortized cost whenever the Directors
determine that
amortized cost is fair value. Amortized cost valuation involves
valuing an
instrument at its cost initially and, thereafter, assuming a
constant amortiza-
tion to maturity of any discount or premium, regardless of the
impact of fluc-
tuating interest rates on the market value of the instrument.
Further informa-
tion regarding the Fund's valuation policies is contained in the
Statement of
Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net investment income
monthly; dividends
ordinarily will be paid on the last Friday of each calendar month
to sharehold-
ers of record as of three business days prior thereto.
Distributions of net
realized long- and short-term capital gains, if any, are declared
and paid
annually after the end of the fiscal year in which they have been
earned.
If a shareholder does not otherwise instruct, dividends and
capital gains
distributions will be reinvested automatically in additional
shares of the same
Class at net asset value, subject to no sales charge or CDSC. In
addition, in
23
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
order to avoid the application of a 4% nondeductible excise tax
on certain
undistributed amounts of ordinary income and capital gains, the
Fund may make
an additional distribution shortly before December 31 of each
year of any
undistributed ordinary income or capital gains and expects to pay
any other
distributions as are necessary to avoid the application of this
tax.
If, for any full fiscal year, the Fund's total distributions
exceed net
investment income and net realized capital gains, the excess
distributions may
be treated as a tax-free return of capital (up to the amount of
the sharehold-
er's tax basis in his or her shares). The amount treated as a tax-
free return
of capital will reduce a shareholder's adjusted basis in his or
her shares.
Pursuant to the requirements of the 1940 Act and other applicable
laws, a
notice will accompany any distribution paid from sources other
than net invest-
ment income. In the event the Fund distributes amounts in excess
of its net
investment income and net realized capital gains, such
distributions may have
the effect of decreasing the Fund's total assets, which may
increase the Fund's
expense ratio.
The per share dividends on Class B and Class C shares may be
lower than the
per share dividends on Class A and Class Y shares principally as
a result of
the distribution fee applicable with respect to Class B and Class
C shares. The
per share dividends on Class A shares of the Fund may be lower
than the per
share dividends on Class Y shares principally as a result of the
service fee
applicable to Class A shares. Distributions of capital gains, if
any, will be
in the same amount for Class A, B, C and Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each
year as a reg-
ulated investment company under the Code and will designate and
pay exempt-
interest dividends derived from interest earned on qualifying tax-
exempt obli-
gations. Such exempt-interest dividends may be excluded by
shareholders from
their gross income for Federal income tax purposes although (a)
all or a por-
tion of such exempt-interest dividends will be a specific
preference item for
purposes of the Federal individual and corporate alternative
minimum taxes to
the extent they are derived from certain types of private
activity bonds issued
after August 7, 1986 and (b) all exempt-interest dividends will
be a component
of the "current earnings" adjustment item for purposes of the
Federal corporate
alternative minimum tax. In addition, corporate shareholders may
incur a
greater Federal "environmental" tax liability through the receipt
of the Fund's
dividends and distributions. Dividends derived from interest on
California
24
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Municipal Securities also will be exempt from California state
personal income
(but not corporate franchise or corporate income) taxes.
Dividends paid from taxable net investment income, if any, and
distributions
of any net realized short-term capital gains (whether from tax-
exempt or tax-
able securities) are taxable to shareholders as ordinary income,
regardless of
how long they have held their Fund shares and whether such
dividends or distri-
butions are received in cash or reinvested in additional Fund
shares. Distribu-
tions of net realized long-term capital gains will be taxable to
shareholders
as long-term capital gains, regardless of how long they have held
their Fund
shares and whether such distributions are received in cash or
reinvested in
additional shares. Furthermore, as a general rule, a
shareholder's gain or loss
on a sale or redemption of his or her shares will be a long-term
capital gain
or loss if the shareholder has held the shares for more than one
year and will
be a short-term capital gain or loss if the shareholder has held
the shares for
one year or less. The Fund's dividends and distributions will not
qualify for
the dividends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends
and distribu-
tions are mailed annually. Each shareholder will also receive, if
appropriate,
various written notices after the close of the Fund's prior
taxable year as to
the Federal income tax status of his or her dividends and
distributions which
were received from the Fund during the Fund's prior taxable year.
These state-
ments set forth the dollar amount of income excluded from Federal
income taxes
or California state personal income taxes and the dollar amount,
if any, sub-
ject to Federal income taxes. Moreover, these statements will
designate the
amount of exempt-interest dividends that is a specific preference
item for pur-
poses of the Federal individual and corporate alternative minimum
taxes. Share-
holders should consult their tax advisors with specific reference
to their own
tax situations.
25
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES
GENERAL
The Fund offers four classes of shares. Class A shares are sold
to investors
with an initial sales charge and Class B and Class C shares are
sold without an
initial sales charge but are subject to a CDSC payable upon
certain redemp-
tions. Class Y shares are sold without an initial sales charge or
CDSC and are
available only to investors investing a minimum of $5,000,000
(except for pur-
chases of Class Y shares by Smith Barney Concert Series Inc., for
which there
is no minimum purchase amount). See "Prospectus Summary--
Alternative Purchase
Arrangements" for a discussion of factors to consider in
selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage
account maintained
with Smith Barney, with an Introducing Broker or with an
investment dealer in
the selling group. When purchasing shares of the Fund, investors
must specify
whether the purchase is for Class A, Class B, Class C or Class Y
shares. No
maintenance fee will be charged by the Fund in connection with a
brokerage
account through which an investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may open an
account in the
Fund by making an initial investment of at least $1,000.
Investors in Class Y
shares may open an account by making an initial investment of
$5,000,000. Sub-
sequent investments of at least $50 may be made for all Classes.
For the Fund's
Systematic Investment Plan, the minimum initial investment
requirement for
Class A, Class B and Class C shares and the subsequent investment
requirement
for all Classes is $50. There are no minimum investment
requirements for Class
A shares for employees of Travelers and its subsidiaries,
including Smith Bar-
ney, unitholders who invest distributions from a UIT sponsored by
Smith Barney,
and Directors of the Fund and their spouses and children. The
Fund reserves the
right to waive or change minimums, to decline any order to
purchase its shares
and to suspend the offering of shares from time to time. Shares
purchased will
be held in the shareholder's account by the Fund's transfer
agent, First Data
Investor Services Group, Inc. (the "Transfer Agent"). Share
certificates are
issued only upon a shareholder's written request to the Transfer
Agent.
Purchase orders received by the Fund or Smith Barney prior to
the close of
regular trading on the NYSE, on any day the Fund calculates its
net asset val-
ue, are priced according to the net asset value determined on
that day. Orders
received by dealers or Introducing Brokers prior to the close of
regular trad-
ing
26
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
on the NYSE on any day the Fund calculates its net asset value,
are priced
according to the net asset value determined on that day, provided
the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). For shares purchased through Smith Barney or
Introducing
Brokers purchasing through Smith Barney, payment for Fund shares
is due on the
third business day after the trade date (the "settlement date").
In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time
by purchasing
shares through a service known as the Systematic Investment Plan.
Under the
Systematic Investment Plan, Smith Barney or the Transfer Agent is
authorized
through preauthorized transfers of $50 or more to charge an
account with a bank
or other financial institution on a monthly or quarterly basis as
indicated by
the shareholder to provide for systematic additions to the
shareholder's Fund
account. A shareholder who has insufficient funds to complete the
transfer will
be charged a fee of up to $25 by Smith Barney or the Transfer
Agent. The Sys-
tematic Investment Plan also authorizes Smith Barney to apply
cash held in the
shareholder's Smith Barney brokerage account or redeem the
shareholder's shares
of a Smith Barney money market fund to make additions to the
account. Addi-
tional information is available from the Fund or a Smith Barney
Financial Con-
sultant.
27
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of
the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
DEALERS
SALES CHARGE AS % OF
REALLOWANCE AS %
AS % OF AMOUNT
OF OFFERING
AMOUNT OF INVESTMENT* TRANSACTION INVESTED
PRICE
----------------------------------------------------------------
- ------------------
<S> <C> <C>
<C>
Under $25,000 4.00% 4.17%
3.60%
$25,000--$49,999 3.50% 3.63%
3.15%
$50,000--$99,999 3.00% 3.09%
2.70%
$100,000--$249,999 2.50% 2.56%
2.25%
$250,000--$499,999 1.50% 1.52%
1.35%
$500,000 and over* * *
*
----------------------------------------------------------------
- ------------------
</TABLE>
* Purchases of Class A shares, which when combined with current
holdings of Class A shares offered with a sales charge equal
or exceed $500,000 in the aggregate, will be made at net asset
value without any initial sales charge, but will be subject to
a CDSC of 1.00% on redemptions made within 12 months of
purchase. The CDSC on Class A shares is payable to Smith
Barney, which compensates
Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived
in the same circumstances in which the CDSC applicable to
Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales
charge and
may be deemed to be underwriters of the Fund as defined in the
Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the aggregate of
purchases of
Class A shares of the Fund made at one time by "any person,"
which includes an
individual, his or her spouse and children, or a trustee or other
fiduciary of
a single trust estate or single fiduciary account. The reduced
sales charge
minimums may also be met by aggregating the purchase with the net
asset value
of all Class A shares held in funds sponsored by Smith Barney
that are offered
with a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value
without a sales
charge in the following circumstances: (a) sales to (i) Board
Members and
employees of Travelers and its subsidiaries and any of the Smith
Barney Mutual
Funds (including retired Board Members and employees), the
immediate families
of such persons (including the surviving spouse of a deceased
Board Member or
employee), and to a pension, profit-sharing or other benefit plan
for such per-
sons and (ii) employees of members of the National Association of
Securities
28
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
Dealers, Inc., provided such sales are made upon the assurance of
the purchaser
that the purchase is made for investment purposes and that the
securities will
not be resold except through redemption or repurchase; (b) offers
of Class A
shares to any other investment company in connection with the
combination of
such company with the Fund by merger, acquisition of assets or
otherwise; (c)
purchases of Class A shares by any client of a newly employed
Smith Barney
Financial Consultant (for a period up to 90 days from the
commencement of the
Financial Consultant's employment with Smith Barney), on the
condition the pur-
chase of Class A shares is made with the proceeds of the
redemption of shares
of a mutual fund which (i) was sponsored by the Financial
Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant
and (iii) was
subject to a sales charge; (d) shareholders who have redeemed
Class A shares in
the Fund (or Class A shares of another Smith Barney Mutual Fund
that are
offered with a sales charge equal to or greater than the maximum
sales charge
of the Fund) and who wish to reinvest their redemption proceeds
in the Fund,
provided the reinvestment is made within 60 calendar days of the
redemption;
(e) accounts managed by registered investment advisory
subsidiaries of Travel-
ers; and (f) investments of distributions from a UIT sponsored by
Smith Barney.
In order to obtain such discounts, the purchaser must provide
sufficient infor-
mation at the time of purchase to permit verification that the
purchase would
qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as
defined
above) at a reduced sales charge or at net asset value determined
by aggregat-
ing the dollar amount of the new purchase and the total net asset
value of all
Class A shares of the Fund and of funds sponsored by Smith Barney
which are
offered with a sales charge listed under "Exchange Privilege"
then held by such
person and applying the sales charge applicable to such
aggregate. In order to
obtain such discount, the purchaser must provide sufficient
information at the
time of purchase to permit verification that the purchase
qualifies for the
reduced sales charge. The right of accumulation is subject to
modification or
discontinuance at any time with respect to all shares purchased
thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales
charge or pur-
chase at net asset value will also be available to employees (and
partners) of
the same employer purchasing as a group, provided each
participant makes the
min-
29
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
imum initial investment required. The sales charge applicable to
purchases by
each member of such a group will be determined by the table set
forth above
under "Initial Sales Charge Alternative--Class A Shares," and
will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual
Funds offered
with a sales charge to, and share holdings of, all members of the
group. To be
eligible for such reduced sales charges or to purchase at net
asset value, all
purchases must be pursuant to an employer-or partnership-
sanctioned plan meet-
ing certain requirements. One such requirement is that the plan
must be open to
specified partners or employees of the employer and its
subsidiaries, if any.
Such plan may, but is not required to, provide for payroll
deductions. Smith
Barney may also offer a reduced sales charge or net asset value
purchase for
aggregating related fiduciary accounts under such conditions that
Smith Barney
will realize economies of sales efforts and sales related
expenses. An individ-
ual who is a member of a qualified group may also purchase Class
A shares at
the reduced sales charge applicable to the group as a whole. The
sales charge
is based upon the aggregate dollar value of Class A shares
offered with a sales
charge that have been previously purchased and are still owned by
the group,
plus the amount of the current purchase. A "qualified group" is
one which (a)
has been in existence for more than six months, (b) has a purpose
other than
acquiring Fund shares at a discount and (c) satisfies uniform
criteria which
enable Smith Barney to realize economies of scale in its costs of
distributing
shares. A qualified group must have more than 10 members, must be
available to
arrange for group meetings between representatives of the Fund
and the members,
and must agree to include sales and other materials related to
the Fund in its
publications and mailings to members at no cost to Smith Barney.
In order to
obtain such reduced sales charge or to purchase at net asset
value, the pur-
chaser must provide sufficient information at the time of
purchase to permit
verification that the purchase qualifies for the reduced sales
charge. Approval
of group purchase reduced sales charge plans is subject to the
discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or
more provides an
opportunity for an investor to obtain a reduced sales charge by
aggregating
investments over a 13 month period, provided that the investor
refers to such
Letter when placing orders. For purposes of a Letter of Intent,
the "Amount of
Investment" as referred to in the preceding sales charge table
includes (i) all
Class A shares of the Fund and other Smith Barney Mutual
30
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
Funds offered with a sales charge acquired during the term of the
Letter plus
(ii) the value of all Class A shares previously purchased and
still owned. Each
investment made during the period receives the reduced sales
charge applicable
to the total amount of the investment goal. If the goal is not
achieved within
the period, the investor must pay the difference between the
sales charges
applicable to the purchases made and the charges actually paid,
or an appropri-
ate number of escrowed shares will be redeemed. The term of the
Letter will
commence upon the date the Letter is signed, or at the option of
the investor,
up to 90 days before such date. Please contact a Smith Barney
Financial Consul-
tant or the Transfer Agent to obtain a Letter of Intent
application.
Class Y Shares. A Letter of Intent may also be used as a way
for investors to
meet the minimum investment requirement for Class Y shares. Such
investors must
make an initial minimum purchase of $1,000,000 in Class Y shares
of the Fund
and agree to purchase a total of $5,000,000 of Class Y shares of
the Fund
within 6 months from the date of the Letter. If a total
investment of
$5,000,000 is not made within the six month period, all Class Y
shares pur-
chased to date will be transferred to Class A shares, where they
will be sub-
ject to all fees (including a service fee of 0.15%) and expenses
applicable to
the Fund's Class A shares, which may include a CDSC of 1.00%. The
Fund expects
that such transfer will not be subject to federal income taxes.
Please contact
the Transfer Agent or a Smith Barney Financial Consultant for
further informa-
tion.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined
without an initial
sales charge so that the full amount of an investor's purchase
payment may be
immediately invested in the Fund. A CDSC, however, may be imposed
on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B
shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A
shares offered
with a sales charge currently held by an investor equal or exceed
$500,000 in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the
lesser of the
original cost of the shares being redeemed or their net asset
value at the time
of redemption. CDSC Shares that are redeemed will not be subject
to a CDSC to
the extent that the value of such shares represents: (a) capital
appreciation
of Fund assets; (b) reinvestment of dividends or capital gain
distributions;
(c) with respect to Class B shares, shares redeemed more than
five years after
their purchase; or (d) with respect to Class C shares and Class A
shares that
are CDSC Shares, shares redeemed more than 12 months after their
purchase.
31
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
Class C and Class A shares that are CDSC Shares are subject to
a 1.00% CDSC
if redeemed within 12 months of purchase. In circumstances in
which the CDSC is
imposed on Class B shares, the amount of the charge will depend
on the number
of years since the shareholder made the purchase payment from
which the amount
is being redeemed. Solely for purposes of determining the number
of years since
a purchase payment, all purchase payments made during a month
will be aggre-
gated and deemed to have been made on the last day of the
preceding Smith Bar-
ney statement month. The following table sets forth the rates of
the charge for
redemptions of Class B shares by shareholders.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ---------------------------------
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth and thereafter 0.00%
- ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares
eight years after
the date on which they were purchased and thereafter will no
longer be subject
to any distribution fees. There will also be converted at that
time such pro-
portion of Class B Dividend Shares owned by the shareholder as
the total number
of his or her Class B shares converting at the time bears to the
total number
of outstanding Class B shares (other than Class B Dividend
Shares) owned by the
shareholder. Shareholders who held Class B shares of Smith Barney
Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund")
on July 15,
1994 and who subsequently exchanged those shares for Class B
shares of the Fund
will be offered the opportunity to exchange all such Class B
shares for Class A
shares of the Fund four years after the date on which those
shares were deemed
to have been purchased. Holders of such Class B shares will be
notified of the
pending exchange in writing approximately 30 days before the
fourth anniversary
of the purchase date and, unless the exchange has been rejected
in writing, the
exchange will occur on or about the fourth anniversary date. See
"Prospectus
Summary--Alternative Purchase Arrangements--Class B Shares
Conversion Feature."
The length of time that CDSC Shares acquired through an
exchange have been
held will be calculated from the date that the shares exchanged
were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund
32
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PURCHASE OF SHARES (CONTINUED)
shares being redeemed will be considered to represent, as
applicable, capital
appreciation or dividend and capital gain distribution
reinvestments in such
other funds. For Federal income tax purposes, the amount of the
CDSC will
reduce the gain or increase the loss, as the case may be, on the
amount real-
ized on redemption. The amount of any CDSC will be paid to Smith
Barney.
To provide an example, assume an investor purchased 100 Class B
shares at $10
per share for a cost of $1,000. Subsequently, the investor
acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth
month after
the purchase, the investor decided to redeem $500 of his or her
investment.
Assuming at the time of the redemption the net asset value had
appreciated to
$12 per share, the value of the investor's shares would be $1,260
(105 shares
at $12 per share). The CDSC would not be applied to the amount
which represents
appreciation ($200) and the value of the reinvested dividend
shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260)
would be
charged at a rate of 4.00% (the applicable rate for Class B
shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00%
per month of
the value of the shareholder's shares at the time the withdrawal
plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that
automatic cash
withdrawals in amounts equal to or less than 2.00% per month of
the value of
the shareholder's shares will be permitted for withdrawal plans
that were
established prior to November 7, 1994); (c) redemptions of shares
within 12
months following the death or disability of the shareholder; (d)
involuntary
redemptions; and (e) redemptions of shares in connection with a
combination of
the Fund with any investment company by merger, acquisition of
assets or other-
wise. In addition, a shareholder who has redeemed shares from
other Smith Bar-
ney Mutual Funds may, under certain circumstances, reinvest all
or part of the
redemption proceeds within 60 days and receive pro rata credit
for any CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith
Barney in the
case of shareholders who are also Smith Barney clients or by the
Transfer Agent
in the case of all other shareholders) of the shareholder's
status or holdings,
as the case may be.
33
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be
exchanged at the
net asset value next determined for shares of the same Class in
the following
Smith Barney Mutual Funds, to the extent shares are offered for
sale in the
shareholder's state of residence. Exchanges of Class A, Class B
and Class C
shares are subject to minimum investment requirements and all
shares are sub-
ject to the other requirements of the fund into which exchanges
are made and a
sales charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*Smith Barney Funds, Inc.--Income Return Account Portfolio
++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
34
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
*Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Portfolio
Smith Barney World Funds, Inc.--International Balanced
Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc.--Balanced Portfolio
Smith Barney Concert Series Inc.--Conservative Portfolio
Smith Barney Concert Series Inc.--Growth Portfolio
Smith Barney Concert Series Inc.--High Growth Portfolio
Smith Barney Concert Series Inc.--Income Portfolio
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
35
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
**Smith Barney Money Funds, Inc.--Retirement Portfolio
++Smith Barney Municipal Money Market Fund, Inc.
++Smith Barney Muni Funds--California Money Market Portfolio
++Smith Barney Muni Funds--New York Money Market Portfolio
- -----------------------------------------------------------------
- ---------------
* Available for exchange with Class A, Class C and Class Y shares
of the Fund.
** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the
Fund.
++ Available for exchange with Class A and Class Y shares of the
Fund.
Class A Exchanges. Class A shares of Smith Barney Mutual Funds
sold without a
sales charge or with a maximum sales charge of less than the
maximum charged by
other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for Class A
shares of a
fund sold with a higher sales charge. The "sales charge
differential" is lim-
ited to a percentage rate no greater than the excess of the sales
charge rate
applicable to purchases of shares of the mutual fund being
acquired in the
exchange over the sales charge rate(s) actually paid on the
mutual fund shares
relinquished in the exchange and on any predecessor of those
shares. For pur-
poses of the exchange privilege, shares obtained through
automatic reinvestment
of dividends and capital gains distributions are treated as
having paid the
same sales charges applicable to the shares on which the
dividends or distribu-
tions were paid; however, if no sales charge was imposed upon the
initial pur-
chase of shares, any shares obtained through automatic
reinvestment will be
subject to a sales charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless
such
shareholder was a Class B shareholder of the Short-Term World
Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her
shares in any
of the funds imposing a higher CDSC than that imposed by the
Fund, the
exchanged Class B shares will be subject to the higher applicable
CDSC. Upon an
exchange, the new Class B shares will be deemed to have been
purchased on the
same date as the Class B shares of the Fund that have been
exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares
will be deemed to
have been purchased on the same date as the Class C shares of the
Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to
exchange all
or a portion of their Class Y shares for Class Y shares in any of
the funds
identified above may do so without imposition of any charge.
36
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
EXCHANGE PRIVILEGE (CONTINUED)
Additional Information Regarding the Exchange Privilege.
Although the
exchange privilege is an important benefit, excessive exchange
transactions can
be detrimental to the Fund's performance and its shareholders.
SBMFM may deter-
mine that a pattern of frequent exchanges is excessive and
contrary to the best
interests of the Fund's other shareholders. In this event, SBMFM
will notify
Smith Barney that the Fund may, at its discretion, decide to
limit additional
purchases and/or exchanges by a shareholder. Upon such a
determination, the
Fund will provide notice in writing or by telephone to the
shareholder at least
15 days prior to suspending the exchange privilege and during the
15 day period
the shareholder will be required to (a) redeem his or her shares
in the Fund or
(b) remain invested in the Fund or exchange into any of the Smith
Barney Mutual
Funds ordinarily available, which position the shareholder would
be expected to
maintain for a significant period of time. All relevant factors
will be consid-
ered in determining what constitutes an abusive pattern of
exchanges.
Certain shareholders may be able to exchange shares by
telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program."
Exchanges will
be processed at the net asset value next determined, plus any
applicable sales
charge differential. Redemption procedures discussed below are
also applicable
for exchanging shares, and exchanges will be made upon receipt of
all support-
ing documents in proper form. If the account registration of the
shares of the
fund being acquired is identical to the registration of the
shares of the fund
exchanged, no signature guarantee is required. A capital gain or
loss for tax
purposes will be realized upon the exchange, depending upon the
cost or other
basis of shares redeemed. Before exchanging shares, investors
should read the
current prospectus describing the shares to be acquired. The Fund
reserves the
right to modify or discontinue exchange privileges upon 60 days'
prior notice
to shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered
to it, as
described below, at a redemption price equal to their net asset
value per share
next determined after receipt of a written request in proper form
at no charge
other than any applicable CDSC. Redemption requests received
after the close of
regular trading on the NYSE are priced at the net asset value
next determined.
37
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
If a shareholder holds shares in more than one Class, any
request for redemp-
tion must specify the Class being redeemed. In the event of a
failure to spec-
ify which Class, or if the investor owns fewer shares of the
Class than speci-
fied, the redemption request will be delayed until the Transfer
Agent receives
further instructions from Smith Barney, or if the shareholder's
account is not
with Smith Barney, from the shareholder directly. The redemption
proceeds will
be remitted on the third business day after receipt of proper
tender, except on
any days on which the NYSE is closed or as permitted under the
1940 Act in
extraordinary circumstances. Generally, if the redemption
proceeds are remitted
to a Smith Barney brokerage account, these funds will not be
invested for the
shareholder's benefit without specific instruction and Smith
Barney will bene-
fit from the use of temporarily uninvested funds. Redemption
proceeds for
shares purchased by check, other than a certified or official
bank check, will
be remitted upon clearance of the check, which may take up to ten
days or more.
Shares held by Smith Barney as custodian must be redeemed by
submitting a
written request to a Smith Barney Financial Consultant. Shares
other than those
held by Smith Barney as custodian may be redeemed through an
investor's
Financial Consultant, Introducing Broker or dealer in the selling
group or by
submitting a written request for redemption to:
Smith Barney California Municipals Fund Inc.
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and
number or dollar
amount of shares to be redeemed, (b) identify the shareholder's
account number
and (c) be signed by each registered owner exactly as the shares
are regis-
tered. If the shares to be redeemed were issued in certificate
form, the cer-
tificates must be endorsed for transfer (or be accompanied by an
endorsed stock
power) and must be submitted to the Transfer Agent together with
the redemption
request. Any signature required in connection with a share
certificate, stock
power or on a written redemption request in excess of $2,000,
must be guaran-
teed by an eligible guarantor institution such as a domestic
bank, savings and
loan institution, domestic credit union, member bank of the
Federal Reserve
System or member firm of a national securities exchange. The
Transfer Agent may
require additional supporting documents for redemptions made by
corporations,
executors, administrators, trustees or guardians. A redemption
request will not
be deemed
38
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
properly received until the Transfer Agent receives all required
documents in
proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM FOR SHAREHOLDERS WHO
DO NOT HAVE A
SMITH BARNEY BROKERAGE ACCOUNT
Certain shareholders may be eligible to redeem and exchange
Fund shares by
telephone. To determine if a shareholder is entitled to
participate in this
program, he or she should contact the Transfer Agent at (800) 451-
2010. Once
eligibility is confirmed, the shareholder must complete and
return a Telephone/
Wire Authorization Form, including a signature guarantee, that
will be provided
by the Transfer Agent upon request. (Alternatively, an investor
may authorize
telephone redemptions on the new account application with a
signature guarantee
when making his/her initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class
or classes of
the Fund's shares may be made by eligible shareholders by calling
the Transfer
Agent at (800) 451-2010. Such requests may be made between 9:00
a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open.
Redemptions of shares
(i) by retirement plans or (ii) for which certificates have been
issued are not
permitted under this program.
A shareholder will have the option of having the redemption
proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed or
wired, as the
case may be, on the next business day following the redemption
request. In
order to use the wire procedures, the bank receiving the proceeds
must be a
member of the Federal Reserve System or have a correspondent
relationship with
a member bank. The Fund reserves the right to charge shareholders
a nominal fee
for each wire redemption. Such charges, if any, will be assessed
against the
shareholder's account from which shares were redeemed. In order
to change the
bank account designated to receive redemption proceeds, a
shareholder must com-
plete a new Telephone/Wire Authorization Form and, for the
protection of the
shareholder's assets, will be required to provide a signature
guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the fund being acquired is identical to
the registra-
tion of the shares of the fund exchanged. Such exchange requests
may be made by
call
39
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
REDEMPTION OF SHARES (CONTINUED)
ing the Transfer Agent at (800) 451-2010 between 9:00 a.m. and
4:00 p.m. (New
York City time) on any day the NYSE is open.
Additional Information regarding Telephone Redemption and
Exchange
Program. Neither the Fund nor its agents will be liable for
following instruc-
tions communicated by telephone that are reasonably believed to
be genuine. The
Fund and its agents will employ procedures designed to verify the
identity of
the caller and legitimacy of instructions (for example, a
shareholder's name
and account number will be required and phone calls may be
recorded). The Fund
reserves the right to suspend, modify or discontinue the
telephone redemption
and exchange program or to impose a charge for this service at
any time follow-
ing at least seven (7) days' prior notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan,
under which
shareholders who own shares with a value of at least $10,000 may
elect to
receive cash payments of at least $50 monthly or quarterly. The
withdrawal plan
will be carried over on exchanges between funds or Classes of the
Fund. Any
applicable CDSC will not be waived on amounts withdrawn by a
shareholder that
exceed 1.00% per month of the value of the shareholder's shares
subject to the
CDSC at the time the withdrawal plan commences. (With respect to
withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC
will be waived
on amounts withdrawn that do not exceed 2.00% per month of the
shareholder's
shares subject to the CDSC.) For further information regarding
the automatic
cash withdrawal plan, shareholders should contact a Smith Barney
Financial Con-
sultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any
shareholder's
account in the Fund if the aggregate net asset value of the
shares held in the
Fund account is less than $500. (If a shareholder has more than
one account in
the Fund, each account must satisfy the minimum account size.)
The Fund, howev-
er, will not redeem shares based solely on market reductions in
net asset val-
ue. Before the Fund exercises such right, shareholders will
receive written
notice and will be permitted 60 days to bring accounts up to the
minimum to
avoid automatic redemption.
40
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PERFORMANCE
YIELD
From time to time, the Fund may advertise its 30-day "yield"
and "equivalent
taxable yield" for each Class of shares. The yield refers to the
income gener-
ated by an investment in those shares over the 30-day period
identified in the
advertisement and is computed by dividing the net investment
income per share
earned by the Class during the period by the maximum public
offering price per
share on the last day of the period. This income is "annualized"
by assuming
that the amount of income is generated each month over a one-year
period and is
compounded semi-annually. The annualized income is then shown as
a percentage
of the net asset value.
The equivalent taxable yield demonstrates the yield on a
taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-
exempt yield
for each Class. It is calculated by increasing the yield shown
for the Class to
the extent necessary to reflect the payment of taxes at specified
tax rates.
Thus, the equivalent taxable yield always will exceed the Fund's
yield. For
more information on equivalent taxable yields, refer to the table
under "Divi-
dends, Distributions and Taxes."
TOTAL RETURN
From time to time, the Fund may include its total return,
average annual
total return and current dividend return in advertisements and/or
other types
of sales literature. These figures are computed separately for
Class A, Class
B, Class C and Class Y shares of the Fund. These figures are
based on histori-
cal earnings and are not intended to indicate future performance.
Total return
is computed for a specific period of time assuming deduction of
the maximum
sales charge, if any, from the initial amount invested and
reinvestment of all
income dividends and capital gain distributions on the
reinvestment dates at
prices calculated as stated in this Prospectus, then dividing the
value of the
investment at the end of the period so calculated by the initial
amount
invested and subtracting 100%. The standard average annual total
return, as
prescribed by the SEC, is derived from this total return, which
provides the
ending redeemable value. Such standard total return information
may also be
accompanied with nonstandard total return information for
differing periods
computed in the same manner but without annualizing the total
return or taking
sales charges into account. The Fund calculates current dividend
return for
each Class by annualizing the most recent monthly distribution
and dividing by
the net asset value of the maximum public offering price
(including sales
charge) on the last
41
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
PERFORMANCE (CONTINUED)
day of the period for which current dividend return is presented.
The current
dividend return for each Class may vary from time to time
depending on market
conditions, the composition of its investment portfolio and
operating expenses.
These factors and possible differences in the methods used in
calculating cur-
rent dividend return should be considered when comparing a Class'
current
return to yields published for other investment companies and
other investment
vehicles. The Fund may also include comparative performance
information in
advertising or marketing its shares. Such performance information
may include
data from Lipper Analytical Services, Inc. or similar independent
services that
monitor the performance of mutual funds or other industry
publications.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the
Fund rests with
the Fund's Board of Directors. The Directors approve all
significant agreements
between the Fund and the companies that furnish services to the
Fund, including
agreements with its distributor, investment adviser and
administrator, custo-
dian and transfer agent. The day-to-day operations of the Fund
are delegated by
the Board to the Fund's investment adviser and administrator. The
Statement of
Additional Information contains background information regarding
each Director
and executive officer of the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR
SBMFM, located at 388 Greenwich Street, New York, New York
10013, serves as
the Fund's investment adviser pursuant to a transfer of the
advisory agreement,
effective November 7, 1994, from its affiliate Mutual Management
Corp. (Mutual
Management Corp. and SBMFM are both wholly owned subsidiaries of
Holdings.)
Investment advisory services continue to be provided to the Fund
by the same
portfolio managers who provided services under the agreement with
Mutual Man-
agement Corp. SBMFM (through predecessor entities) has been in
the investment
counseling business since 1934 and is a registered investment
adviser. SBMFM
renders investment advice to investment companies that had
aggregate assets
under management as of April 30, 1996, in excess of $75 billion.
42
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
MANAGEMENT OF THE FUND (CONTINUED)
Subject to the supervision and direction of the Fund's Board of
Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's
stated invest-
ment objective and policies, makes investment decisions for the
Fund, places
orders to purchase and sell securities and employs professional
portfolio man-
agers and securities analysts who provide research services to
the Fund. Prior
to November 17, 1995, for investment advisory services rendered,
the Fund paid
SBMFM a fee at the following annual rates of average daily net
assets: 0.35% up
to $500 million; 0.32% of the value of its average daily net
assets in excess
of $500 million. Effective November 17, 1995, the Fund pays SBMFM
an investment
advisory fee at an annual rate of 0.30% of the value of its
average daily net
assets. For the fiscal year ended February 29, 1996, SBMFM was
paid investment
advisory fees equal to 0.33% of the value of the average daily
net assets of
the Fund.
SBMFM also serves as the Fund's administrator and oversees all
aspects of the
Fund's administration. For administration services rendered, the
Fund pays
SBMFM a fee at the following annual rates of average daily net
assets: 0.20% to
$500 million and 0.18% thereafter. For the fiscal year ended
February 29, 1996,
SBMFM was paid administration fees equal to 0.20% of the value of
the average
daily net assets of the Fund.
PORTFOLIO MANAGEMENT
Joseph P. Deane, Vice President and Investment Officer of the
Fund since
November 1, 1988 and an Investment Officer of SBMFM, is
responsible for manag-
ing the day-to-day operations of the Fund, including making all
investment
decisions.
Management's discussion and analysis, and additional
performance information
regarding the Fund during the fiscal year ended February 29, 1996
is included
in the Annual Report dated February 29, 1996. A copy of the
Annual Report may
be obtained upon request and without charge from a Smith Barney
Financial Con-
sultant or by writing or calling the Fund at the address or phone
number listed
on page one of this Prospectus.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New
York 10013.
Smith Barney distributes shares of the Fund as principal
underwriter and as
such conducts a continuous offering pursuant to a "best efforts"
arrangement
requiring Smith Barney to take and pay for only such securities
as may be
43
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
DISTRIBUTOR (CONTINUED)
sold to the public. Pursuant to a plan of distribution adopted by
the Fund
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is
paid a serv-
ice fee with respect to Class A, Class B and Class C shares of
the Fund at the
annual rate of 0.15% of the average daily net assets of the
respective Class.
Smith Barney is also paid a distribution fee with respect to
Class B and Class
C shares at the rate of 0.50% and 0.55%, respectively, of the
average daily net
assets attributable to those Classes. Class B shares which
automatically con-
vert to Class A shares eight years after the date of original
purchase, will no
longer be subject to a distribution fee. The fees are used by
Smith Barney to
pay its Financial Consultants for servicing shareholder accounts
and, in the
case of Class B and Class C shares, to cover expenses primarily
intended to
result in the sale of those shares. These expenses include:
advertising
expenses; the cost of printing and mailing prospectuses to
potential investors;
payments to and expenses of Smith Barney Financial Consultants
and other per-
sons who provide support services in connection with the
distribution of
shares; interest and/or carrying charges; and indirect and
overhead costs of
Smith Barney associated with the sale of Fund shares, including
lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling
shares of a
Class include a commission or fee paid by the investor or Smith
Barney at the
time of sale and, with respect to Class A, Class B and Class C
shares, a con-
tinuing fee for servicing shareholder accounts for as long as a
shareholder
remains a holder of that Class. Smith Barney Financial
Consultants may receive
different levels of compensation for selling different Classes of
shares.
Payments under the Plan with respect to Class B and C shares
are not tied
exclusively to the distribution and shareholder service expenses
actually
incurred by Smith Barney and the payments may exceed distribution
expenses
actually incurred. The Fund's Board of Directors will evaluate
the appropriate-
ness of the Plan and its payment terms on a continuing basis and
in so doing
will consider all relevant factors, including expenses borne by
Smith Barney,
amounts received under the Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State of
Maryland on February
17, 1984, and is registered with the SEC as a non-diversified,
open- end man-
agement investment company.
44
<PAGE>
SMITH BARNEY
California Municipals Fund Inc.
ADDITIONAL INFORMATION (CONTINUED)
Each Class of the Fund represents an identical interest in the
Fund's invest-
ment portfolio. As a result, the Classes have the same rights,
privileges and
preferences, except with respect to: (a) the designation of each
Class; (b) the
effect of the respective sales charges for each Class; (c) the
distribution
and/or service fees borne by each Class; (d) the expenses
allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting
a single
Class; (f) the exchange privilege of each Class; and (g) the
conversion feature
of the Class B shares. The Board of Directors does not anticipate
that there
will be any conflicts among the interests of the holders of the
different Clas-
ses. The Directors, on an ongoing basis, will consider whether
any such con-
flict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There
normally will be no
meetings of shareholders for the purpose of electing Directors
unless and until
such time as less than a majority of the Directors holding office
have been
elected by shareholders. The Directors will call a meeting for
any purpose upon
written request of shareholders holding at least 10% of the
Fund's outstanding
shares, and the Fund will assist shareholders in calling such a
meeting as
required by the 1940 Act. When matters are submitted for
shareholder vote,
shareholders of each Class will have one vote for each full share
owned and a
proportionate, fractional vote for any fractional share held of
that Class.
Generally, shares of the Fund will be voted on a Fund-wide basis
on all matters
except matters affecting only the interests of one Class.
PNC Bank, National Association, located at 17th and Chestnut
Streets, Phila-
delphia, Pennsylvania, 19103, serves as custodian of the Fund's
investments.
First Data Investor Services Group, Inc., located at Exchange
Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent.
The Fund sends to each of its shareholders a semi-annual report
and an
audited annual report, which include listings of the investment
securities held
by the Fund at the end of the reporting period. In an effort to
reduce the
Fund's printing and mailing costs, the Fund plans to consolidate
the mailing of
its semi-annual and annual reports by household. This
consolidation means that
a household having multiple accounts with the identical address
of record will
receive a single copy of each report. Shareholders who do not
want this consol-
idation to apply to their account should contact their Financial
Consultants or
the Fund's transfer agent.
-----------------------
45
<PAGE>
SmithBarney
---
- --------
A Member of
TravelersGroup [ART]
SMITH BARNEY
CALIFORNIA
MUNICIPALS
FUND INC.
388
Greenwich Street
New York, New
York 10013
FD
0209 5/96
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART B
Smith Barney
CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement Of Additional June 3, 1996
Information
This Statement of Additional Information expands upon and
supplements the information contained in the current Prospectus
of Smith Barney California Municipals Fund Inc. (the "Fund")
dated June 3, 1996, as amended or supplemented from time
to time, and should be read in conjunction with the Fund's
Prospectus. The Fund's Prospectus may be obtained from your Smith
Barney Financial Consultant or by writing or calling the Fund at
the address or telephone number set forth above. This Statement
of Additional Information, although not in itself a prospectus,
is incorporated by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in both
the Prospectus and this Statement of Additional Information,
except where shown below:
<TABLE>
<S> <C>
Management of the 1
Fund................................................
......................................
Investment Objective and Management 5
Policies............................................
........
Municipal Bonds (See in the Prospectus 11
"California Municipal Securities")..........
Purchase of 24
Shares..............................................
.................................................
Redemption of 25
Shares..............................................
............................................
Distributor......................................... 25
....................................................
..............
Valuation of 26
Shares..............................................
...............................................
Exchange 27
Privilege...........................................
...................................................
Performance Data (See in the Prospectus "The 28
Fund's Performance")...................
Taxes (See in the Prospectus "Dividends, 30
Distributions and Taxes").....................
Additional 32
Information.........................................
................................................
Financial 33
Statements..........................................
..................................................
Appendix............................................ A-
.................................................... 1
.............
</TABLE>
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of
the organizations that provide services to the Fund. These
organizations are as follows:
<TABLE>
<S> <C>
Name Service
Smith Barney Inc.
("Smith Distributor
Barney")............................
........................
Smith Barney Mutual Funds
Management Inc.
Investment Adviser and
("SBMFM")........................... Administrator
................................
PNC Bank, National Association
Custodian
("PNC").............................
...................................
First Data Investor Services
Group, Inc.
(the "Transfer Transfer Agent
Agent").............................
..............
</TABLE>
These organizations and the functions they perform for the
Fund are discussed in the Prospectus and in this Statement of
Additional Information.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund,
together with information as to their principal business
occupations during the past five years, are set forth below. Each
Director who is an "interested person" of the Fund, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"),
is indicated by an asterisk.
Herbert Barg, Director (Age 72). Private Investor. His
address is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania
19004.
Alfred J. Bianchetti, Director (Age 73). Retired; formerly
Senior Consultant to Dean Witter Reynolds Inc. His address is 19
Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody, Director (Age 74). Vice Chairman of the Board
of Restaurant Associates Corp. His address is HMK Associates,
Three ADP Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director (Age 58). Professor, Graduate
School of Business Administration, Harvard University; Business
Consultant. His address is Graduate School of Business
Administration, Harvard University, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 65). Managing Partner of
Dorsett McCabe Management, Inc., an investment counseling firm;
Director of Research Corporation Technologies, Inc., a non-profit
patent-clearing and licensing firm. His address is 201 East 62nd
Street, New York, New York 10021.
Elliot S. Jaffe, Director (Age 69). Chairman of the Board and
Chief Executive Officer of The Dress Barn, Inc. His address is 30
Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 63). Attorney. His address
is 277 Park Avenue, New York, New York 10172.
Joseph J. McCann, Director (Age 65). Financial Consultant.
His address is 200 Oak Park Place, Pittsburgh, Pennsylvania
15243.
*Heath B. McLendon, Chairman of the Board and Investment
Officer (Age 62). Managing Director of Smith Barney and Chairman
of Smith Barney Strategy Advisers Inc.; prior to July 1993,
Senior Executive Vice President of Shearson Lehman Brothers Inc.
("Shearson Lehman Brothers"), Vice Chairman of Shearson Asset
Management, a Director of PanAgora Asset Management, Inc. and
PanAgora Asset Management Limited. Mr. McLendon is Chairman of
the Board and Investment Officer of 41 Smith Barney Mutual Funds.
His address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 62). Chairman of the
Board, Cornelius C. Rose Associates, Inc., financial consultants,
and Chairman of Performance Learning Systems, an educational
consultant. His address is P.O. Box 335, Enfield, New Hampshire
03748.
Jessica M. Bibliowicz, President (Age 36). Executive Vice
President of Smith Barney; prior to 1994, Director of Sales and
Marketing for Prudential Mutual Funds; prior to 1990, First Vice
President, Asset Management Division of Shearson Lehman Brothers.
Ms. Bibliowicz serves as President of 39 Smith Barney Mutual
Funds. Her address is 388 Greenwich Street, New York, New York
10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age
38). Managing Director of Smith Barney; Director and Senior Vice
President of SBMFM. Mr. Daidone serves as Senior Vice President
and Treasurer of 41 Smith Barney Mutual Funds. His address is
388 Greenwich Street, New York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer (Age
48). Investment Officer of SBMFM; prior to July 1993, Managing
Director of Shearson Lehman Advisors. Mr. Deane is also an
Investment Officer of five other Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
David Fare, Investment Officer (Age 33). Investment Officer of
SBMFM; prior to July 1993, Vice President of Shearson Lehman
Advisors. Mr. Fare is also an Investment Officer of 4 other Smith
Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Christina T. Sydor, Secretary (Age 45). Managing Director of
Smith Barney; General Counsel and Secretary of SBMFM. Ms. Sydor
serves as Secretary of 41 Smith Barney Mutual Funds. Her address
is 388 Greenwich Street, New York, NY 10013.
As of March 30, 1996, the Directors and officers of the Fund
as a group owned less than 1.00% of the outstanding common stock
of the Fund. As of March 30, 1996, to the knowledge of the Fund
and the Board no single shareholder or "group" (as that term is
used in Section 13(d) of the Securities Act of 1934) beneficially
owned more than 5% of the outstanding shares of the Fund.
No director, officer or employee of Smith Barney or any parent
or subsidiary receives compensation from the Fund for serving as
an officer or Director of the Fund. The Fund pays each
Director who is not an officer, director or employee of Smith
Barney or any of its affiliates a fee of $2,000 per annum plus
$500 per in-person meeting and $100 per telephonic meeting. Each
Director emeritus who is not an officer, director or employee of
Smith Barney or any of its affiliates receives a fee of $1,000
per annum plus $250 per in-person meeting and $50 per telephonic
meeting. All Directors are reimbursed for travel and out-of-
pocket expenses.
For the fiscal year ended February 29, 1996 , the
Directors of the Fund were paid the following compensation:
<TABLE>
<S> <C> <C>
Aggregate
Compensation
Aggregate from all Smith
Compensation Barney
Director(*) from the Fund Mutual
Funds***
Herbert Barg $4,100 $85,200
(18)....................
........
Alfred J. Bianchetti 4,100 40,850
(13)..................
Martin Brody 4,000 97,550
(20)....................
.......
Dwight B. Crane 4,100 122,600
(24)....................
..
Burt N. Dorsett 4,100 54,000
(13)....................
....
Elliot S. Jaffe 4,100 53,250
(13)....................
.......
Stephen E. Kaufman 4,100 59,350
(14)................
Joseph J. McCann 4,100 40,750
(13)....................
Heath B. McLendon ------ ------
(41).................
Cornelius C. Rose, Jr. 4,100 54,100
(13)..............
James J. Crisona** 2,050 26,400
(10)..................
</TABLE>_____________________
* Number of directorships/trusteeships held with Smith
Barney Mutual Funds.
** Director emeritus. A Director emeritus may attend meetings
of the Fund's Board of Directors but has no voting
rights at such meetings.
*** Reflects compensation paid during the calendar year ended
December 31, 1995.
INVESTMENT ADVISER AND ADMINISTRATOR--SBMFM
SBMFM serves as investment adviser to the Fund pursuant to a
transfer of the investment advisory agreement effective November
7, 1994 from its affiliate, Mutual Management Corp. (Mutual
Management Corp. and SBMFM are both wholly owned subsidiaries of
Smith Barney Holdings Inc. ("Holdings")). Holdings is a wholly
owned subsidiary of Travelers Group Inc. ("Travelers"). The
advisory agreement is dated July 30, 1993 (the "Advisory
Agreement"), and was most recently approved by the Board of
Directors, including a majority of those Directors who are not
"interested persons" of the Fund or SBMFM ("Independent
Directors"), on July 19, 1995. The services provided by SBMFM
under the Advisory Agreement are described in the Prospectus
under "Management of the Fund." SBMFM pays the salary of any
officer or employee who is employed by both it and the Fund.
SBMFM bears all expenses in connection with the performance of
its services.
Prior to November 17, 1995, as compensation for investment
advisory services, the Fund paid SBMFM a fee computed daily and
paid monthly at the following annual percentages of the Fund's
average daily net assets: 0.35% up to $500 million and 0.32% in
excess of $500 million. Effective November 17, 1995, the Fund
pays SBMFM a fee for investment advisory services at an annual
rate of 0.30% of the value of its daily net assets. For the 1994,
1995 and 1996 fiscal years, the Fund incurred $1,761,043,
$1,776,849 and $1,977,596, respectively, in investment advisory
fees.
SBMFM also serves as administrator to the Fund pursuant to a
written agreement dated April 20, 1994 (the "Administration
Agreement"), which was most recently approved by the Fund's Board
of Directors, including a majority of the Independent
Directors on July 19, 1995. Prior to April 20, 1994, The Boston
Company Advisors, Inc. ("Boston Advisors") served as
administrator to the Fund and from April 21, 1994 through July
10, 1995 served as sub-administrator to the Fund. Under the sub-
administration agreement, Boston Advisors was paid a portion of
the administration fee paid by the Fund to SBMFM at a rate agreed
upon from time to time between SBMFM and Boston Advisors. The
services provided by SBMFM under the Administration Agreement are
described in the Prospectus under "Management of the Fund." SBMFM
pays the salary of any officer and employee who is employed by
both it and the Fund and bears all expenses in connection with
the performance of its services.
As compensation for administrative services rendered to the
Fund, SBMFM receives a fee paid monthly at the following annual
percentage of average daily net assets: 0.20% up to $500 million;
and 0.18% thereafter. For the fiscal year ended February 28, 1994
and for the period beginning March 1 through April 20, 1994, the
Fund paid Boston Advisors $1,005,899, and $141,817, respectively,
for administration fees. For the period beginning April 21, 1994
through February 28, 1995, the Fund paid SBMFM $873,148 in
administration fees. For the fiscal year ended February 29, 1996,
the Fund paid SBMFM $1,172,244 in administration fees.
The Fund bears expenses incurred in its operations, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Directors who are not officers, directors, shareholders or
employees of Smith Barney or SBMFM; SEC fees and state Blue Sky
qualification fees; charges of custodian; transfer and dividend
disbursing agent fees; certain insurance premiums; outside
auditing and legal expenses; costs of maintaining corporate
existence; costs of investor services (including allocated
telephone and personnel expenses); costs of preparation and
printing of prospectuses for regulatory purposes and for
distribution to existing shareholders; costs of shareholders'
reports and shareholder meetings; and meetings of the officers or
Board of Directors of the Fund.
SBMFM and the Fund have agreed that if in any fiscal year the
aggregate expenses of the Fund (including fees payable pursuant
to the Advisory Agreement and Administration Agreement, but
excluding interest, taxes, brokerage fees paid pursuant to the
Fund's services and distribution plan, and, with the prior
written consent of the necessary state securities commissions,
extraordinary expenses) exceed the expense limitation of any
state having jurisdiction over the Fund, SBMFM will, to the
extent required by state law, reduce its fees by the amount of
such excess expenses. Such fee reductions, if any, will be
reconciled on a monthly basis. The most restrictive state
limitation currently applicable to the Fund would require SBMFM
to reduce its fees in any year that such expenses exceed 2.50% of
the first $30 million of average daily net assets, 2.00% of the
next $70 million and 1.50% of the remaining average daily net
assets. No fee reduction was required for the 1994, 1995 and
1996 fiscal years.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Fund.
The Independent Directors of the Fund have selected Stroock &
Stroock & Lavan as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, has been selected as the Fund's independent auditor to
examine and report on the Fund's financial statements and
highlights for the fiscal year ended February 28, 1997.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the
policies it employs to achieve that objective. The following
discussion supplements the description of the Fund's investment
policies in the Prospectus. For purposes of this Statement of
Additional Information, obligations of non-California municipal
issuers, the interest on which is excluded from gross income for
Federal income tax purposes, together with obligations of the
State of California, local governments in the State of California
and certain other municipal issuers such as the Commonwealth of
Puerto Rico ("California Municipal Securities"), are collectively
referred to as "Municipal Bonds."
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P") represent
the opinions of those agencies as to the quality of the Municipal
Bonds and short-term investments which they rate. It should be
emphasized, however, that such ratings are relative and
subjective, are not absolute standards of quality and do not
evaluate the market risk of securities. These ratings will be
used by the Fund as initial criteria for the selection of
portfolio securities, but the Fund also will rely upon the
independent advice of SBMFM to evaluate potential investments.
Among the factors that will be considered are the long-term
ability of the issuer to pay principal and interest and general
economic trends. To the extent the Fund invests in lower-rated
and comparable unrated securities, the Fund's achievement of its
investment objective may be more dependent on SBMFM's credit
analysis of such securities than would be the case for a
portfolio consisting entirely of higher-rated securities. The
Appendix contains information concerning the ratings of Moody's
and S&P and their significance.
Subsequent to its purchase by the Fund, an issue of Municipal
Bonds may cease to be rated or its rating may be reduced below
the rating given at the time the securities were acquired by the
Fund. Neither event will require the sale of such Municipal Bonds
by the Fund, but SBMFM will consider such event in its
determination of whether the Fund should continue to hold the
Municipal Bonds. In addition, to the extent that the ratings
change as a result of changes in such organizations or their
rating systems or due to a corporate restructuring of Moody's or
S&P, the Fund will attempt to use comparable ratings as standards
for its investments in accordance with its investment objective
and policies.
The Fund generally may invest up to 20% of its total assets in
securities rated below A, MIG3 or Prime-1 (P-1) by Moody's or A,
SP-2 or A-3 by S&P, or in unrated securities of comparable
quality. Such securities (a) will likely have some quality and
protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the
obligation.
Zero coupon securities involve special considerations. Zero
coupon securities are debt obligations which do not entitle the
holder to any periodic payments of interest prior to maturity of
a specified cash payment date when the securities begin paying
current interest (the "cash payment date") and therefore are
issued and traded at a discount from their face amounts or par
values. The discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity or cash payment date
of the security approaches. The market prices of zero coupon
securities generally are more volatile than the market prices of
other debt securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater
degree than do debt securities having similar maturities and
credit quality. The credit risk factors pertaining to low-rated
securities also apply to low-rated zero coupon bonds. Such zero
coupon bonds carry an additional risk in that, unlike bonds which
pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date unless a portion of
such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investment.
Current Federal income tax laws may require the holder of a
zero coupon security to accrue income with respect to that
security prior to the receipt of cash payments. To maintain its
qualification as a registered investment company and avoid
liability for Federal income taxes, the Fund may be required to
distribute income accrued with respect to zero coupon securities
and may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to
satisfy these distribution requirements.
TEMPORARY INVESTMENTS
When the Fund is maintaining a defensive position, the Fund
may invest in short-term investments ("Temporary Investments")
consisting of: (a) tax-exempt securities in the form of notes of
municipal issuers having, at the time of purchase, a rating
within the three highest grades of Moody's or S&P or, if not
rated, having an issue of outstanding Municipal Bonds rated
within the three highest grades by Moody's or S&P; and (b) the
following taxable securities: obligations of the United States
government, its agencies or instrumentalities ("U.S. government
securities"), repurchase agreements, other debt securities rated
within the three highest grades by Moody's or S&P, commercial
paper rated in the highest grade by either of such rating
services, and certificates of deposit of domestic banks with
assets of $1 billion or more. The Fund may invest in Temporary
Investments for defensive reasons in anticipation of a market
decline. At no time will more than 20% of the Fund's total assets
be invested in Temporary Investments unless the Fund has adopted
a defensive investment policy. The Fund intends, however, to
purchase tax-exempt Temporary Investments pending the investment
of the proceeds of the sale of portfolio securities or shares of
the Fund's common stock, or in order to have highly liquid
securities available to meet anticipated redemptions. For the
fiscal year ended February 29, 1996, the Fund invested in taxable
Temporary Investments which accounted for less than 0.01% of its
total income.
Repurchase Agreements. The Fund may enter into repurchase
agreements with banks which are the issuers of instruments
acceptable for purchase by the Fund and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers.
A repurchase agreement is a contract under which the buyer of a
security simultaneously commits to resell the security to the
seller at an agreed-upon price on an agreed-upon date. Under the
terms of a typical repurchase agreement, the Fund would acquire
an underlying debt obligation for a relatively short period of
time (usually not more than seven days) subject to an obligation
of the seller to repurchase, and the Fund to resell, the
obligation at an agreed-upon price and time, thereby determining
the yield during the Fund's holding period. This arrangement
results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. Under each
repurchase agreement, the selling institution will be required to
maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase
agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying
securities, the risk of a possible decline in the value of the
underlying securities during the period in which the Fund seeks
to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all
or part of the income from the agreement. In evaluating these
potential risks, SBMFM, acting under the supervision of the
Fund's Board of Directors, reviews on an ongoing basis the value
of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements.
INVESTMENTS IN FINANCIAL FUTURES CONTRACTS AND OPTIONS ON
FINANCIAL FUTURES CONTRACTS
The Fund may invest in financial futures contracts and options
on financial futures contracts that are traded on a domestic
exchange or board of trade. Such investments may be made by the
Fund solely for the purpose of hedging against changes in the
value of its portfolio securities due to anticipated changes in
interest rates and market conditions, and not for purposes of
speculation. Further, such investments will be made only in
unusual circumstances, such as when SBMFM anticipates an extreme
change in interest rates or market conditions.
Municipal Bond Index Futures Contracts. A municipal bond index
futures contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to a
specific dollar amount multiplied by the difference between the
value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally
written. No physical delivery of the underlying municipal bonds
in the index is made. Municipal bond index futures contracts
based on an index of 40 tax-exempt, long-term municipal bonds
with an original issue size of at least $50 million and a rating
of A- or higher by S&P or A or higher by Moody's began trading in
mid-1985.
The purpose of the acquisition or sale of a municipal bond
index futures contract by the Fund, as the holder of long-term
municipal securities, is to protect the Fund from fluctuations in
interest rates on tax-exempt securities without actually buying
or selling long-term municipal securities.
Unlike the purchase or sale of a Municipal Bond, no
consideration is paid or received by the Fund upon the purchase
or sale of a futures contract. Initially, the Fund will be
required to deposit with the broker an amount of cash or cash
equivalents equal to approximately 10% of the contract amount
(this amount is subject to change by the board of trade on which
the contract is traded and members of such board of trade may
charge a higher amount). This amount is known as initial margin
and is in the nature of a performance bond or good faith deposit
on the contract which is returned to the Fund upon termination of
the futures contract, assuming that all contractual obligations
have been satisfied. Subsequent payments, known as variation
margin, to and from the broker, will be made on a daily basis as
the price of the index fluctuates, making the long and short
positions in the futures contract more or less valuable, a
process known as marking-to-market. At any time prior to the
expiration of the contract, the Fund may elect to close the
position by taking an opposite position, which will operate to
terminate the Fund's existing position in the futures contract.
There are several risks in connection with the use of futures
contracts as a hedging device. Successful use of futures
contracts by the Fund is subject to SBMFM's ability to predict
correctly movements in the direction of interest rates. Such
predictions involve skills and techniques which may be different
from those involved in the management of a long-term municipal
bond portfolio. In addition, there can be no assurance that
there will be a correlation between movements in the price of the
municipal bond index and movements in the price of the Municipal
Bonds which are the subject of the hedge. The degree of
imperfection of correlation depends upon various circumstances,
such as variations in speculative market demand for futures
contracts and municipal securities, technical influences on
futures trading, and differences between the municipal securities
being hedged and the municipal securities underlying the futures
contracts, in such respects as interest rate levels, maturities
and creditworthiness of issuers. A decision of whether, when and
how to hedge involves the exercise of skill and judgment and even
a well-conceived hedge may be unsuccessful to some degree because
of market behavior or unexpected trends in interest rates.
Although the Fund intends to purchase or sell futures
contracts only if there is an active market for such contracts,
there is no assurance that a liquid market will exist for the
contracts at any particular time. Most domestic futures
exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount the price of a
futures contract may vary either up or down from the previous
day's settlement price at the end of a trading session. Once the
daily limit has been reached in a particular contract, no trades
may be made that day at a price beyond that limit. The daily
limit governs only price movement during a particular trading day
and, therefore, does not limit potential losses because the limit
may prevent the liquidation of unfavorable positions. It is
possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial
losses. In such event, it will not be possible to close a futures
position and, in the event of adverse price movements, the Fund
would be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. As described
above, however, there is no guarantee that the price of Municipal
Bonds will, in fact, correlate with the price movements in the
municipal bond index futures contract and thus provide an offset
to losses on a futures contract.
If the Fund has hedged against the possibility of an increase
in interest rates adversely affecting the value of the Municipal
Bonds held in its portfolio and rates decrease instead, the Fund
will lose part or all of the benefit of the increased value of
the Municipal Bonds it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices
which reflect the decline in interest rates. The Fund may have to
sell securities at a time when it may be disadvantageous to do
so.
When the Fund purchases municipal bond index futures
contracts, an amount of cash and U.S. government securities or
other high grade debt securities equal to the market value of the
futures contracts will be deposited in a segregated account with
the Fund's custodian (and/or such other persons as appropriate)
to collateralize the positions and thereby insure that the use of
such futures contracts is not leveraged. In addition, the ability
of the Fund to trade in municipal bond index futures contracts
and options on interest rate futures contracts may be materially
limited by the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), applicable to a regulated investment
company. See "Taxes."
Options on Financial Futures Contracts. The Fund may purchase
put and call options on futures contracts which are traded on a
domestic exchange or board of trade as a hedge against changes in
interest rates, and may enter into closing transactions with
respect to such options to terminate existing positions. The Fund
will sell put and call options on interest rate futures contracts
only as part of closing sale transactions to terminate its
options positions. There is no guarantee that such closing
transactions can be effected.
Options on futures contracts, as contrasted with the direct
investment in such contracts, gives the purchaser the right, in
return for the premium paid, to assume a position in futures
contracts at a specified exercise price at any time prior to the
expiration date of the options. Upon exercise of an option, the
delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures contract margin
account, which represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on
the futures contract. The potential loss related to the purchase
of an option on interest rate futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the point of sale, there are no
daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change
daily and that change would be reflected in the net asset value
of the Fund.
There are several risks relating to options on futures
contracts. The ability to establish and close out positions on
such options will be subject to the existence of a liquid market.
In addition, the Fund's purchase of put or call options will be
based upon predictions as to anticipated interest rate trends by
SBMFM, which could prove to be inaccurate. Even if SBMFM's
expectations are correct there may be an imperfect correlation
between the change in the value of the options and of the Fund's
portfolio securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions for
the protection of shareholders. Restrictions 1 through 7 below
may not be changed without the approval of the holders of a
majority of the outstanding shares of the Fund, defined as the
lesser of (a) 67% of the Fund's shares present at a meeting if
the holders of more than 50% of the outstanding shares are
present in person or by proxy or (b) more than 50% of the Fund's
outstanding shares. The remaining restrictions may be changed by
the Fund's Board of Directors at any time.
The Fund may not:
1.Issue senior securities as defined in the 1940 Act and
any rules and orders thereunder, except insofar as the Fund
may be deemed to have issued senior securities by reason of:
(a) borrowing money or purchasing securities on a when-issued
or delayed-delivery basis; (b) purchasing or selling futures
contracts and options on futures contracts and other similar
instruments; and (c) issuing separate classes of shares.
2.Invest more than 25% of its total assets in securities,
the issuers of which are in the same industry. For purposes
of this limitation, U.S. government securities and securities
of state or municipal governments and their political
subdivisions are not considered to be issued by members of any
industry.
3.Borrow money, except that the Fund may borrow from banks
for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, in
an amount not exceeding 10% of the value of the Fund's total
assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time
the borrowing is made. Whenever borrowings exceed 5% of the
value of the Fund's total assets, the Fund will not make any
additional investments.
4.Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Fund may invest
consistent with its investment objective and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities.
5.Engage in the business of underwriting securities issued
by other persons, except to the extent that the Fund may
technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of portfolio
securities.
6.Purchase or sell real estate, real estate mortgages, real
estate investment trust securities, commodities or commodity
contracts, but this shall not prevent the Fund from: (a)
investing in securities of issuers engaged in the real estate
business and securities which are secured by real estate or
interests therein; (b) holding or selling real estate received
in connection with securities it holds; or (c) trading in
futures contracts and options on futures contracts.
7.Purchase any securities on margin (except for such short-
term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities
short (except against the box). For purposes of this
restriction, the deposit or payment by the Fund of initial or
maintenance margin in connection with futures contracts and
related options and options on securities is not considered to
be the purchase of a security on margin.
8.Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
9.Purchase or sell oil and gas interests.
10.Invest more than 5% of the value of its total assets in
the securities of issuers having a record, including
predecessors, of less than three years of continuous
operation, except U.S. government securities. For purposes of
this restriction, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and
originators of underlying assets.
11.Invest in companies for the purpose of exercising
control.
12.Invest in securities of other investment companies,
except as they may be acquired as part of a merger,
consolidation or acquisition of assets.
13.Engage in the purchase or sale of put, call, straddle or
spread options or in the writing of such options, except that
the Fund may purchase and sell options on interest rate
futures contracts.
Certain restrictions listed above permit the Fund to engage in
investment practices that the Fund does not currently pursue.
The Fund has no present intention of altering its current
investment practices as otherwise described in the Prospectus and
this Statement of Additional Information and any future change in
those practices would require Board approval and appropriate
notice to shareholders. If a percentage restriction is complied
with at the time of an investment, a later increase or decrease
in the percentage of assets resulting from a change in the values
of portfolio securities or in the amount of the Fund's assets
will not constitute a violation of such restriction. In order to
permit the sale of the Fund's shares in certain states, the Fund
may make commitments more restrictive than the restrictions
described above. Should the Fund determine that any such
commitment is no longer in the best interests of the Fund and its
shareholders, it will revoke the commitment by terminating sales
of its shares in the state involved.
PORTFOLIO TRANSACTIONS
Newly issued securities normally are purchased directly from
the issuer or from an underwriter acting as principal. Other
purchases and sales usually are placed with those dealers from
which it appears the best price or execution will be obtained;
those dealers may be acting as either agents or principals. The
purchase price paid by the Fund to underwriters of newly issued
securities usually includes a concession paid by the issuer to
the underwriter, and purchases of after-market securities from
dealers normally are executed at a price between the bid and
asked prices. The Fund paid no brokerage commissions for the
1994, 1995 and 1996 fiscal years.
Allocation of transactions, including their frequency, to
various dealers is determined by SBMFM in its best judgment and
in a manner deemed fair and reasonable to shareholders. The
primary considerations are availability of the desired security
and the prompt execution of orders in an effective manner at the
most favorable prices. Subject to these considerations, dealers
that provide supplemental investment research and statistical or
other services to SBMFM may receive orders for portfolio
transactions by the Fund. Information so received enables SBMFM
to supplement its own research and analysis with the views and
information of other securities firms. Such information may be
useful to SBMFM in serving both the Fund and other clients, and,
conversely, supplemental information obtained by the placement of
business of other clients may be useful to SBMFM in carrying out
its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the
existence of any underwriting or selling group relating thereto
of which Smith Barney is a member, except to the extent permitted
by the SEC. Under certain circumstances, the Fund may be at a
disadvantage because of this limitation in comparison with other
investment companies which have a similar investment objective
but which are not subject to such limitation.
While investment decisions for the Fund are made independently
from those of the other accounts managed by SBMFM, investments of
the type the Fund may make also may be made by those other
accounts. When the Fund and one or more other accounts managed by
SBMFM are prepared to invest in, or desire to dispose of, the
same security, available investments or opportunities for sales
will be allocated in a manner believed by SBMFM to be equitable
to each. In some cases, this procedure may adversely affect the
price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate (the lesser of purchases or
sales of portfolio securities during the year, excluding
purchases or sales of short-term securities, divided by the
monthly average value of portfolio securities) generally is not
expected to exceed 100%, but the portfolio turnover rate will not
be a limiting factor whenever the Fund deems it desirable to sell
or purchase securities. Securities may be sold in anticipation of
a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and
later sold. In addition, a security may be sold and another
security of comparable quality may be purchased at approximately
the same time in order to take advantage of what the Fund
believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities
may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest
rates, such as changes in the overall demand for or supply of
various types of tax-exempt securities. For the 1995 and 1996
fiscal years, the Fund's portfolio turnover rate was 59% and 44%,
respectively.
MUNICIPAL BONDS
General Information
Municipal Bonds generally are understood to include debt
obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities,
refunding of outstanding obligations, payment of general
operating expenses and extensions of loans to public institutions
and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately
operated facilities are included within the term Municipal Bonds
if the interest paid thereon qualifies as excluded from gross
income (but not necessarily from alternative minimum taxable
income) for Federal income tax purposes in the opinion of bond
counsel to the issuer.
The yield on Municipal Bonds is dependent upon a variety of
factors, including general economic and monetary conditions,
general money market conditions, general conditions of the
Municipal Bond market, the financial condition of the issuer, the
size of a particular offering, the maturity of the obligation
offered and the rating of the issue.
Municipal Bonds also are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy
taxes. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of any one
or more issuers to pay, when due, the principal of and interest
on its or their Municipal Bonds may be materially affected.
WHEN-ISSUED SECURITIES
The Fund may purchase Municipal Bonds on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated
price and yield). The payment obligation and the interest rate
that will be received on the Municipal Bonds purchased on a when-
issued basis are each fixed at the time the buyer enters into the
commitment. Although the Fund will purchase Municipal Bonds on a
when-issued basis only with the intention of actually acquiring
the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of
investment strategy.
Municipal Bonds are subject to changes in value based upon the
public's perception of the creditworthiness of the issuers and
changes, real or anticipated, in the level of interest rates. In
general, Municipal Bonds tend to appreciate when interest rates
decline and depreciate when interest rates rise. Purchasing
Municipal Bonds on a when-issued basis, therefore, can involve
the risk that the yields available in the market when the
delivery takes place may actually be higher than those obtained
in the transaction itself. To account for this risk, a separate
account of the Fund consisting of cash or liquid debt securities
equal to the amount of the when-issued commitments will be
established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If
the market or fair value of such securities declines, additional
cash or securities will be placed in the account on a daily basis
so the value of the account will equal the amount of such
commitments by the Fund. Placing securities rather than cash in
the segregated account may have a leveraging effect on the Fund's
net assets. That is, to the extent the Fund remains
substantially fully invested in securities at the same time it
has committed to purchase securities on a when-issued basis,
there will be greater fluctuations in its net assets than if it
had set aside cash to satisfy its purchase commitments. Upon the
settlement date of the when-issued securities, the Fund will meet
obligations from then-available cash flow, sale of securities
held in the segregated account, sale of other securities or,
although it normally would not expect to do so, from the sale of
the when-issued securities themselves (which may have a value
greater or less than the Fund's payment obligations). Sales of
securities to meet such obligations may involve the realization
of capital gains, which are not exempt from Federal income taxes
or California state personal income tax.
When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to
do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Special Considerations Relating to California Municipal
Securities
Some of the significant financial considerations relating to the
Fund's investments in California Municipal Securities are
summarized below. This summary information is derived principally
from official statements and prospectuses relating to securities
offerings of the State of California and various local agencies
in California, available as of the date of this Statement of
Additional Information and does not purport to be a complete
description of any of the considerations mentioned herein. It is
also based on the disclosure statement filed in the County of
Orange bankruptcy case. The accuracy and completeness of the
information contained in such official statements and disclosure
statement has not been independently verified.
ECONOMIC FACTORS. The Governor's 1993-1994 Budget, introduced on
January 8, 1993, proposed general fund expenditures of $37.3
billion, with projected revenues of $39.9 billion. To balance the
budget in the face of declining revenues, the Governor proposed a
series of revenue shifts from local government, reliance on
increased federal aid, and reductions in state spending.
The Department of Finance of the State of California's May
Revision of General Fund Revenues and Expenditures (the "May
Revision"), released on May 20, 1993, projected the State would
have an accumulated deficit of about $2.75 billion by June 30,
1993 essentially unchanged from the prior year. The Governor
proposed to eliminate this deficit over an 18-month period.
Unlike previous years, the Governor's Budget and May Revision did
not calculate a "gap" to be closed, but rather set forth revenue
and expenditure forecasts and proposals designed to produce a
balanced budget.
The 1993-94 budget act (the "1993-94 Budget Act") was signed by
the Governor on June 30, 1993, along with implementing
legislation. The Governor vetoed about $71 million in spending.
The 1993-94 Budget Act is predicated on general fund revenues and
transfers estimated at $40.6 billion, $400 million below 1992-93
(and the second consecutive year of actual decline). The
principal reasons for declining revenue are the continued weak
economy and the expiration (or repeal) of three fiscal steps
taken in 1991 -- a half cent temporary sales tax, a deferral of
operating loss carryforwards, and repeal by initiative of a sales
tax on candy and snack foods.
The 1993-94 Budget Act also assumes special fund revenues of
$11.9 billion, an increase of 2.9% over 1992-93.
The 1993-94 Budget Act includes general fund expenditures of
$38.5 billion (a 6.3% reduction from projected 1992-93
expenditures of $41.1 billion), in order to keep a balanced
budget within the available revenues. The 1993-94 Budget Act also
includes special fund expenditures of $12.1 billion, a 4.2%
increase. The 1993-94 Budget Act reflects the following major
adjustments:
1. Changes in local government financing to shift about $2.6
billion in property taxes from cities, counties, special
districts and redevelopment agencies to school and community
college districts, thereby reducing general fund support by
an equal amount. About $2.5 billion would be permanent,
reflecting termination of the State's "bailout" of local
governments following the property tax cuts of Proposition
13 in 1978 (See "Constitutional, Legislative and Other
Factors" below).
The property tax revenue losses for cities and counties are
offset in part by additional sales tax revenues and mandate
relief. The temporary 0.5% sales tax was extended through
December 31, 1993, for allocation to counties for public
safety programs. The voters approved Proposition 172 in
November 1993 and the 0.5% sales tax was extended
permanently for public safety purposes.
Legislation also has been enacted to eliminate state
mandates in order to provide local governments flexibility
in making their programs responsive to local needs.
Legislation provides mandate relief for local justice
systems which affect county audit requirements, court
reporter fees, and court consolidation; health and welfare
relief involving advisory boards, family planning, state
audits and realignment maintenance efforts; and relief in
areas such as county welfare department self-evaluations,
noise guidelines and recycling requirements.
2. The 1993-94 Budget Act projected K-12 Proposition 98
funding on a cash basis at the same per-pupil level as 1992-
93 by providing schools a $609 million loan payable from
future years' Proposition 98 funds.
3. The 1993-94 Budget Act assumed receipt of about $692
million of aid to the State from the Federal government to
offset health and welfare costs associated with foreign
immigrants living in the State, which would reduce a like
amount of general fund expenditures. About $411 million of
this amount was one-time funding. Congress ultimately
appropriated only $450 million.
4. Reductions of $600 million in health and welfare
programs, and $400 million in support for higher education
(partly offset by fee increases at all three units of higher
education) and various miscellaneous cuts (totaling
approximately $150 million) in State government services in
many agencies, up to 15%.
5. A 2-year suspension of the renters' tax credit ($390
million expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of
payment to the Public Employees Retirement Fund ($339
million) and a change in accounting for debt service from
accrual to cash basis, saving $107 million.
The 1993-94 Budget Act contains no general fund tax/revenue
increases other than a two-year suspension of the renters' tax
credit. The 1993-94 Budget Act suspended the 4% automatic budget
reduction "trigger," as was done in 1992-93 so that cuts could be
focused.
Administration reports during the course of the 1993-94 Fiscal
Year have indicated that while economic recovery appears to have
started in the second half of the fiscal year, recessionary
conditions continued longer than had been anticipated when the
1993-94 Budget Act was adopted. Overall, revenues for the 1993-94
Fiscal Year were about $800 million lower than original
projections, and expenditures were about $780 million higher,
primarily because of higher health and welfare caseloads, lower
property taxes which require greater State support for K-14
education to make up the shortfall, and lower than anticipated
Federal government payments for immigration-related costs. The
reports in May and June, 1994, indicated that revenues in the
second half of the 1993-94 Fiscal Year have been very close to
the projections made in the Governor's Budget of January 10,
1994, which is consistent with a slow turnaround in the economy.
The Department of Finance's July 1994 Bulletin, including the
final June receipts, reported that June revenues were $114
million (2.5%) above projection, with final end-of-year results
at $377 million (about 1%) above the May Revision projections.
Part of this result was due to end-of-year adjustments and
reconciliations. Personal income tax and sales tax continued to
track projections very well. The largest factor in the higher
than anticipated revenues was from bank and corporation taxes,
which were $140 million (18.4%) above projection in June. While
the higher June receipts are reflected in the actual 1993-94
Fiscal Year cash flow results, and help the starting cash balance
for the 1994-95 Fiscal Year, the Department of Finance has not
adjusted any of its revenue projections for the 1994-95 or 1995-
96 Fiscal Years.
During the 1993-94 Fiscal Year, the State implemented the
deficit retirement plan, which was part of the 1993-94 Budget
Act, by issuing $1.2 billion of revenue anticipation warrants in
February 1994 maturing December 21, 1994. This borrowing reduced
the cash deficit at the end of the 1993-94 Fiscal Year.
Nevertheless, because of the $1.5 billion variance from the
original 1993-94 Budget Act assumptions, the General Fund ended
the fiscal year at June 30, 1994 carrying forward an accumulated
deficit of approximately $2 billion.
Because of the revenue shortfall and the State's reduced
internal borrowable cash resources, in addition to the $1.2
billion of revenue anticipation warrants issued as part of the
deficit retirement plan, the State issued an additional $2.0
billion of revenue anticipation warrants, maturing July 26, 1994,
which were needed to fund the State's obligations and expenses
through the end of the 1993-94 Fiscal Year.
On January 17, 1994, a major earthquake measuring an estimated
6.8 on the Richter Scale struck Los Angeles. Significant property
damage to private and public facilities occurred in a four-county
area including northern Los Angeles County, Ventura County, and
parts of Orange and San Bernardino Counties, which were declared
as State and Federal disaster areas by January 18. Current
estimates of total property damage (private and public) are in
the range of $20 billion but these estimates still are subject to
change.
Despite such damage, on the whole, the vast majority of
structures in the areas, including large manufacturing and
commercial buildings and all modern high-rise offices, survived
the earthquake with minimal or no damage, validating the
cumulative effect of strict building codes and thorough
preparation for such an emergency by the State and local
agencies.
State-owned facilities, including transportation corridors and
facilities such as Interstate Highways 5 and 10 and State
Highways 14, 118 and 210 sustained damage. Most of the major
highways (Interstate 5 and 10) have now been repaired. The campus
of California State University at Northridge (very near the
epicenter) suffered an estimated $350 million damage, resulting
in temporary closure of the campus. It has reopened using
borrowed facilities elsewhere in the area and many temporary
structures. There was also some damage to the University of
California at Los Angeles and to an office building in Van Nuys
(now open after a temporary closure). Overall, except for the
temporary road and bridge closures, and CSU-Northridge, the
earthquake did not and is not expected to significantly affect
State government operations.
The State in conjunction with the Federal government is
committed to providing assistance to local governments,
individuals and businesses suffering damage as a result of the
earthquake, as well as to provide for the repair and replacement
of State-owned facilities. The Federal government will provide
substantial earthquake assistance.
The President immediately allocated some available disaster
funds, and Congress has approved additional funds for a total of
at least $9.5 billion of Federal funds for earthquake relief,
including assistance to homeowners and small businesses, and
costs for repair of damaged public facilities. The Governor
originally proposed that the State will have to pay about $1.9
billion for earthquake relief costs, including a 10% match to
some of the Federal funds, and costs for some programs not
covered by the Federal aid. The Governor proposed to cover $1.05
billion of these costs from a general obligation bond issue which
was on the June 1994 ballot, but it was not approved by the
voters. The Governor subsequently announced that the State's
share for transportation projects would come from existing
Department of Transportation funds (thereby delaying other, non-
earthquake related projects), that the State's share for certain
other costs (including local school building repairs) would come
from reallocating existing bond funds, and that a proposed
program for homeowner and small business aid supplemental to
Federal aid would have to be abandoned. Some other costs will be
borrowed from the Federal government in a manner similar to that
used by the State of Florida after Hurricane Andrew; pursuant to
Senate Bill 2383, repayment will have to be addressed in 1995-96
or beyond.
The 1994-95 Fiscal Year represented the fourth consecutive
year the Governor and Legislature faced a very difficult budget
environment to produce a balanced budget. Many program cuts and
budgetary adjustments had already been made in the last three
years. The Governor's Budget proposal, as updated in May and
June, 1994, recognized that the accumulated deficit could not be
repaid in one year, and proposed a two-year solution. The budget
proposal set forth revenue and expenditure forecasts and revenue
and expenditure proposals which would result in operating
surpluses for the budget for both 1994-95 and 1995-96, and lead
to the elimination of the accumulated budget deficit, estimated
at about $2.0 billion at June 30, 1994, by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8,
1994, projects revenues and transfers of $41.9 billion, $2.1
billion higher than revenues in 1993-94. This reflects the
Administration's forecast of an improving economy. Also included
in this figure is a projected receipt of about $360 million from
the Federal government to reimburse the State's cost of
incarcerating undocumented immigrants. The State will not know
how much the Federal government will actually provide until the
Federal fiscal year 1995 Budget is completed. Completion of the
Federal budget is expected by October 1994. The Legislature took
no action on a proposal in the January Governor's Budget to
undertake an expansion of the transfer of certain programs to
counties, which would also have transferred to counties 0.5% of
the State's current sales tax.
The Budget Act projects Special Fund revenues of $12.1
billion, a decrease of 2.4% from 1993-94 estimated revenues.
The 1994-95 Budget Act projects General Fund expenditures of
$40.9 billion, an increase of $1.6 billion over 1993-94. The
Budget Act also projects Special Fund expenditures of $13.7
billion, a 5.4% increase over 1993-94 estimated expenditures. The
principal features of the Budget Act were the following:
1. Receipt of additional Federal aid in 1994-95 of about
$400 million for costs of refugee assistance and medical
care for undocumented immigrants, thereby offsetting a
similar General Fund cost. The State will not know how much
of these funds it will receive until the Federal fiscal year
1995 Budget is passed.
2. Reductions of approximately $1.1 billion in health and
welfare costs. A 2.3% reduction in Aid to Families with
Dependent Children ("AFCD") payments (equal to about $56
million for the entire fiscal year) has been suspended by
court order.
3. A General Fund increase of approximately $38 million in
support for the University of California and $65 million for
California State University. It is anticipated that student
fees for both the U.C. and the C.S.U. will increase up to
10%.
4. Proposition 98 funding for K-14 schools is increased by
$526 million from 1993-94 levels, representing an increase
for enrollment growth and inflation. Consistent with
previous budget agreements, Proposition 98 funding provides
approximately $4,217 per student for K-12 schools, equal to
the level in the past three years.
5. Legislation enacted with the Budget clarifies laws passed
in 1992 and 1993 which require counties and other local
agencies to transfer funds to local school districts,
thereby reducing State aid. Some counties had implemented a
method of making such transfers which provided less money
for schools if there were redevelopment agency projects. The
new legislation bans this method of transfer. If all
counties had implemented this method, General Fund aid to K-
12 schools would have been $300 million higher in each of
the 1994-95 and 1995-96 Fiscal Years.
6. The 1994-95 Budget Act provides funding for anticipated
growth in the State's prison inmate population, including
provisions for implementing recent legislation (the so-
called "Three Strikes" law) which requires mandatory life
prison terms for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund
transfers ($255 million) totaling in the aggregate
approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under
legislation enacted for the 1993-94 Budget, the renters' tax
credit was suspended for two years (1993 and 1994). A ballot
proposition to permanently restore the renters' tax credit after
this year failed at the June, 1994 election. The Legislature
enacted a further one-year suspension of the renters' tax credit,
for 1995, saving about $390 million in the 1995-96 Fiscal Year.
The 1994-95 Budget assumes that the State will use a cash flow
borrowing program in 1994-95 which combines one-year notes and
two-year warrants, which have now been issued. Issuance of
warrants allows the State to defer repayment of approximately
$1.0 billion of its accumulated budget deficit into the 1995-96
Fiscal Year.
The State's cash flow management plan for the 1994-95 fiscal year
included the issuance of $4.0 billion of revenue anticipation
warrants on July 26, 1994, to mature on April 25, 1996, as part
of a two-year plan to retire the accumulated State budget
deficit.
Because preparation of cash flow estimates for the 1995-96 Fiscal
Year is necessarily more imprecise than for the 1994-1995 fiscal
year and entails greater risks of variance from assumptions, and
because the Governor's two-year budget plan assumes receipt of a
large amount of Federal aid in the 1995-96 Fiscal Year for
immigration-related costs which is uncertain, the Legislature
enacted a backup budget adjustment mechanism to mitigate possible
deviations from projected revenues, expenditures or internal
borrowable resources which might reduce available cash resources
during the two-year plan, so as to assure repayment of the
warrants.
Pursuant to Section 12467 of the California Government Code,
enacted by Chapter 135, Statutes of 1994 (the "Budget Adjustment
Law"), the State Controller was required to make a report by
November 15, 1994 on whether the projected cash resources for the
General Fund as of June 30, 1995 will decrease more than $430
million from the amount projected by the State in its Official
Statement in July, 1994 for the sale of $4,000,000,000 of Revenue
Anticipation Warrants. On November 15, 1994, the State Controller
issued the report on the State's cash position required by the
Budget Adjustment Law. The report indicated that the cash
position of the General Fund on June 30, 1995 would be $581
million better than was estimated in the July, 1994 cash flow
projections and, therefore, no budget adjustment procedures will
be invoked for the 1994-95 fiscal year. The Law would only be
implemented if the State Controller estimated that borrowable
resources on June 30, 1995 would be at least $430 million lower
than projected.
The State Controller's report identified a number of factors
which have led to the improved cash position of the State.
Estimated revenues and transfers for the 1994-95 fiscal year
other than Federal reimbursement for immigration costs were up
about $650 million. The largest portion of this was in higher
bank and corporation tax receipts, but all major tax sources were
above original projections. However, most of the Federal
immigration aid revenues projected in connection with the 1994-95
Budget Act and in the July, 1994 cash flows will not be received,
as indicated above, leaving a net increase in revenues of $322
million.
On the expenditure side, the State Controller reported that
estimated reduced caseload growth in health and welfare programs,
reduced school enrollment growth, and an accounting adjustment
reducing a transfer from the General Fund to the Special Fund for
Economic Uncertainties resulted in overall General Fund
expenditure reductions (again before adjusting for Federal aid)
of $672 million. However, the July, 1994 cash flows projected
that General Fund health and welfare and education expenditures
would be offset by the anticipated receipt of $407 million in
Federal aid for illegal immigrant costs. The State Controller now
estimates that none of these funds will be received, so the net
reduction in General Fund expenditures is $265 million.
Finally, the State Controller indicated that a review of balances
in special funds available for internal borrowing resulted in an
estimated reduction of such borrowable resources of $6 million.
The combination of these factors results in the estimated
improvement of the General Fund's cash position of $581 million.
The State Controller's revised cash flow projections for 1994-95
have allocated this improvement to two line items: an increase
from $0 to $427 million in the estimated ending cash balance of
the General Fund on June 30, 1995, and an increase in unused
borrowable resources of $154 million.
The State Controller's report indicated that there was no
anticipated cash impact in the 1994-95 fiscal year for recent
initiative on "three strikes" criminal penalties and illegal
immigration which were approved by voters on November 8, 1994. At
a hearing before a committee of the Legislature on November 15,
1994, both the Legislative Analyst and the Department of Finance
concurred in the reasonableness of the State Controller's report.
(The Legislative Analyst had issued a preliminary analysis on
November 1, 1994 which reached a conclusion very close to that of
the State Controller.) The State Controller's report makes no
projections about whether the Law may have to be implemented in
1995-96. However, both the State Controller and the Legislative
Analyst in the November 15 hearing noted that the July, 1994 cash
flows for the 1995-96 fiscal year place continued reliance on
large amounts of federal assistance for immigration costs, which
did not materialize this year, indicating significant budget
pressures for next year. The Department of Finance indicated that
the budgetary issues identified in the hearing would be addressed
in the Governor's Budget proposal for the 1995-96 fiscal year,
which will be released in early January, 1995.
The Director of Finance is required to include updated cash-flow
statements for the 1994-95 and 1995-96 Fiscal Years in the May
revision to the 1995-96 Fiscal Year budget proposal. By June 1,
1995, the State Controller must concur with these updated
statements or provide a revised estimate of the cash condition of
the General Fund for the 1994-95 and the 1995-96 Fiscal Years.
For the 1995-96 Fiscal Year, Chapter 135 prohibits any external
borrowing as of June 30, 1996, thereby requiring the State to
rely solely on internal borrowable resources, expenditure
reductions or revenue increases to eliminate any projected cash
flow shortfall.
Commencing on October 15, 1995, the State Controller will, in
conjunction with the Legislative Analyst's Office, review the
estimated cash condition of the General Fund for the 1995-96
Fiscal Year. The "1996 cash shortfall" shall be the amount
necessary to bring the balance of unused borrowable resources on
June 30, 1996 to zero. On or before December 1, 1995, legislation
must be enacted providing for sufficient General Fund expenditure
reductions, revenue increases, or both, to offset any such 1996
cash shortfall identified by the State Controller. If such
legislation is not enacted, within five days thereafter the
Director of Finance must reduce all General Fund appropriations
for the 1995-96 Fiscal Year, except the Required Appropriations,
by the percentage equal to the ratio of said 1996 cash shortfall
to total remaining General Fund appropriations for the 1995-96
Fiscal Year, excluding the Required Appropriations.
On December 6, 1994, Orange County, California and its Investment
Pool (the "Pool") filed for bankruptcy under Chapter 9 of the
United States Bankruptcy Code. Approximately 187 California
public entities, substantially all of which are public agencies
within the County, were investors in the Pool. Since the filing,
the County has employed various investment advisors to
restructure the investments in the Pool. That and other actions
resulted in the Pool sustaining a loss $1.66 billion. The County
failed to make certain deposits to a fund for repayment of
$169,000,000 aggregate principal amount of its short term
indebtedness resulting in a technical default under its note
resolution. Additionally, the County defaulted in its obligation
to accept tenders of its $110,200,000 aggregate principal amount
of its Taxable Pension Obligation Bonds, Series B used to finance
County pension obligations. Interest at a rate set pursuant to
the bond documents has been timely paid on such Pension Bonds.
Both S&P and Moody's have suspended or downgraded ratings on
various debt securities of the County and certain of the
investors in the Pool. Such suspensions or downgradings could
affect both price and liquidity of such securities.
Orange County has taken a number of steps to resolve its
bankruptcy case. In April of 1995, it entered into a
Comprehensive Settlement Agreement with representatives of
investors in the Pool, which resulted in the distribution to the
investors of, on average, approximately 77% of their Pool
investment balances. A proposed sales tax increase to provide
funds to make up investment losses and assure payment of the
County's debt was defeated by a vote of 61% to 39% on June 27,
1995. However, the County issued $278,790,000 of Recovery Bonds
to fund a portion of the investors' losses on June 16, 1995 and
issued $155,000,000 of Teeter Plan Revenue bonds on June 30, 1995
to fund advances of delinquent taxes to other taxing
jurisdictions within the County (the "Teeter Plan") and to repay
previously issued Teeter Plan Notes maturing on June 30, 1995.
On July 10, 1995, the County completed a consensual modification
of over 99% of its other maturing short-term debt (consisting of
$600 million of taxable notes and $200 million of tax-exempt Tax
and Revenue Anticipation Notes), which now has a new maturity
date of June 30, 1996. In September 1995 the California
legislature passed legislation that shifts revenues from other
County entities to the County. Based on these revenues and the
agreement of Pool investors to subordinate their remaining
claims, the County has filed a plan of adjustment and a
Disclosure Statement with the Bankruptcy Court with an objective
of emerging from bankruptcy by the end of June of 1996. The
County is also pursuing litigation against numerous parties
seeking a recovery of the Pool losses.
CONSTITUTIONAL, LEGISLATIVE AND OTHER FACTORS. Certain California
constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could
result in the adverse effects described below. The following
information constitutes only a brief summary, does not purport to
be a complete description, and is based on information drawn from
official statements and prospectuses relating to securities
offerings of the State of California and various local agencies
in California available as of the date of this Statement of
Additional Information.
Certain of the California Municipal Obligations in which the Fund
may invest may be obligations of issuers which rely in whole or
in part on California State revenues for payment of these
obligations. Property tax revenues and a portion of the State's
general fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to
what extent a portion of the State's general fund will be
distributed in the future to counties, cities and their various
entities, is unclear. In 1988, California enacted legislation
providing for a water's-edge combined reporting method if an
election fee was paid and other conditions met. On October 6,
1993, California Governor Pete Wilson signed Senate Bill 671
(Alquist) which modifies the unitary tax law by deleting the
requirements that a taxpayer electing to determine its income on
a water's-edge basis pay a fee and file a domestic disclosure
spreadsheet and instead requiring an annual information return.
Significantly, the Franchise Tax Board can no longer disregard a
taxpayer's election. The Franchise Tax Board is reported to have
estimated state revenue losses from the Legislation as growing
from $27 million in 1993-94 to $616 million in 1999-2000, but
others, including former Assembly Speaker Willie Brown, disagree
with that estimate and assert that more revenue will be generated
for California, rather than less, because of an anticipated
increase in economic activity and additional revenue generated by
the incentives in the Legislation.
Certain of the California Municipal Obligations may be
obligations of issuers who rely in whole or in part on ad valorem
real property taxes as a source of revenue. On June 6, 1978,
California voters approved an amendment to the California
Constitution known as Proposition 13, which added Article XIIIA
to the California Constitution. The effect of Article XIIIA is to
limit ad valorem taxes on real property and to restrict the
ability of taxing entities to increase real property tax
revenues. On November 7, 1978, California voters approved
Proposition 8, and on June 3, 1986, California voters approved
Proposition 46, both of which amended Article XIIIA. Section 1 of
Article XIIIA limits the maximum ad valorem tax on real property
to 1% of full cash value (as defined in Section 2), to be
collected by the counties and apportioned according to law;
provided that the 1% limitation does not apply to ad valorem
taxes or special assessments to pay the interest and redemption
charges on (a) any indebtedness approved by the voters prior to
July 1, 1978, or (b) any bonded indebtedness for the acquisition
or improvement of real property approved on or after July 1,
1978, by two-thirds of the votes cast by the voters voting on the
proposition. Section 2 of Article XIIIA defines "full cash value"
to mean "the County Assessor's valuation of real property as
shown on the 1975/76 tax bill under 'full cash value' or,
thereafter, the appraised value of real property when purchased,
newly constructed, or a change in ownership has occurred after
the 1975 assessment." The full cash value may be adjusted
annually to reflect inflation at a rate not to exceed 2% per
year, or reduction in the consumer price index or comparable
local data, or reduced in the event of declining property value
caused by damage, destruction or other factors. The California
State Board of Equalization has adopted regulations, binding on
county assessors, interpreting the meaning of "change in
ownership" and "new construction" for purposes of determining
full cash value of property under Article XIIIA.
Legislation enacted by the California Legislature to implement
Article XIIIA (Statutes of 1978, Chapter 292, as amended)
provides that notwithstanding any other law, local agencies may
not levy any ad valorem property tax except to pay debt service
on indebtedness approved by the voters prior to July 1, 1978, and
that each county will levy the maximum tax permitted by Article
XIIIA of $4.00 per $100 assessed valuation (based on the former
practice of using 25%, instead of 100%, of full cash value as the
assessed value for tax purposes). The legislation further
provided that, for the 1978/79 fiscal year only, the tax levied
by each county was to be apportioned among all taxing agencies
within the county in proportion to their average share of taxes
levied in certain previous years. The apportionment of property
taxes for fiscal years after 1978/79 has been revised pursuant to
Statutes of 1979, Chapter 282, which provides relief funds from
State moneys beginning in fiscal year 1979/80 and is designed to
provide a permanent system for sharing State taxes and budget
funds with local agencies. Under Chapter 282, cities and counties
receive more of the remaining property tax revenues collected
under Proposition 13 instead of direct State aid. School
districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are
given additional relief. Chapter 282 does not affect the
derivation of the base levy ($4.00 per $100 of assessed
valuation) and the bonded debt tax rate.
On November 6, 1979, an initiative known as "Proposition 4" or
the "Gann Initiative" was approved by the California voters,
which added Article XIIIB to the California Constitution. Under
Article XIIIB, State and local governmental entities have an
annual "appropriations limit" and are not allowed to spend
certain monies called "appropriations subject to limitation" in
an amount higher than the "appropriations limit." Article XIIIB
does not affect the appropriation of moneys which are excluded
from the definition of "appropriations subject to limitation,"
including debt service on indebtedness existing or authorized as
of January 1, 1979, or bonded indebtedness subsequently approved
by the voters. In general terms, the "appropriations limit" is
required to be based on the limit for the prior year adjusted
annually for certain changes and is tested over consecutive two
year periods. Article XXIIIB also provides that any excess of
aggregate proceeds of taxes received over such two year period
above the combined appropriation limits for those two years is
divided equally between transfers to K-14 districts and refunds
to taxpayers.
At the November 8, 1988 general election, California voters
approved an initiative known as Proposition 98. This initiative
amends Article XIIIB to require that (a) the California
Legislature establish a prudent state reserve fund in an amount
as it shall deem reasonable and necessary and (b) revenues in
excess of amounts permitted to be spent and which would otherwise
be returned pursuant to Article XIIIB by revision of tax rates or
fee schedules, be transferred and allocated (up to a maximum of
4%) to the State School Fund and be expended solely for purposes
of instructional improvement and accountability. No such transfer
or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and
class size meet certain criteria as set forth in Proposition 98.
Any funds allocated to the State School Fund shall cause the
appropriation limits established in Article XIIIB to be annually
increased for any such allocation made in the prior year.
Proposition 98 also amends Article XVI to require that the State
of California provide a minimum level of funding for public
schools and community colleges. Commencing with the 1988-89
fiscal year, state monies to support school districts and
community college districts shall equal or exceed the lesser of
(a) an amount equaling the percentage of state general revenue
bonds for school and community college districts in fiscal year
1986-87, or (b) an amount equal to the prior year's state general
fund proceeds of taxes appropriated under Article XIIIB plus
allocated proceeds of local taxes, after adjustment under Article
XIIIB. The initiative permits the enactment of legislation, by a
two-thirds vote, to suspend the minimum funding requirement for
one year.
On June 30, 1989, the California Legislature enacted Senate
Constitutional Amendment 1, a proposed modification of the
California Constitution to alter the spending limit and the
education funding provisions of Proposition 98. Senate
Constitutional Amendment 1, on the June 5, 1990 ballot as
Proposition 111, was approved by the voters and took effect on
July 1, 1990. Among a number of important provisions, Proposition
111 recalculates spending limits for the State and for local
governments, allows greater annual increases in the limits,
allows the averaging of two years' tax revenues before requiring
action regarding excess tax revenues, reduces the amount of the
funding guarantee in recession years for school districts and
community college districts (but with a floor of 40.9% of State
general fund tax revenues), removes the provision of Proposition
98 which included excess moneys transferred to school districts
and community college districts in the base calculation for the
next year, limits the amount of State tax revenue over the limit
which would be transferred to school districts and community
college districts, and exempts increased gasoline taxes and truck
weight fees from the State appropriations limit. Additionally,
Proposition 111 exempts from the State appropriations limit
funding for capital outlays.
Article XIIIB, like Article XIIIA, may require further
interpretation by both the Legislature and the courts to
determine its applicability to specific situations involving the
State and local taxing authorities. Depending upon the
interpretation, Article XIIIB may limit significantly a
governmental entity's ability to budget sufficient funds to meet
debt service on bonds and other obligations.
On November 4, 1986, California voters approved an initiative
statute known as Proposition 62. This initiative (a) requires
that any tax for general governmental purposes imposed by local
governments be approved by resolution or ordinance adopted by a
two-thirds vote of the governmental entity's legislative body and
by a majority vote of the electorate of the governmental entity,
(b) requires that any special tax (defined as taxes levied for
other than general governmental purposes) imposed by a local
governmental entity be approved by a two-thirds vote of the
voters within that jurisdiction, (c) restricts the use of
revenues from a special tax to the purposes or for the service
for which the special tax was imposed, (d) prohibits the
imposition of ad valorem taxes on real property by local
governmental entities except as permitted by Article XIIIA, (e)
prohibits the imposition of transaction taxes and sales taxes on
the sale of real property by local governments, (f) requires that
any tax imposed by a local government on or after August 1, 1985
be ratified by a majority vote of the electorate within two years
of the adoption of the initiative or be terminated by November
15, 1988, (g) requires that, in the event a local government
fails to comply with the provisions of this measure, a reduction
in the amount of property tax revenue allocated to such local
government occurs in an amount equal to the revenues received by
such entity attributable to the tax levied in violation of the
initiative, and (h) permits these provisions to be amended
exclusively by the voters of the State of California. A decision
of the California Supreme Court upholding the validity of
Proposition 62 became final in December of 1995.
On November 8, 1988, California voters approved Proposition 87.
Proposition 87 amended Article XVI, Section 16, of the California
Constitution by authorizing the California Legislature to
prohibit redevelopment agencies from receiving any of the
property tax revenue raised by increased property tax rates
levied to repay bonded indebtedness of local governments which is
approved by voters on or after January 1, 1989. It is not
possible to predict whether the California Legislature will enact
such a prohibition nor is it possible to predict the impact of
Proposition 87 on redevelopment agencies and their ability to
make payments on outstanding debt obligations.
Certain California Municipal Securities in which the Fund may
invest may be obligations that are payable solely from the
revenues of health care institutions. Certain provisions under
California law may adversely affect such revenues and,
consequently, payment on those California Municipal Securities.
The Federally sponsored Medicaid program for health care services
to eligible welfare beneficiaries in California is known as the
Medi-Cal program. Historically, the Medi-Cal program has provided
for a cost-based system of reimbursement for inpatient care
furnished to Medi-Cal beneficiaries by any hospital wanting to
participate in the Medi-Cal program, provided such hospital met
applicable requirements for participation. California law now
provides that the State of California shall selectively contract
with hospitals to provide acute inpatient services to Medi-Cal
patients. Medi-Cal contracts currently apply only to acute
inpatient services. Generally, such selective contracting is made
on a flat per diem payment basis for all services to Medi-Cal
beneficiaries, and generally such payment has not increased in
relation to inflation, costs or other factors. Other reductions
or limitations may be imposed on payment for services rendered to
Medi-Cal beneficiaries in the future.
Under this approach, in most geographical areas of California,
only those hospitals which enter into a Medi-Cal contract with
the State of California will be paid for non-emergency acute
inpatient services rendered to Medi-Cal beneficiaries. The State
may also terminate these contracts without notice under certain
circumstances and is obligated to make contractual payments only
to the extent the California legislature appropriates adequate
funding therefor.
In February 1987, the Governor of the State of California
announced that payments to Medi-Cal providers for certain
services (not including hospital acute inpatient services) would
be decreased by 10% through June 1987. However, a Federal
district court issued a preliminary injunction preventing
application of any cuts until a trial on the merits can be held.
If the injunction is deemed to have been granted improperly, the
State of California would be entitled to recapture the payment
differential for the intended reduction period. It is not
possible to predict at this time whether any decreases will
ultimately be implemented.
California enacted legislation in 1982 that authorizes private
health plans and insurers to contract directly with hospitals for
services to beneficiaries on negotiated terms. Some insurers have
introduced plans known as "preferred provider organizations"
("PPOs"), which offer financial incentives for subscribers who
use only the hospitals which contract with the plan. Under an
exclusive provider plan, which includes most health maintenance
organizations ("HMOs"), private payors limit coverage to those
services provided by selected hospitals. Discounts offered to
HMOs and PPOs may result in payment to the contracting hospital
of less than actual cost and the volume of patients directed to a
hospital under an HMO or PPO contract may vary significantly from
projections. Often, HMO or PPO contracts are enforceable for a
stated term, regardless of provider losses or of bankruptcy of
the respective HMO or PPO. It is expected that failure to execute
and maintain such PPO and HMO contracts would reduce a hospital's
patient base or gross revenues. Conversely, participation may
maintain or increase the patient base, but may result in reduced
payment and lower net income to the contracting hospitals.
Such California Municipal Securities may also be insured by
the State of California pursuant to an insurance program
implemented by the Office of Statewide Health Planning and
Development for health facility construction loans. If a default
occurs on insured California Municipal Securities, the State
Treasurer will issue debentures payable out of a reserve fund
established under the insurance program or will pay principal and
interest, on an unaccelerated basis from unappropriated State
funds. At the request of the Office of Statewide Health Planning
and Development, Arthur D. Little, Inc. prepared a study in
December 1983 to evaluate the adequacy of the reserve fund
established under the insurance program and, based on certain
formulations and assumptions found the reserve fund substantially
underfunded. In September of 1986, Arthur D. Little, Inc.
prepared an update of the study and concluded that an additional
10% reserve be established for "multi-level" facilities. For the
balance of the reserve fund, the update recommended maintaining
the current reserve calculation method. In March 1990, Arthur D.
Little, Inc. prepared a further review of the study and
recommended that separate reserves continue to be established for
"multi-level" facilities at a reserve level consistent with those
that would be required by an insurance company.
Certain California Municipal Securities in the Fund may be
obligations which are secured in whole or in part by a mortgage
or deed of trust on real property. California has five principal
statutory provisions which limit the remedies of a creditor
secured by a mortgage or deed of trust. Two limit the creditor's
right to obtain a deficiency judgment, one limitation being based
on the method of foreclosure and the other on the type of debt
secured. Under the former, a deficiency judgment is barred when
the foreclosure is accomplished by means of a nonjudicial
trustee's sale. Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain
purchase money obligations. Another California statute, commonly
known as the "one form of action" rule, requires creditors
secured by real property to exhaust their real property security
by foreclosure before bringing a personal action against the
debtor. The fourth statutory provision limits any deficiency
judgment obtained by a creditor secured by real property
following a judicial sale of such property to the excess of the
outstanding debt over the fair value of the property at the time
of the sale, thus preventing the creditor from obtaining a large
deficiency judgment against the debtor as the result of low bids
at a judicial sale. The fifth statutory provision gives the
debtor the right to redeem the real property from any judicial
foreclosure sale as to which a deficiency judgment may be ordered
against the debtor.
Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure
rights under the power of sale contained in the mortgage or deed
of trust are subject to the constraints imposed by California law
upon transfers of title to real property by private power of
sale. During the three-month period beginning with the filing of
a formal notice of default, the debtor is entitled to reinstate
the mortgage by making any overdue payments. Under standard loan
servicing procedures, the filing of the formal notice of default
does not occur unless at least three full monthly payments have
become due and remain unpaid. The power of sale is exercised by
posting and publishing a notice of sale for at least 20 days
after expiration of the three-month reinstatement period.
Therefore, the effective minimum period for foreclosing on a
mortgage could be in excess of seven months after the initial
default. Such time delays in collections could disrupt the flow
of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur
with respect to a substantial number of mortgages or deeds of
trust securing an issuer's obligations.
In addition, a court could find that there is sufficient
involvement of the issuer in the nonjudicial sale of property
securing a mortgage for such private sale to constitute "state
action," and could hold that the private-right-of-sale
proceedings violate the due process requirements of the Federal
or State Constitutions, consequently preventing an issuer from
using the nonjudicial foreclosure remedy described above.
Certain California Municipal Securities in the Fund may be
obligations which finance the acquisition of single family home
mortgages for low and moderate income mortgagors. These
obligations may be payable solely from revenues derived from the
home mortgages, and are subject to California's statutory
limitations described above applicable to obligations secured by
real property. Under California antideficiency legislation, there
is no personal recourse against a mortgagor of a single family
residence purchased with the loan secured by the mortgage,
regardless of whether the creditor chooses judicial or
nonjudicial foreclosure.
Under California law, mortgage loans secured by single-family
owner-occupied dwellings may be prepaid at any time. Prepayment
charges on such mortgage loans may be imposed only with respect
to voluntary prepayments made during the first five years during
the term of the mortgage loan, and cannot in any event exceed six
months' advance interest on the amount prepaid in excess of 20%
of the original principal amount of the mortgage loan. This
limitation could affect the flow of revenues available to an
issuer for debt service on the outstanding debt obligations which
financed such home mortgages.
ADDITIONAL CONSIDERATIONS. With respect to Municipal Obligations
issued by the State of California and its political sub-
divisions, (i.e., California Municipal Securities) the Fund
cannot predict what legislation, if any, may be proposed in the
California State Legislature as regards the California State
personal income tax status of interest on such obligations, or
which proposals, if any, might be enacted. Such proposals, if
enacted, might materially adversely affect the availability of
California Municipal Securities for investment by the Fund and
the value of the Fund's portfolio. In such an event, the Trustees
would reevaluate the Fund's investment objective and policies and
consider changes in its structure or possible dissolution.
RATINGS
On July 15, 1994, S&P, Moody's, and Fitch Investors Service,
Inc. ("Fitch") all downgraded their ratings of California's
general obligation bonds. These bonds are usually sold in 20- to
30-year increments and used to finance the construction of
schools, prisons, water systems and other projects. The ratings
were reduced by S&P from "A+" to "A," by Moody's from "Aa" to
"A1," and by Fitch from "AA" to "A." Since 1991, when it had a
"AAA" rating, the State's rating has been downgraded three times
by all three ratings agencies. All three agencies cite the 1994-
95 Budget Act's dependence on a "questionable" federal bailout to
pay for the cost of illegal immigrants, the Proposition 98
guaranty of a minimum portion of State revenues for kindergarten
through community college, and the persistent deficit requiring
more borrowing as reasons for the reduced rating. Another
concern was the State's reliance on a standby mechanism which
could trigger across-the-board reductions in all State programs,
and which could disrupt State operations, particularly in fiscal
year 1995-96. However, an S&P spokesman stated that, although the
lowered ratings means California is a riskier borrower, S&P
anticipates that the State will pay off its debts and not
default. There can be no assurance that such ratings will
continue for any given period of time or that they will not in
the future be further revised.
As a result of Orange County's Chapter 9 bankruptcy filing on
December 6, 1994, Moody's has suspended the County's bond
ratings, and S&P has cut its rating of all Orange County debt
from "AA-" to "CCC," a level below investment grade and an
indication of high risk and uncertainty. Fitch does not rate
Orange County bonds. It is anticipated that as Orange County's
credit and bond ratings fall, it will have difficulty in getting
loans or selling its bonds to raise money. Additionally, the
County's bankruptcy filing could affect about 180 municipalities,
school districts and other municipal entities which entrusted
billions of dollars to Orange County to invest. S&P has informed
such entities that they have been placed on negative credit
watch, the usual step prior to a downgrade of credit rating.
Additional Considerations. With respect to Municipal
Securities issued by the State of California and its political
sub-divisions, (i.e., California Municipal Obligations) the Fund
cannot predict what legislation, if any, may be proposed in the
California State Legislature as regards the California State
personal income tax status of interest on such obligations, or
which proposals, if any, might be enacted. Such proposals, if
enacted, might materially adversely affect the availability of
California Municipal Obligations for investment by the Fund and
the value of the Fund's portfolio. In such an event, the
Directors would reevaluate the Fund's investment objective and
policies and consider changes in its structure or possible
dissolution.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in
the Prospectus applies to purchases made by any "purchaser,"
which is defined to include the following: (a) an individual; (b)
an individual's spouse and his or her children purchasing shares
for his or her own account; (c) a trustee or other fiduciary
purchasing shares for a single trust estate or single fiduciary
account; (d) a pension, profit sharing or other employee benefit
plan qualified under Section 401(a) of the Code and qualified
employee benefit plans of employers who are "affiliated persons"
of each other within the meaning of the 1940 Act; (e) tax-exempt
organizations enumerated in Section 501(c)(3) or (13) of the
Code; and (f) a trustee or other professional fiduciary
(including a bank, or an investment adviser registered with the
SEC under the Investment Advisers Act of 1940, as amended)
purchasing shares of the Fund for one or more trust estates or
fiduciary accounts. Purchasers who wish to combine purchase
orders to take advantage of volume discounts should contact a
Smith Barney Financial Consultant.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedule in the
Prospectus, apply to any purchase of Class A shares if the
aggregate investment in Class A shares of the Fund and in Class A
shares of other Smith Barney Mutual Funds that are offered with a
sales charge, including the purchase being made, of any purchaser
is $25,000 or more. The reduced sales charge is subject to
confirmation of the shareholder's holdings through a check of
appropriate records. The Fund reserves the right to terminate or
amend the combined right of accumulation at any time after
written notice to shareholders. For further information regarding
the right of accumulation, shareholders should contact a Smith
Barney Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICE
The Fund offers its shares to the public on a continuous
basis. The public offering price for a Class A and Class Y share
of the Fund is equal to the net asset value per share at the time
of purchase, plus for Class A shares an initial sales charge
based on the aggregate amount of the investment. The public
offering price for a Class B and Class C share (and Class A share
purchases, including applicable rights of accumulation, equaling
or exceeding $500,000) is equal to the net asset value per share
at the time of purchase and no sales charge is imposed at the
time of purchase. A contingent deferred sales charge ("CDSC"),
however, is imposed on certain redemptions of Class B and Class C
shares, and Class A shares when purchased in amounts equaling or
exceeding $500,000. The method of computation of the public
offering price is shown in the Fund's financial statements,
incorporated by reference in their entirety into this Statement
of Additional Information.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of
payment postponed (a) for any period during which the New York
Stock Exchange, Inc. ("NYSE") is closed (other than for customary
weekend and holiday closings), (b) when trading in the markets
the Fund normally utilizes is restricted, or an emergency exists,
as determined by the SEC, so that disposal of the Fund's
investments or determination of net asset value is not reasonably
practicable or (c) for such other periods as the SEC by order may
permit for protection of the Fund's shareholders.
DISTRIBUTIONS IN KIND
If the Board of Directors of the Fund determines that it would
be detrimental to the best interests of the remaining
shareholders to make a redemption payment wholly in cash, the
Fund may pay, in accordance with SEC rules, any portion of a
redemption in excess of the lesser of $250,000 or 1.00% of the
Fund's net assets by a distribution in kind of portfolio
securities in lieu of cash. Securities issued as a distribution
in kind may incur brokerage commissions when shareholders
subsequently sell those securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is
available to shareholders who own shares with a value of at least
$10,000 and who wish to receive specific amounts of cash monthly
and quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences.
(With respect to Withdrawal Plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn
that do not exceed 2.00% per month of the value of the
shareholder's shares that are subject to a CDSC). To the extent
withdrawals exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction
in the value of the shareholder's investment, and continued
withdrawal payments may reduce the shareholder's investment and
ultimately exhaust it. Withdrawal payments should not be
considered as income from investment in the Fund. Furthermore, as
it generally would not be advantageous to a shareholder to make
additional investments in the Fund at the same time he or she is
participating in the Withdrawal Plan, purchases by such
shareholder in amounts of less than $5,000 ordinarily will not be
permitted. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value
in additional shares of the Fund.
Shareholders who wish to participate in the Withdrawal Plan and
who hold their shares in certificate form must deposit their
share certificates with the Transfer Agent as agent for
Withdrawal Plan members. All other investors should contact a
Smith Barney Financial Consultant. A shareholder who purchases
shares directly through the Transfer Agent may continue to do so
and applications for participation in the Withdrawal Plan must be
received by the Transfer Agent no later than the eighth day of
the month to be eligible for participation beginning with that
month's withdrawal.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best
efforts basis pursuant to a written agreement (the "Distribution
Agreement"), which was most recently approved by the Fund's Board
of Directors on July 19, 1995. For the 1994, 1995 and 1996 fiscal
years, Smith Barney or its predecessor, Shearson Lehman Brothers,
received $937,828, $548,572 and $704,000, respectively, in sales
charges for the sale of the Fund's Class A shares, and did not
reallow any portion thereof to dealers. For the 1994, 1995 and
1996 fiscal years, the Fund's distributor received $75,150,
$310,446 and $350,000, respectively, representing CDSC on
redemption of the Fund's Class B shares. For the period from
November 14, 1994 through February 28, 1995 and the fiscal year
ended February 29, 1996, the Fund's distributor received $0 and
$1,000, respectively, representing CDSC on redemption of the
Fund's Class C shares.
When payment is made by the investor before settlement date,
unless otherwise noted by the investor, the funds will be held as
a free credit balance in the investor's brokerage account, and
Smith Barney may benefit from the temporary use of the funds. The
investor may designate another use for the funds prior to
settlement date, such as an investment in a money market fund
(other than the Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to
invest in a Smith Barney money market fund, the amount of the
investment will be included as part of the average daily net
assets of both the Fund and the money market fund, and affiliates
of Smith Barney that serve the funds in an investment advisory or
administrative capacity will benefit from the fact they are
receiving fees from both such investment companies for managing
these assets, computed on the basis of their average daily net
assets. The Fund's Board of Directors has been advised of the
benefits to Smith Barney resulting from these settlement
procedures and will take such benefits into consideration when
reviewing the Advisory, Administration and Distribution
Agreements for continuance.
For the fiscal year ended February 29, 1996, Smith Barney
incurred distribution expense totaling approximately $2,456,000,
consisting of approximately $169,000 for advertising, $18,00 for
printing and mailing of prospectuses, $1,080,000 for support
services, $1,160,000 to Smith Barney Financial Consultants, and
$29,000 for accruals for interest on the excess of Smith Barney
expenses incurred in distribution of the Fund's shares over the
sum of the distribution fees and CDSC received by Smith Barney
from the Fund.
DISTRIBUTION ARRANGEMENTS
To compensate Smith Barney for the services it provides and
for the expense it bears under the Distribution Agreement, the
Fund has adopted a services and distribution plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the
Fund pays Smith Barney a service fee, accrued daily and paid
monthly, calculated at the annual rate of 0.15% of the value of
the Fund's average daily net assets attributable to the Class A,
Class B and Class C shares. In addition, the Fund pays Smith
Barney a distribution fee with respect to the Class B and Class C
shares primarily intended to compensate Smith Barney for its
initial expense of paying its Financial Consultants a commission
upon sales of those shares. The Class B distribution fee is
calculated at the annual rate of 0.50% of the value of the Fund's
average net assets attributable to the shares of the Class. The
Class C distribution fee is calculated at the annual rate of
0.55% of the value of the Fund's average net assets attributable
to the shares of the Class.
For the 1994, 1995 and 1996 fiscal years, Class A shares
incurred $641,265, $590,964 and $676,363, respectively, in
service fees. For the 1994, 1995 and 1996 fiscal years, the Class
B shares incurred $115,317, $172,009 and $215,205, respectively,
in service fees. For the same periods, Class B shares incurred
$384,392, $573,363 and $717,349, respectively, in distribution
fees. For the period from November 14, 1994 through February 28,
1995, and for the fiscal year ended February 29 1996, Class C
shares incurred $229 and $6,355 in service fees, respectively.
For the period from November 14, 1994 through February 28, 1995,
and for the fiscal year ended February 29 1996, Class C shares
incurred $838 and $21,185 in distribution fees, respectively.
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote of the
Fund's Board of Directors, including a majority of the
Independent Directors who have no direct or indirect financial
interest in the operation of the Plan or in the Distribution
Agreement. The Plan may not be amended to increase the amount of
the service and distribution fees without shareholder approval,
and all amendments of the Plan also must be approved by the
Directors and Independent Directors in the manner described
above. The Plan may be terminated with respect to a Class at any
time, without penalty, by vote of a majority of the Independent
Directors or by vote of a majority of the outstanding voting
securities of the Class (as defined in the 1940 Act). Pursuant to
the Plan, Smith Barney will provide the Board of Directors
periodic reports of the amounts expended under the Plan and the
purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each
day, Monday through Friday, except days on which the NYSE is
closed. The NYSE currently is scheduled to be closed on New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. Because of
the differences in distribution fees and Class-specific expenses,
the per share net asset value of each Class may differ. The
following is a description of the procedures used by the Fund in
valuing its assets.
The valuation of the Fund's assets is made by SBMFM after
consultation with an independent pricing service (the "Service")
approved by the Fund's Board of Directors. When, in the judgment
of the Service, quoted bid prices for investments are readily
available and representative of the bid side of the market, these
investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the
Service, there is no readily obtainable market quotation (which
may constitute a majority of the portfolio securities) are
carried at fair value as determined by the Service. For the most
part, such investments are liquid and may be readily sold. The
Service may employ electronic data processing techniques and/or a
matrix system to determine valuations. The procedures of the
Service are reviewed periodically by the officers of the Fund
under the general supervision and responsibility of the Board of
Directors, which may replace any such Service at any time if it
determines it to be in the best interest of the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of certain Smith Barney
Mutual Funds may exchange all or part of their shares for shares
of the same class of other Smith Barney Mutual Funds, to the
extent such shares are offered for sale in the shareholder's
state of residence, on the basis of relative net asset value per
share at the time of exchange as follows:
A.Class A shares of any fund purchased with a sales charge
may be exchanged for Class A shares of any of the other funds,
and the sales charge differential, if any, will be applied.
Class A shares of any fund may be exchanged without a sales
charge for shares of the funds that are offered without a
sales charge. Class A shares of any fund purchased without a
sales charge may be exchanged for shares sold with a sales
charge, and the appropriate sales charge differential will be
applied.
B.Class A shares of any fund acquired by a previous
exchange of shares purchased with a sales charge may be
exchanged for Class A shares of any of the other funds, and
the sales charge differential, if any, will be applied.
C.Class B shares of any fund may be exchanged without a
sales charge. Class B shares of the Fund exchanged for Class
B shares of another fund will be subject to the higher
applicable CDSC of the two funds and, for purposes of
calculating CDSC rates and conversion periods, will be deemed
to have been held since the date the shares being exchanged
were purchased.
Dealers other than Smith Barney must notify the Transfer Agent
of the investor's prior ownership of Class A shares of Smith
Barney High Income Fund and the account number in order to
accomplish an exchange of shares of the Smith Barney High Income
Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares
of the same Class in a fund with different investment objectives
when they believe that a shift between funds is an appropriate
investment decision. This privilege is available to shareholders
residing in any state in which the fund shares being acquired may
legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund
into which an exchange is being considered. Prospectuses may be
obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed
at the then-current net asset value and, subject to any
applicable CDSC, the proceeds immediately invested, at a price as
described above, in shares of the fund being acquired. Smith
Barney reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time
after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return of
a Class in advertisements or in reports and other communications
to shareholders. The Fund may include comparative performance
information in advertising or marketing the Fund's shares. Such
performance information may be included in the following
financial publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar
Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. To the extent any advertisement or sales
literature of the Fund describes the expenses or performance of
any Class, it will also disclose such information for the other
Classes.
Average Annual Total Return
"Average annual total return" figures are computed according to a
formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or
fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's average annual total return was as follows for the
periods indicated:
7.45% for the one-year period beginning on March 1, 1995 through
February 29, 1996
7.61% per annum during the five-year period beginning on March 1,
1991 through February 29, 1996
7.49% per annum during the ten-year period beginning on March 1,
1986 through February 29, 1996
The average annual total return figures assume that the maximum
4.00% sales charge has been deducted from the investment at the
time of purchase. If the maximum sales charge had not been
deducted, Class A's average annual total return for those same
periods would have been 11.93%, 8.49% and 7.93%, respectively.
Class B's average annual total return was as follows for the
periods indicated:
6.89% for the one-year period beginning on March 1, 1995 through
February 29, 1996
7.91% for the period from inception (November 6, 1992) through
February 29, 1996
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum CDSC had not been deducted, Class
B's average annual total return for those same periods would have
been 11.39% and 8.41%, respectively.
Class C's average annual total return was as follows for the
periods indicated:
10.30% for the one-year period beginning on March 1, 1995 through
February 29, 1996
18.35% for the period from inception (November 14, 1994) through
February 29, 1996
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum CDSC had not been deducted, Class
C's average annual total return for those same periods would have
been 11.30% and 18.35%, respectively.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change
in the value of an investment in the Class for the specified
period and are computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of
$10,000
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment
made at the beginning of a 1-, 5- or 10-year
period at the end
of the 1-, 5- or 10-year period (or
fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's aggregate total return was as follows for the periods
indicated:
7.45% for the one-year period beginning on March 1, 1995 through
February 29, 1996
44.31% for the five-year period beginning on March 1, 1991
through February 29, 1996
106.00% for the ten-year period beginning on March 1, 1986
through February 29, 1996
These aggregate total return figures assume the maximum 4.00%
sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge had not been deducted,
Class A's aggregate total return for those same periods would
have been 11.93%, 50.30% and 114.54%, respectively.
Class B's aggregate total return was as follows for the periods
indicated:
6.89% for the one-year period beginning on March 1, 1995 through
February 29, 1996
28.69% for the period from inception (November 6, 1992) through
February 29, 1996
These aggregate total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum applicable CDSC had not been
deducted, Class B's aggregate total return for those same periods
would have been 11.39% and 30.69%, respectively.
Class C's aggregate total return was as follows for the periods
indicated:
10.30% for the one-year period beginning on January 1, 1995
through February 29, 1996
24.34% for the period from inception (November 14, 1994) through
February 29, 1996
These aggregate total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum CDSC had not been deducted, Class
C's aggregate total return for those same periods would have been
11.30% and 24.34%, respectively.
Performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio and operating
expenses and the expenses exclusively attributable to the Class.
Consequently, any given performance quotation should not be
considered representative of the Class' performance for any
specified period in the future. Because the performance will
vary, it may not provide a basis for comparing an investment in
the Class with certain bank deposits or other investments that
pay a fixed yield for a stated period of time. Investors
comparing a Class' performance with that of other mutual funds
should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
It is important to note that the total return figures set
forth above are based on historical earnings and are not intended
to indicate future performance. Each Class' net investment income
changes in response to fluctuation in interest rates and the
expenses of the Fund.
TAXES
The following is a summary of selected Federal income tax
considerations that may affect the Fund and its shareholders. The
summary is not intended as a substitute for individual tax advice
and investors are urged to consult their own tax advisors as to
the tax consequences of an investment in the Fund.
As described above and in the Prospectus, the Fund is designed
to provide investors with current income which is excluded from
gross income for Federal income tax purposes and exempt from
California state personal income taxes. The Fund is not intended
to constitute a balanced investment program and is not designed
for investors seeking capital gains or maximum tax-exempt income
irrespective of fluctuations in principal. Investment in the Fund
would not be suitable for tax-exempt institutions, qualified
retirement plans, H.R. 10 plans and individual retirement
accounts because such investors would not gain any additional tax
benefit from the receipt of tax-exempt income.
The Fund has qualified and intends to continue to qualify each
year as a "regulated investment company" under the Code. Provided
that the Fund (a) qualifies as a regulated investment company and
(b) distributes at least 90% of its taxable net investment income
and net realized short-term capital gains and 90% of its tax-
exempt interest income (reduced by certain expenses), the Fund
will not be liable for Federal and California state income or
franchise taxes to the extent its taxable net investment income
and its net realized short-and long-term capital gains, if any,
are distributed to its shareholders. Any such taxes paid by the
Fund would reduce the amount of income and gains available for
distribution to shareholders.
Because the Fund will distribute exempt-interest dividends,
interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for Federal and California
state income tax purposes. If a shareholder receives exempt-
interest dividends with respect to any share and if such share is
held by the shareholder for six months or less, then for Federal
and California state income tax purposes, any loss on the sale or
exchange of such share, to the extent of such exempt-interest
dividend, may be disallowed. In addition, the Code may require a
shareholder, if he or she receives exempt-interest dividends, to
treat as taxable income a portion of certain otherwise non-
taxable social security and railroad retirement benefit payments.
Furthermore, that portion of any exempt-interest dividends paid
by the Fund which represents income derived from private activity
bonds held by the Fund may not retain its Federal tax-exempt
status in the hands of a shareholder who is a "substantial user"
of a facility financed by such bonds or a "related person"
thereof. Similar rules are applicable for California state
personal income tax purposes. Moreover, as noted in the Fund's
Prospectus, (a) some or all of the Fund's dividends and
distributions may be a specific tax preference item, or a
component of an adjustment item, for purposes of the Federal
individual and corporate alternative minimum taxes and (b) the
receipt of the Fund's dividends and distributions may affect a
corporate shareholder's Federal "environmental" tax liability. In
addition, the receipt of Fund dividends and distributions may
affect a foreign corporate shareholder's Federal "branch profits"
tax liability and the Federal and California state "excess net
passive income" tax liability of a shareholder of a Subchapter S
corporation. Shareholders should consult their own tax advisors
as to whether they are (a) substantial users with respect to a
facility or related to such users within the meaning of the Code
and (b) subject to a Federal alternative minimum tax, the Federal
environmental tax, the Federal branch profits tax or the Federal
and California state excess net passive income tax.
As described above and in the Fund's Prospectus, the Fund may
invest in exchange-traded municipal bond index futures contracts
and options on interest rates futures contracts. The Fund
anticipates that these investment activities will not prevent the
Fund from qualifying as a regulated investment company. As a
general rule, these investment activities will increase or
decrease the amount of long-and short-term capital gains or
losses realized by the Fund and, accordingly, will affect the
amount of capital gains distributed to the Fund's shareholders.
For Federal and California state income tax purposes, gain or
loss on the futures contracts and options described above
(collectively referred to herein as "section 1256 contracts") is
taxed pursuant to a special "mark-to-market system." Under the
mark-to-market system, these instruments are treated as if sold
at the Fund's fiscal year end for their fair market value. As a
result, the Fund will be recognizing gains or losses before they
are actually realized. As a general rule, gain or loss on section
1256 contracts is treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss, and, accordingly, the
mark-to-market system generally will affect the amount of capital
gains or losses taxable to the Fund and the amount of
distributions taxable to a shareholder. Moreover, if the Fund
invests in both section 1256 contracts and offsetting positions
in such contracts which together constitute a straddle, then the
Fund may be required to defer certain realized losses. The Fund
expects that its activities with respect to section 1256
contracts and offsetting positions in such contracts will not
cause it to be treated as recognizing a materially greater amount
of capital gains than actually realized and will permit it to use
substantially all of the losses of the Fund for the fiscal years
in which such losses actually occur.
While the Fund does not expect to realize a significant amount
of net long term capital gains, any such gains realized by the
Fund will be distributed annually as described in the Prospectus.
Such distributions ("capital gain dividends") will be taxable to
shareholders as long-term capital gains, regardless of how long
they have held Fund shares, and will be designated as capital
gain dividends in a written notice mailed to shareholders after
the close of the Fund's taxable year. If a shareholder receives a
capital gain dividend with respect to any share and if the share
has been held by the shareholder for six months or less, then any
loss (to the extent not disallowed pursuant to the other six-
month rule described above relating to exempt-interest dividends)
on the sale or exchange of such share will be treated as a long-
term capital loss to the extent of the capital gain dividend.
If a shareholder incurs a sales charge when acquiring shares
of the Fund, disposes of those shares within 90 days and then
acquires shares in a mutual fund for which the otherwise
applicable sales charge is reduced by reason of a reinvestment
right (i.e., exchange privilege), the original sales charge will
not be taken into account when computing gain or loss on the
original shares to the extent the subsequent sales charge is
reduced. The portion of the original sales charge that does not
increase the shareholder's tax basis in the original shares will
be treated as incurred with respect to the second acquisition
and, as a general rule, will increase the shareholder's tax basis
in the newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired shares made within
90 days of the second acquisition. This provision prevents a
shareholder from immediately deducting the sales charge by
shifting his or her investment in a family of mutual funds.
Each shareholder will receive after the close of the calendar
year an annual statement as to the Federal income tax and
California state personal income tax status of his or her
dividends and distributions from the Fund for the prior calendar
year. Dividends attributable to California Municipal Securities
and any other obligations which, when held by an individual, the
interest therefrom would be exempt from taxation by California,
will be exempt from California state personal income taxation
("California exempt-interest dividends"). Any dividends
attributable to interest on municipal obligations that are not
California Municipal Securities generally will be taxable as
ordinary dividends for California state personal income tax
purposes even if such dividends are excluded from gross income
for Federal income tax purposes. These statements also will
designate the amount of exempt-interest dividends that is a
specific preference item for purposes of the Federal individual
and corporate alternative minimum taxes. Each shareholder also
will receive, if appropriate, various written notices after the
close of the Fund's prior taxable year as to the Federal income
tax status of his or her dividends and distributions which were
received from the Fund during the Fund's prior taxable year.
Shareholders should consult their tax advisors as to any other
state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded or exempt
from Federal income taxation or California state personal income
taxation and the dollar amount subject to Federal income taxation
or California state personal income taxation, if any, will vary
for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. In the event the Fund earns
taxable net investment income, it intends to designate as taxable
dividends the same percentage of each day's dividend as its
actual taxable net investment income bears to its total net
investment income earned for the year.
Investors considering buying shares of the Fund just prior to
a record date for a capital gain distribution should be aware
that, regardless of whether the price of the Fund shares to be
purchased reflects the amount of the forthcoming distribution
payment, any such payment will be a taxable distribution payment.
If a shareholder fails to furnish the Fund with a correct
taxpayer identification number, fails to fully report dividend or
interest income or fails to certify to the Fund that he or she
has provided a correct taxpayer identification number and that he
or she is not subject to "backup withholding," then the
shareholder may be subject to a 31% backup withholding tax with
respect to (a) any taxable dividends and distributions and (b)
the proceeds of any redemption of Fund shares. An individual's
taxpayer identification number is his or her social security
number. The backup withholding tax is not an additional tax and
may be credited against a shareholder's regular Federal income
tax liability.
The foregoing is only a summary of certain tax considerations
generally affecting the Fund and its shareholders, and is not
intended as a substitute for careful tax planning. Further, it
should be noted that, for California state tax purposes, the
portion of any Fund dividends constituting California exempt-
interest dividends is exempt from income for California state
personal income tax purposes only. Dividends (including
California exempt-interest dividends) paid to shareholders
subject to California state franchise tax or California state
corporate income tax may therefore be taxed as ordinary dividends
to such shareholders, notwithstanding that all or a portion of
such dividends is exempt from California state personal income
tax. Potential shareholders in the Fund, including, in
particular, corporate shareholders which may be subject to either
California franchise tax or California corporate income tax,
should consult their tax advisors with respect to (a) the
application of such corporate and franchise taxes to the receipt
of Fund dividends and as to their own California state tax
situation in general, (b) the application of other state and
local taxes to the receipt of Fund dividends and distributions
and (c) their own specific tax situations.
ADDITIONAL INFORMATION
The Fund was incorporated on February 17, 1984 under the name
Shearson California Municipals Inc. On December 15, 1988,
November 19, 1992, July 30, 1993 and October 14, 1994, the Fund
changed its name to SLH California Municipals Fund Inc., Shearson
Lehman Brothers California Municipals Fund Inc., Smith Barney
Shearson California Municipals Fund Inc. and Smith Barney
California Municipals Fund Inc., respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, serves as the custodian of the Fund. Under
the custody agreement with the Fund, PNC holds the Fund's
portfolio securities and keeps all necessary accounts and
records. For its services, PNC receives a monthly fee based upon
the month-end market value of securities held in custody and also
receives certain securities transaction charges. The assets of
the Fund are held under bank custodianship in compliance with the
1940 Act.
The Transfer Agent is located at Exchange Place, Boston,
Massachusetts 02109. Under the transfer agency agreement, the
Transfer Agent maintains the shareholder account records for the
Fund, handles certain communications between shareholders and the
Fund and distributes dividends and distributions payable by the
Fund. For these services, the Transfer Agent receives a monthly
fee computed on the basis of the number of shareholder accounts
it maintains for the Fund during the month, and is reimbursed for
certain out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual and Semi-Annual Reports for the fiscal year
ended February 29, 1996 and semi-annual period ended August
31, 1995 are incorporated herein by reference in their
entirety.
APPENDIX
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and
political subdivisions. Ratings are assigned to general
obligation and revenue bonds. General obligation bonds are
usually secured by all resources available to the municipality
and the factors outlined in the rating definitions below are
weighed in determining the rating. Because revenue bonds in
general are payable from specifically pledged revenues, the
essential element in the security for a revenue bond is the
quantity and quality of the pledged revenues available to pay
debt service.
Although an appraisal of most of the same factors that bear on
the quality of general obligation bond credit is usually
appropriate in the rating analysis of a revenue bond, other
factors are important, including particularly the competitive
position of the municipal enterprise under review and the basic
security covenants. Although a rating reflects S&P's judgment as
to the issuer's capacity for the timely payment of debt service,
in certain instances it may also reflect a mechanism or procedure
for an assured and prompt cure of a default, should one occur,
i.e., an insurance program, Federal or state guarantee or the
automatic withholding and use of state aid to pay the defaulted
debt service.
AAA
Prime -- These are obligations of the highest quality. They have
the strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the
issuers will suffer the smallest declines in income and will be
least susceptible to autonomous decline. Debt burden is moderate.
A strong revenue structure appears more than adequate to meet
future expenditure requirements. Quality of management appears
superior.
Revenue Bonds -- Debt service coverage has been, and is expected
to remain, substantial. Stability of the pledged revenues is also
exceptionally strong, due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic
security provisions (including rate covenant, earnings test for
issuance of additional bonds, and debt service reserve
requirements) are rigorous. There is evidence of superior
management.
AA
High Grade -- The investment characteristics of general
obligation and revenue bonds in this group are only slightly less
marked than those of the prime quality issues. Bonds rated AA
have the second strongest capacity for payment of debt service.
A
Good Grade -- Principal and interest payments on bonds in this
category are regarded as safe. This rating describes the third
strongest capacity for payment of debt service. It differs from
the two higher ratings because:
General Obligation Bonds -- There is some weakness, either in the
local economic base, in debt burden, in the balance between
revenues and expenditures, or in quality of management. Under
certain adverse circumstances, any one such weakness might impair
the ability of the issuer to meet debt obligations at some future
date.
Revenue Bonds -- Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could show some
variations because of increased competition or economic
influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance appears
adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the
lowest.
General Obligation Bonds -- Under certain adverse conditions,
several of the above factors could contribute to a lesser
capacity for payment of debt service. The difference between
``A'' and ``BBB'' ratings is that the latter shows more than one
fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the
pledged revenues could show substantial variations, with the
revenue flow possibly being subject to erosion over time. Basic
security provisions are no more than adequate. Management
performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
C
The rating C is reserved for income bonds on which no interest is
being paid.
D
Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or
a minus sign, which is used to show relative standing within the
major rating categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are
usually given note ratings (designated SP-1, -2 or -3) by S&P to
distinguish more clearly the credit quality of notes as compared
to bonds. Notes rated SP-1 have a very strong or strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of
SP-1+. Notes rated SP-2 have a satisfactory capacity to pay
principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is
secure. While the various protective
elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of
such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B
Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Moody's applies the numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through B. The modifier 1
indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Caa
Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with
respect to principal or interest.
Ca
Bonds that are rated Ca represent obligations that are
speculative in a high degree. These issues are often in default
or have other marked short comings.
C
Bonds that are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-
term loans are designated Moody's Investment Grade ("MIG") and
for variable rate demand obligations are designated Variable
Moody's Investment Grade ("VMIG"). This distinction is in
recognition of the differences between short-term credit risk and
long-term credit risk. Loans bearing the designation MIG 1 or
VMIG 1 are of the best quality, enjoying strong protection by
established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing,
or both. Loans bearing the designation MIG 2 or VMIG 2 are of
high quality, with ample margins of protection although not as
large as the preceding group. Loans bearing the designation MIG 3
or VMIG 3 are of favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow may be tight and market
access for refinancing, in particular, is likely to be less well
established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest,
commercial paper rating assigned by S&P. Paper rated A-1+ must
have either the direct credit support of an issuer or guarantor
that possesses excellent long-term operating and financial
strengths combined with strong liquidity characteristics
(typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating
of AA- or higher), or the direct credit support of an issuer or
guarantor that possesses above average long-term fundamental
operating and financing capabilities combined with ongoing
excellent liquidity characteristics. Paper rated A-1 by S&P has
the following characteristics: liquidity ratios are adequate to
meet cash requirements; long-term senior debt is rated A or
better; the issuer has access to at least two additional channels
of borrowing; basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances; typically, the
issuer's industry is well established and the issuer has a strong
position within the industry; and the reliability and quality of
management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (a) evaluation of the
management of the issuer; (b) economic evaluation of the issuer's
industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; (c) evaluation of the
issuer's products in relation to competition and customer
acceptance; (d) liquidity; (e) amount and quality of long-term
debt; (f) trend of earnings over a period of ten years; (g)
financial strength of a parent company and the relationships
which exist with the issuer; and (h) recognition by the
management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such
obligations.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended February
29, 1996 and the Report of Independent Accountants dated April
29, 1996 are incorporated by reference to the Definitive 30b2-1
filed on May 23, 1996 as Accession #0000091155-96-204.
Included in Part C:
Consent of Independent Auditors is filed herein.
(b) Exhibits
All references are to the Registrant's Registration Statement on
Form N-1A as filed with the Securities and Exchange Commission on
February 21, 1984. File Nos. 2-89548 and 811-3970 (the
"Registration Statement").
(1)(a) Registrant's Articles of Incorporation dated February
16, 1984 are incorporated by reference to the Registration
Statement.
(b) Articles of Amendment dated August 26, 1987, December
14, 1988, November 4, 1992 and July 30, 1993, respectively, to
Articles of Incorporation are incorporated by reference to
Post-Effective Amendment No. 18 to the Registration Statement
("Post-Effective Amendment No. 18").
(c) Articles of Amendment dated October 14, 1994
are
incorporated by reference to Post-Effective Amendment No. 21 to
the Registration Statement ("Post-Effective Amendemnt No. 21").
(d) Form of Articles of Amendment to the Articles of
Incorporation are incorporated by reference to Post-Effective No.
21.
(e) Articles Supplementary dated November 2, 1992, to
Articles of Incorporation are incorporated by reference to
Post-Effective Amendment No. 18.
(f) Form of Articles Supplementary to the Articles of
Incorporation are incorporated by reference to Post-Effective
Amendment No. 21.
(2)(a) Registrant's By-Laws dated March 21, 1984 are
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement ("Pre-Effective Amendment No. 1").
(b) Amendments to Registrant's By-Laws dated March 21, 1987
are incorporated by reference to Post-Effective Amendment No. 5
to the Registration Statement ("Post-Effective Amendment No. 5").
(c) Amendment to Registrant's By-Laws dated July 20, 1994
is incorporated to Post-Effective Amendment No. 22 to the
Registration Statement ("Post-Effective Amendment No. 22").
(3) Not Applicable.
(4) Registrant's form of stock certificate is incorporated by
reference to Post-Effective Amendment No. 16 to the Registration
Statement filed on October 23, 1992 ("Post-Effective Amendment
No. 16").
(5)(a) Investment Advisory Agreement between the Registrant
and Greenwich Street Advisors dated July 30, 1993 is incorporated
by reference to Post-Effective Amendment No. 18.
(b) Form of Transfer and Assumption of Investment Advisory
Agreement dated as of November 7, 1994 is incorporated by
reference to Post-Effective Amendment No. 21.
(c) Amendment to Investement Advisory Agreement dated
November 17, 1995 is filed herein.
(6) Distribution Agreement between the Registrant and Smith
Barney Shearson Inc. dated July 30, 1993 is incorporated by
reference to Post-Effective Amendment No. 18.
(7) Not Applicable.
(8) Form of Custodian Agreement between the Registrant and PNC
Bank, National Association is incorporated by reference to Post-
Effective No. 22.
(9) (a) Transfer Agency Agreement between the Registrant and
The Shareholders Services Group, Inc. dated August 2, 1993 is
incorporated by reference to Post-Effective Amendment No. 18.
(b) Administration Agreement dated April 20, 1994 between
the Registrant and Smith, Barney Advisers, Inc. is incorporated
by reference to Post-Effective Amendment No. 21.
(10) Opinions of counsel as to the legality of securities are
incorporated by reference to Post-Effective Amendment No. 10 to
the Registration Statement filed on June 28, 1989 ("Post-
Effective Amendment No. 10") and Post-Effective Amendment No. 16.
(11)(a) Consent of Independent Accountants is filed herein.
(b) Consent of Morningstar Mutual Fund Values is
incorporated by reference to Post-Effective Amendment No. 16.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Amended Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant and Smith Barney Inc. is incorporated by
reference to Post-Effective Amendment No. 21.
(16) Performance data is incorporated by reference to
Post-Effective Amendment No. 10.
17. Financial Data Schedule is filed herein.
18. Form of Registrant's Rule 18f-3(d) Multiple Class Plan is
incorporated by reference to Post-Effective Amendment No. 22.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record Holders
Title of Class by Class as of May 24, 1996
Common Stock Class A - 8,237
par value $.001 per Class B - 3,770
share Class C - 283
Class Y - 0
Item 27. Indemnification
The response to this item is incorporated by reference to
Post-Effective Amendment No. 16.
Item 28(a). Business and Other Connections of Investment
Adviser
Investment Adviser - - Smith Barney Mutual Funds Management Inc.,
formerly known as Smith Barney Advisers, Inc. ("SBMFM").
SBMFM was incorporated in December 1968 under the laws of the
State of Delaware. SBFMFM is a wholly owned subsidiary of Smith
Barney Holdings Inc. (formerly known as Smith Barney Shearson
Holdings Inc.) ("Holdings"), which in turn is a wholly owned
subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). SBMFM is registered as an investment
adviser under the Investment Advisers Act of 1940 (the "Advisers
Act").
The list required by this Item 28 of officers and directors of
SBMFM together with information as to any other business,
profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two
years, is incorporated by reference to Schedules A and D of FORM
ADV filed by SBMFM pursuant to the Advisers Act (SEC File No.
801-8314).
Prior to the close of business on November 7, 1994, Greenwich
Street Advisors served as investment adviser. Greenwich Street
Advisors, through its predecessors, had been in the investment
counseling business since 1934 and was a division of Mutual
Management Corp. ("MMC"). MMC was incorporated in 1978 and is a
wholly owned subsidiary of Holdings, which is in turn a wholly
owned subsidiary of Travelers. The list required by this Item 28
of officers and directors of MMC and Greenwich Street Advisors,
together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such
officers and directors during the past two fiscal years, is
incorporated by reference to Schedules A and D of FORM ADV filed
by MMC on behalf of Greenwich Street Advisors pursuant to the
Advisers Act (SEC File No. 801-14437).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as a
distributor for Smith Barney Managed Municipals Fund Inc., Smith
Barney California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Managed Government
Fund Inc., Smith Barney Aggressive Growth Fund Inc., Smith Barney
Appreciation Fund Inc., Smith Barney Principal Return Fund, Smith
Barney Income Funds, Smith Barney Equity Funds, Smith Barney
Investment Funds Inc., Smith Barney Natural Resources Fund Inc.,
Smith Barney Telecommunications Trust, Smith Barney Arizona
Municipals Fund Inc., Smith Barney New Jersey Municipals Fund
Inc., The USA High Yield Fund N.V., Smith Barney/Travelers Series
Fund, Smith Barney Fundamental Value Fund Inc., Smith Barney
Series Fund, Consulting Group Capital Markets Funds, Smith
Barney Investment Trust, Smith Barney Adjustable Rate Government
Income Fund, Smith Barney Oregon Municipals Fund, Smith Barney
Funds, Inc., Smith Barney Muni Funds, Smith Barney World Funds,
Inc., Smith Barney Money Funds, Inc., Smith Barney Municipal
Money Market Fund, Inc., Smith Barney Variable Account Funds,
Smith Barney U.S. Dollar Reserve Fund (Cayman), Worldwide Special
Fund, N.V., Worldwide Securities Limited (Bermuda), Smith Barney
International Fund (Luxembourg), Smith Barney Institutional Cash
Management Fund, Inc., Smith Barney Concert Series Inc. and
various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Holdings,
which in turn is a wholly owned subsidiary of Travelers. On
June 1, 1994, Smith Barney changed its name from Smith Barney
Shearson Inc. to its current name. The information required by
this Item 29 with respect to each director, officer and partner
of Smith Barney is incorporated by reference to Schedule A of
FORM BD filed by Smith Barney pursuant to the Securities Exchange
Act of 1934 (SEC File No. 812-8510).
Item 30. Location of Accountants and Records
(1) Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None.
485(b) Certification
The Registrant hereby certifies that it meets all the
requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act or 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York and State of
New York, on the 29th day of May, 1996.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
By:/s/Heath B. McLendon
Health B. McLendon
Chairman of the Board
We, the undersigned, hereby severally constitute and appoint
Heath B. McLendon, Christina T. Sydor and Caren Cunningham and
each of them singly, our true and lawful attorneys, with full
power to them and each of them to sign for us, and in our hands
and in the capacities indicated below, any and all Amendments to
this Registration Statement and to file the same, with all
exhibits thereto, and other documents therewith, with the
Securities and Exchange Commission, granting unto said attorneys
and each of them, acting alone, full authority and power to do
and perform each and every act and thing requisite or necessary
to be done in the premises, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and
confirming all that said attorneys or any of them may lawfully do
or cause to be done by virtue thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Amendment to the Registration Statement and the
above Power of Attorney has been signed below by the following
persons in the capacities and as of the dates indicated.
Signature: Title: Date:
/s/Heath B. Chairman of the May 29, 1996
McLendon Board
Heath B. McLendon (Chief Executive
Officer)
/s/Lewis E. Senior Vice May 29, 1996
Daidone President and
Lewis E. Daidone Treasurer (Chief
Financial
and Accounting
Officer)
/s/Herbert Barg Director May 29, 1996
Herbert Barg
/s/Alfred J. Brody Director May 29, 1996
Alfred J.
Bianchetti
/s/Martin Brody Director May 29, 1996
Martin Brody
/s/Dwight B. Crane Director May 29, 1996
Dwight B. Crane
/s/Burt N. Dorsett Director May 29, 1996
Burt N. Dorsett
/s/Elliot S. Jaffe Director May 29, 1996
Elliot S. Jaffe
/s/Stephen E. Director May 29, 1996
Kaufman
Stephen E. Kaufman
/s/Joseph J. Director May 29, 1996
McCann
Joseph J. McCann
/s/Cornelius C. Director May 29, 1996
Rose, Jr.
Cornelius C. Rose,
Jr.
AMENDMENT TO
ADVISORY AGREEMENT
This Amendment to the Advisory Agreement is entered
into by Greenwich Street Advisors, a division of Smith
Barney Mutual Funds Inc. ("SBMFM") and Smith Barney
California Municipals Fund Inc. (the "Company"), as of the
17th day of November, 1995.
WHEREAS, the Board of Directors of the Company has
voted, and SBMFM has agreed, to decrease the annual fee
payable under the Advisory Agreement from: 0.35% of the
first $500 million of the Company's average daily net assets
and 0.32% of the Company's daily net assets in excess of
$500 million to 0.30% of the Company's average daily net
assets; and
WHEREAS, the Company and SBMFM desire to amend the
Advisory Agreement to reflect the decrease in the annual fee
as provided herein.
NOW THEREFORE, the parties hereto agree as follows:
1. Section 6 of the Advisory Agreement is deleted in
its entirety and the following substituted in lieu thereof:
6. Compensation. In consideration of the services
rendered pursuant to this Agreement, the Company will
pay the Adviser on the first business day of each month
a fee for the previous month at the annual rate of
0.30% of 1.00% of the Company's average daily net
assets. Upon any termination of this Agreement before
the end of a month, the fee for such part of that month
shall be payable upon the date of termination of this
Agreement. For the purpose of determining fees payable
to the Adviser, the value of the Company's net assets
shall be computed at the times and in the manner
specified in the Prospectus and/or Statement.
2. Except as amended herein, all the provisions of the
Advisory Agreement shall remain unchanged and in full force
and effect.
IN WITNESS WHEREOF, the parties have caused their duly
authorized representatives to execute this Amendment to
Advisory Agreement as of the date first written above.
SMITH BARNEY MUTUAL SMITH BARNEY CALIFORNIA
FUNDS MANAGEMENT INC. MUNICIPALS FUND INC.
By: ____________________________ By:
____________________________
Heath B. McLendon
Title: Title: Chairman of
the Board of
Directors
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney California Municipals Fund Inc.:
We consent to the use of our report dated April 26, 1996
incorporated herein by reference and to the references to our
Firm under the headings "Financial Highlights" in the
Prospectus and "Counsel and Auditors" in the Statement of
Additional Information.
KPMG PEAT MARWICK LLP
New York, New York
June 3, 1996
[ARTICLE] 6
[CIK] 0000740871
[NAME] SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. CLASS A
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] FEB-29-1996
[PERIOD-END] FEB-29-1996
[INVESTMENTS-AT-COST] 694,084,936
[INVESTMENTS-AT-VALUE] 737,052,035
[RECEIVABLES] 16,874,882
[ASSETS-OTHER] 10,728
[OTHER-ITEMS-ASSETS] 114,817
[TOTAL-ASSETS] 754,022,462
[PAYABLE-FOR-SECURITIES] 6,974,339
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 871,292
[TOTAL-LIABILITIES] 7,845,631
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 45,736
[SHARES-COMMON-STOCK] 35,693,286
[SHARES-COMMON-PRIOR] 26,089,810
[ACCUMULATED-NII-CURRENT] 30,479,419
[OVERDISTRIBUTION-NII] (850,098)
[ACCUMULATED-NET-GAINS] (2,168,823)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 46,126,568
[NET-ASSETS] 746,176,831
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 35,773,466
[OTHER-INCOME] 0
[EXPENSES-NET] 5,294,047
[NET-INVESTMENT-INCOME] 30,479,419
[REALIZED-GAINS-CURRENT] 7,626,812
[APPREC-INCREASE-CURRENT] 25,439,325
[NET-CHANGE-FROM-OPS] 63,545,556
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 23,970,420
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 3,014,516
[NUMBER-OF-SHARES-REDEEMED] 3,775,198
[SHARES-REINVESTED] 879,885
[NET-CHANGE-IN-ASSETS] 215,783,004
[ACCUMULATED-NII-PRIOR] 28,735,320
[ACCUMULATED-GAINS-PRIOR] (9,979,114)
[OVERDISTRIB-NII-PRIOR] 283,943
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,977,596
[INTEREST-EXPENSE] 35,773,466
[GROSS-EXPENSE] 5,294,047
[AVERAGE-NET-ASSETS] 594,601,147
[PER-SHARE-NAV-BEGIN] 15.40
[PER-SHARE-NII] 0.85
[PER-SHARE-GAIN-APPREC] 0.93
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] (0.87)
[RETURNS-OF-CAPITAL] 11.93
[PER-SHARE-NAV-END] 16.31
[EXPENSE-RATIO] 0.76
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000740871
[NAME] SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. CLASS B
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] FEB-29-1996
[PERIOD-END] FEB-29-1996
[INVESTMENTS-AT-COST] 694,084,936
[INVESTMENTS-AT-VALUE] 737,052,035
[RECEIVABLES] 16,874,882
[ASSETS-OTHER] 10,728
[OTHER-ITEMS-ASSETS] 114,817
[TOTAL-ASSETS] 754,022,462
[PAYABLE-FOR-SECURITIES] 6,974,339
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 871,292
[TOTAL-LIABILITIES] 7,845,631
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 45,736
[SHARES-COMMON-STOCK] 9,379,826
[SHARES-COMMON-PRIOR] 8,305,989
[ACCUMULATED-NII-CURRENT] 30,479,419
[OVERDISTRIBUTION-NII] (850,098)
[ACCUMULATED-NET-GAINS] (2,168,823)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 46,126,568
[NET-ASSETS] 746,176,831
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 35,773,466
[OTHER-INCOME] 0
[EXPENSES-NET] 5,294,047
[NET-INVESTMENT-INCOME] 30,479,419
[REALIZED-GAINS-CURRENT] 7,626,812
[APPREC-INCREASE-CURRENT] 25,439,325
[NET-CHANGE-FROM-OPS] 63,545,556
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 6,897,404
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,998,416
[NUMBER-OF-SHARES-REDEEMED] 1,221,047
[SHARES-REINVESTED] 240,003
[NET-CHANGE-IN-ASSETS] 215,783,004
[ACCUMULATED-NII-PRIOR] 28,735,320
[ACCUMULATED-GAINS-PRIOR] (9,979,114)
[OVERDISTRIB-NII-PRIOR] 283,943
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,977,596
[INTEREST-EXPENSE] 35,773,466
[GROSS-EXPENSE] 5,294,047
[AVERAGE-NET-ASSETS] 594,601,147
[PER-SHARE-NAV-BEGIN] 15.40
[PER-SHARE-NII] 0.75
[PER-SHARE-GAIN-APPREC] 0.96
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] (0.79)
[RETURNS-OF-CAPITAL] 11.39
[PER-SHARE-NAV-END] 16.32
[EXPENSE-RATIO] 1.29
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
[ARTICLE] 6
[CIK] 0000740871
[NAME] SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. CLASS C
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] FEB-29-1996
[PERIOD-END] FEB-29-1996
[INVESTMENTS-AT-COST] 694,084,936
[INVESTMENTS-AT-VALUE] 737,052,035
[RECEIVABLES] 16,874,882
[ASSETS-OTHER] 10,728
[OTHER-ITEMS-ASSETS] 114,817
[TOTAL-ASSETS] 754,022,462
[PAYABLE-FOR-SECURITIES] 6,974,339
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 871,292
[TOTAL-LIABILITIES] 7,845,631
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 45,736
[SHARES-COMMON-STOCK] 662,884
[SHARES-COMMON-PRIOR] 49,505
[ACCUMULATED-NII-CURRENT] 30,479,419
[OVERDISTRIBUTION-NII] (850,098)
[ACCUMULATED-NET-GAINS] (2,168,823)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 46,126,568
[NET-ASSETS] 746,176,831
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 35,773,466
[OTHER-INCOME] 0
[EXPENSES-NET] 5,294,047
[NET-INVESTMENT-INCOME] 30,479,419
[REALIZED-GAINS-CURRENT] 7,626,812
[APPREC-INCREASE-CURRENT] 25,439,325
[NET-CHANGE-FROM-OPS] 63,545,556
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 177,750
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 333,004
[NUMBER-OF-SHARES-REDEEMED] 113,763
[SHARES-REINVESTED] 5,792
[NET-CHANGE-IN-ASSETS] 215,783,004
[ACCUMULATED-NII-PRIOR] 28,735,320
[ACCUMULATED-GAINS-PRIOR] (9,979,114)
[OVERDISTRIB-NII-PRIOR] 283,943
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,977,596
[INTEREST-EXPENSE] 35,773,466
[GROSS-EXPENSE] 5,294,047
[AVERAGE-NET-ASSETS] 594,601,147
[PER-SHARE-NAV-BEGIN] 15.40
[PER-SHARE-NII] 0.78
[PER-SHARE-GAIN-APPREC] 0.92
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] (0.79)
[RETURNS-OF-CAPITAL] 11.30
[PER-SHARE-NAV-END] 16.31
[EXPENSE-RATIO] 1.39
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
