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. 24 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 25 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
28, 1997 was filed on April 15, 1997 under Accession #91155-97-000192.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of Registrant
Cover Page; Prospectus Summary;
Investment Objective and Management
Policies; Additional Information
5. Management of the Fund
Management of the Fund; Distributor;
Additional Information; Annual Report
6. Capital Stock and Other Securities
Investment Objective and Management
Policies; Dividends, Distributions and
Taxes; Additional Information
7. Purchase of Securities Being
Offered
Purchase of Shares; Valuation of
Shares; Redemption of Shares; Exchange
Privilege; Minimum Account Size;
Distributor; Additional Information
8. Redemption or Repurchase
Purchase of Shares; Redemption of
Shares; Exchange Privilege
9. Legal Proceedings
Not Applicable
Part B
Item No.
Statement Of Additional Information
Caption
10. Cover Page
Cover Page
11. Table of Contents
Table of Contents
12. General Information
Distributor; Additional Information
13. Investment Objective and Policies
Investment Objective and Management
Policies
14. Management of the Fund
Management of the Fund
15. Control Persons and Principal
Holders of Securities
Management of the Fund
16. Investment Advisory and Other
Services
Management of the Fund; Distributor
17. Brokerage Allocation
Investment Objective and Management
Policies; Distributor
18. Capital Stock and Other Securities
Investment Objective and Management
Policies; Purchase of Shares;
Redemption of Shares; Taxes
19. Purchase, Redemption and Pricing
of Securities
Being Offered
Purchase of Shares; Redemption of
Shares; Distributor; Valuation of
Shares; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance Data
Performance Data
23. Financial Statements
Financial Statements
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART A
<PAGE>
P R O S P E C T U S
SMITH BARNEY
California
Municipals
Fund Inc.
JUNE 27, 1997
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
PROSPECTUS
June 27, 1997
Smith Barney California Municipals Fund Inc.
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 27, 1997, 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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- ---------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- ---------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- ---------------------------------------------------
CALIFORNIA MUNICIPAL SECURITIES 20
- ---------------------------------------------------
VALUATION OF SHARES 21
- ---------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 21
- ---------------------------------------------------
PURCHASE OF SHARES 23
- ---------------------------------------------------
EXCHANGE PRIVILEGE 30
- ---------------------------------------------------
REDEMPTION OF SHARES 33
- ---------------------------------------------------
MINIMUM ACCOUNT SIZE 35
- ---------------------------------------------------
PERFORMANCE 36
- ---------------------------------------------------
MANAGEMENT OF THE FUND 37
- ---------------------------------------------------
DISTRIBUTOR 38
- ---------------------------------------------------
ADDITIONAL INFORMATION 39
- ---------------------------------------------------
</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 Prospectus 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 jurisdiction.
- --------------------------------------------------------------------------------
2
<PAGE>
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 of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See "Pro-
spectus Summary--Reduced or No Initial Sales Charge."
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.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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 serv-
ice 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
regular investment may wish to consider Class A shares; as the investment
accumulates shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the investment. As an
alternative, 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 cannot 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
conversion 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
4
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
distribution fee. Thus, Class B shares may be more attractive than Class C
shares to investors with longer term investment outlooks.
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
purchases of $500,000 or more 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 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.
See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Tax-
es" and "Exchange 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 Bar-
ney 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 mini-
mum investment requirement for purchases of portfolio shares through the Sys-
tematic Investment Plan is described below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Invest-
ment Plan under which they may authorize the automatic placement of a purchase
order each month or quarter for Fund shares. The minimum initial requirement
for Class A, Class B and Class C shares and the subsequent investment require-
ment for all Classes for shareholders purchasing shares through the Systematic
Investment Plan on a monthly basis is $25 and on a quarterly basis is $50. See
"Purchase of Shares."
5
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
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."
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. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are 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
6
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
from Federal income taxes, but may be subject to California state personal
income taxes. Dividends derived from certain municipal securities (including
California Municipal Securities), however, may be a specific tax item for Fed-
eral alternative minimum tax purposes. The Fund may invest without limit in
securities subject to the Federal alternative minimum tax. See "Investment
Objective and Management Policies" and "Dividends, Distributions and Taxes."
The Fund is more susceptible to factors adversely affecting issuers of Cali-
fornia municipal securities than is a municipal bond fund that does not empha-
size these issuers. See "California Municipal Securities" in the Prospectus
and "Special Considerations Relating to California Municipal Securities" in
the Statement of Additional Information for further details about the risks of
investing in California obligations.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that
it may invest in the obligations of a single issuer. The Fund's assumption of
large positions in the obligations of a small number of issuers may cause the
Fund's share price to fluctuate to a greater extent than that of a diversified
company as a result of changes in the financial condition or in the market's
assessment of the issuers. See "Investment Objective and Management Policies."
The Fund generally will invest at least 80% of its assets in securities
rated investment grade, and may invest the remainder of its assets in securi-
ties rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by
Standard & Poor's Rating Group ("S&P"), or in unrated obligations of compara-
ble quality. Securities in the fourth highest rating category, though consid-
ered 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."
7
<PAGE>
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 the Fund's operating 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 --
Other expenses*** 0.06 0.08 0.09 0.06
- ------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.71% 1.23% 1.29% 0.56%
- ------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 of purchase.
** 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 28, 1997.
Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant.
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
8
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
annual 12b-1 fee of 0.65% of the value of average daily net assets of that
Class, consisting of a 0.50% distribution fee and a 0.15% service 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 $62 $78 $125
Class B 58 69 78 134
Class C 23 41 71 156
Class Y 6 18 31 70
An investor would pay the following expenses
on the same investment, assuming the same
annual return and
no redemption:
Class A 47 62 78 125
Class B 13 39 68 134
Class C 13 41 71 156
Class Y 6 18 31 70
- ------------------------------------------------------------------------------
</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.
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the two years ended February 28, 1997 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's Annual Report dated February 28, 1997. The information
for the fiscal years ended February 28, 1987 through February 28, 1995 has
been audited by other auditors. 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 28, 1997, no Class Y
shares were outstanding and, accordingly, no comparable information is avail-
able at this time for that class.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
<TABLE>
<CAPTION>
CLASS A SHARES 1997 1996(1) 1995 1994(1) 1993 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $16.31 $15.40 $16.15 $16.70 $15.78 $15.66
- -------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.85 0.85 0.89 0.86 0.97 1.04
Net realized and
unrealized gain (loss) 0.15 0.93 (0.56) 0.08 1.25 0.40
- -------------------------------------------------------------------------------------
Total Income From
Operations 1.00 1.78 0.33 0.94 2.22 1.44
- -------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.85) (0.84) (0.89) (0.84) (0.97) (1.05)
Net realized gains (0.20) (0.03) (0.19) (0.65) (0.29) (0.27)
Capital -- -- -- -- (0.04) --
- -------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.05) (0.87) (1.08) (1.49) (1.30) (1.32)
- -------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $16.26 $16.31 $15.40 $16.15 $16.70 $15.78
- -------------------------------------------------------------------------------------
TOTAL RETURN 6.37% 11.93% 2.46% 5.92% 14.76% 9.50%
- -------------------------------------------------------------------------------------
NET ASSETS, END OF
YEAR 000S $578,687 $582,324 $401,743 $425,181 $423,504 $364,809
- -------------------------------------------------------------------------------------
RATIOS TO AVERAGE
NET ASSETS:
Expenses 0.71% 0.76% 0.80% 0.80% 0.70% 0.65%
Net investment income 5.29 5.26 5.76 5.20 6.04 6.54
- -------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 60% 44% 59% 76% 72% 86%
- -------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects per share data for the period.
10
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
<TABLE>
<CAPTION>
CLASS A SHARES 1991 1990 1989 1988
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $ 15.61 $ 15.33 $ 15.49 $ 16.54
- -----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 1.07 1.09 1.12 1.09
Net realized and
unrealized gain (loss) 0.17 0.26 (0.13) (0.98)
- -----------------------------------------------------------------
Total Income From
Operations 1.24 1.35 0.99 0.11
- -----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.07) (1.07) (1.12) (1.09)
Net realized gains (0.12) -- (0.03) (0.07)
Capital -- -- -- --
- -----------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.19) (1.07) (1.15) (1.16)
- -----------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $15.66 $15.61 $15.33 $15.49
- -----------------------------------------------------------------
TOTAL RETURN 8.29% 9.02% 6.67% 1.09%
- -----------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $334,599 $328,938 $313,059 $156,464
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.65% 0.72% 0.67% 0.64%
Net investment income 6.85 6.95 7.19 7.26
- -----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 53% 35% 27% 22%
- -----------------------------------------------------------------
</TABLE>
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
<TABLE>
<CAPTION>
CLASS B SHARES 1997 1996(1) 1995 1994(1) 1993(2)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $16.32 $15.40 $16.15 $16.70 $15.84
- --------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.76 0.75 0.81 0.77 0.29
Net realized and unrealized gain
(loss) 0.14 0.96 (0.57) 0.09 1.15
- --------------------------------------------------------------------------------------
Total Income From Operations 0.90 1.71 0.24 0.86 1.44
- --------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.77) (0.76) (0.80) (0.76) (0.28)
Net realized gains (0.20) (0.03) (0.19) (0.65) (0.29)
Capital -- -- -- -- (0.01)
- --------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.97) (0.79) (0.99) (1.41) (0.58)
- --------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.25 $16.32 $15.40 $16.15 $16.70
- --------------------------------------------------------------------------------------
TOTAL RETURN 5.73% 11.39% 1.89% 5.40% 9.27%++
- --------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $173,347 $153,044 $127,888 $107,740 $37,924
- --------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.23% 1.29% 1.32% 1.33% 1.30%+
Net investment income 4.75 4.71 5.25 4.67 5.44+
- --------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 60% 44% 59% 76% 72%
- --------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(2) 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.
12
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<S> <C>
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES 1997 1996(1) 1995(2)
- --------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $ 16.31 $ 15.40 $14.19
- --------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.75 0.78 0.24
Net realized and unrealized gain 0.15 0.92 1.39*
- --------------------------------------------------------------
Total Income From Operations 0.90 1.70 1.63
- --------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.77) (0.76) (0.23)
Net realized gains (0.20) (0.03) (0.19)
- --------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.97) (0.79) (0.42)
- --------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 16.24 $ 16.31 $15.40
- --------------------------------------------------------------
TOTAL RETURN 5.68% 11.30% 11.72%++
- --------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $16,678 $10,809 $ 762
- --------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.29% 1.39% 1.37%+
Net investment income 4.69 4.44 5.19+
- --------------------------------------------------------------
PORTFOLIO TURNOVER RATE 60% 44% 59%
- --------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from November 14, 1994 (inception date) to February 28,
1995.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
13
<PAGE>
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.
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.
14
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Low and Comparable Unrated Securities.While the market values of low-rated
and comparable unrated securities tend to react less to fluctuations in inter-
est rate levels than the market values of higher-rated securities, the market
values of certain low-rated and comparable unrated municipal securities also
tend to be more sensitive than higher-rated securities to short-term corporate
and industry developments and changes in economic conditions (including reces-
sion) in specific regions or localities or among specific types of issuers. In
addition, low-rated securities and comparable unrated securities generally
present a higher degree of credit risk. During an economic downturn or a pro-
longed period of rising interest rates, the ability of issuers of low-rated
and comparable unrated securities to service their payment obligations, meet
projected 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
subordinated to the prior payment of senior indebtedness. The Fund may incur
additional 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 compara-
ble unrated securities may diminish the Fund's ability to (a) obtain accurate
market 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 finan-
cial markets. The market for certain low-rated and comparable unrated securi-
ties 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 yield-
ing security, thus resulting in a decreased return to the Fund.
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
property or equipment. Although lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the municipality's cove-
nant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has
15
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
no obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. In addition to
the "non-appropriation" risk, these securities represent a relatively new type
of financing that has not yet developed the depth of marketability associated
with more conventional bonds. Although "non-appropriation" lease obligations
are often secured by the underlying property, disposition of the property in
the event of foreclosure might prove difficult. There is no limitation on the
percentage of the Fund's assets that may be invested in municipal lease obliga-
tions. In evaluating municipal lease obligations, 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 creditworthiness 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 essen-
tial 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.
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 obliga-
16
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tions of a small number of issuers may cause the Fund's share price to fluctu-
ate 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.
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, debt securities of any grade or
equity securities, having a value equal to or greater than the Portfolio's pur-
chase commitments, provided such securities have been determined by SBMFM to be
liquid and unencumbered, and are marked to market daily, pursuant to guidelines
established by the Directors. Placing securities rather than cash in the segre-
gated account may have a leveraging effect on the Fund's net assets. The
17
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fund generally will make commitments to purchase California Municipal Securi-
ties (and other tax-exempt obligations) on a when-issued basis only with the
intention of actually acquiring the securities, but the Fund may sell such
securities before the delivery date if it is deemed advisable.
Temporary Investments.Under normal market conditions, the Fund may hold up
to 20% of its total assets in cash or money market instruments, including tax-
able money market instruments ("Temporary Investments"). In addition, when
SBMFM believes that market conditions warrant, including when acceptable Cali-
fornia Municipal Securities are unavailable, the Fund may take a temporary
defensive posture and invest without limitation in Temporary Investments.
Securities eligible 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 characteris-
tics comparable to those for tax-exempt investments. To the extent the Fund
holds 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 finan-
cial 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 economi-
cally appropriate 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 mar-
gin," to and from the broker will be made daily as
18
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the price of the index or securities underlying the futures contract fluctu-
ates, making the long and short positions in the futures contract more or less
valuable. At any time prior to the expiration 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 position 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 contract 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 poten-
tial 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
19
<PAGE>
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
extensions of secured credit, consist of possible delays in receiving addi-
tional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower 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 consideration to be earned from such
loans would justify the risk.
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 rea-
son 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 Cali-
fornia 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 rev-
enues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source, but not from the general taxing power. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
related facilities experience financial difficulties. In addition, certain
types of private activity bonds issued by or on behalf of public authorities
to obtain funds for privately operated facilities are included in the term
California Municipal Securities, provided the interest paid thereon qualifies
as excluded from gross income for Federal income tax purposes and as exempt
from California state personal income tax. Private activity bonds are in most
cases revenue bonds and generally do not carry the pledge of the credit of the
issuing municipality.
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
20
<PAGE>
CALIFORNIA MUNICIPAL SECURITIES (CONTINUED)
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 governmental 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
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 regu-
lar 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 amor-
tization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Further
information regarding the Fund's valuation policies is contained in the State-
ment of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net investment income monthly; divi-
dends ordinarily will be 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 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 addi-
tion, in order to avoid the
21
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
application of a 4% nondeductible excise tax on certain undistributed amounts
of ordinary income and capital gains, the Fund may make an additional distribu-
tion shortly before December 31 of each year of any undistributed ordinary
income or capital gains and expects to pay any other distributions as are nec-
essary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions may
be treated as a tax-free return of capital (up to the amount of the sharehold-
er's tax basis in his or her shares). The amount treated as a tax-free return
of capital will reduce a shareholder's adjusted basis in his or her shares.
Pursuant to the requirements of the 1940 Act and other applicable laws, a
notice will accompany any distribution paid from sources other than net invest-
ment income. In the event the Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the Fund's
expense ratio.
The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class C shares. The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be
in the same amount for Class A, B, C and Y shares.
TAXES
The Fund has qualified and intends to continue to qualify each year as a reg-
ulated investment company under the Code and will designate and pay exempt-
interest dividends derived from interest earned on qualifying tax-exempt obli-
gations. Such exempt-interest dividends may be excluded by shareholders from
their gross income for Federal income tax purposes although (a) all or a por-
tion of such exempt-interest dividends will be a specific preference item for
purposes of the Federal individual and corporate alternative minimum taxes to
the extent they are derived from certain types of private activity bonds issued
after August 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
Municipal Securities also will be exempt from California state personal income
(but not corporate franchise or corporate income) taxes.
22
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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.
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, an Introducing Broker or with an investment dealer in the
selling group. When purchasing shares of the Fund, investors must specify
whether the
23
<PAGE>
PURCHASE OF SHARES (CONTINUED)
purchase is for Class A, Class B, Class C or Class Y shares. Smith Barney and
other broker/dealers may charge their customers an annual account maintenance
fee 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 sharehold-
ers purchasing shares of the Fund through the Systematic Investment Plan on a
monthly basis, the minimum initial investment requirement for Class A, Class B
and Class C shares and the subsequent investment requirement for all Classes is
$25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment require-
ment for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment require-
ments for Class A shares for employees of Travelers and its subsidiaries,
including Smith Barney, unitholders who invest distributions from a UIT spon-
sored by Smith Barney, and Directors of the Fund and their spouses and chil-
dren. 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 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 at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indi -
24
<PAGE>
PURCHASE OF SHARES (CONTINUED)
cated by the shareholder to provide systematic additions to the shareholder's
Fund account. A shareholder who has insufficient funds to complete the transfer
will be charged a fee of up to $25 by Smith Barney or the Transfer Agent. The
Systematic Investment Plan also authorizes Smith Barney to apply cash held in
the shareholder's Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE DEALERS
SALES CHARGE AS % OF REALLOWANCE AS %
AS % OF AMOUNT OF OFFERING
AMOUNT OF INVESTMENT* TRANSACTION INVESTED PRICE
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Under $25,000 4.00% 4.17% 3.60%
$25,000--$49,999 3.50% 3.63% 3.15%
$50,000--$99,999 3.00% 3.09% 2.70%
$100,000--$249,999 2.50% 2.56% 2.25%
$250,000--$499,999 1.50% 1.52% 1.35%
$500,000 and over* * * *
----------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares of $500,000 or more 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 and his or her immediate family, or a trustee or other fiduciary of
a single trust estate or single fiduciary account.
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)
25
<PAGE>
PURCHASE OF SHARES (CONTINUED)
employees of members of the National Association of Securities Dealers, Inc.,
provided such sales are made upon the assurance of the purchaser that the pur-
chase 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 to effect 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 Consul-
tant's employment with Smith Barney), on the condition the purchase 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) purchases by 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, and who wish to reinvest their redemption pro-
ceeds in the Fund, provided the reinvestment is made within 60 calendar days
of the redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) investments of distributions from a
UIT sponsored by Smith Barney contracts; and (g) purchases by investors par-
ticipating in a Smith Barney fee-based arrangement. In order to obtain such
discounts, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase would qualify for the elimi-
nation 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 informa-
tion at the time of purchase to permit verification that the purchase quali-
fies for the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares pur-
chased 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
mini-
26
<PAGE>
PURCHASE OF SHARES (CONTINUED)
mum 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 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 dur-
ing 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
27
<PAGE>
PURCHASE OF SHARES (CONTINUED)
an appropriate number of escrowed shares will be redeemed. The term of the
Letter will commence upon the date the Letter is signed, or at the option of
the investor, up to 90 days before such date. Please contact a Smith Barney
Financial Consultant or the Transfer Agent to obtain a Letter of Intent appli-
cation.
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 that were purchased without an initial sales
charge but subject to a CDSC.
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.
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 num-
ber 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 aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders.
28
<PAGE>
PURCHASE OF SHARES (CONTINUED)
<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. 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 shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gain distribution reinvestments in such other funds.
For Federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 addi-
tional shares through dividend reinvestment. During the fifteenth month after
the purchase, the investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had appreciated to
$12 per share, the value of the investor's shares would be $1,260 (105 shares
at $12 per share). The CDSC would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested dividend shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC 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
29
<PAGE>
PURCHASE OF SHARES (CONTINUED)
shareholder's shares will be permitted for withdrawal plans that were estab-
lished prior to November 7, 1994); (c) redemptions of shares within 12 months
following the death or disability of the shareholder; (d) redemption of shares
made in connection with qualified distributions from retirement plans or IRAs
upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f) redemp-
tions of shares to effect a combination of the Fund with any investment company
by merger, acquisition of assets or otherwise. In addition, a shareholder who
has redeemed shares from other Smith Barney Mutual Funds may, under certain
circumstances, reinvest all or part of the redemption proceeds within 60 days
and receive pro rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by the Transfer Agent
in the case of all other shareholders) of the shareholder's status or holdings,
as the case may be.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
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.
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
Concert Social Awareness Fund
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 Utilities Fund
30
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
Taxable Fixed-Income Funds
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfo-
lio
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.
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 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--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 Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
Smith Barney Concert Allocation Series Inc.--Growth Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
Smith Barney Concert Allocation 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
31
<PAGE>
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 and Class B shares of the Fund. In
addition, shareholders who own Class C shares of a Fund through the Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
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 B Exchanges. In the event a Class B shareholder 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 A and Class Y Exchanges. Class A and Class Y shareholders of the Fund
who wish to exchange all or a portion of their shares for shares of the respec-
tive Class in any of the funds identified above may do so without imposition of
any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. SBMFM may deter-
mine that a pattern of frequent exchanges is excessive and contrary to the best
interests of the Fund's other shareholders. In this event, SBMFM will notify
Smith Barney 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. Redemption procedures
32
<PAGE>
EXCHANGE PRIVILEGE (CONTINUED)
discussed below are also applicable for exchanging shares, and exchanges will
be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged, no signature guarantee
is required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange 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.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, 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 redemp-
tion 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 redemp-
tion proceeds are remitted to a Smith Barney brokerage account, these funds
will not be invested for the shareholder's benefit without specific instruc-
tion and Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a certi-
fied 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 5128
Westborough, Massachusetts 01581-5128
33
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
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 properly received until the Transfer Agent receives all required doc-
uments 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
34
<PAGE>
REDEMPTION OF SHARES (CONTINUED)
proceeds, a shareholder must complete a new Telephone/Wire Authorization Form
and, for the protection of the shareholder's assets, will be required to pro-
vide 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 calling 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 following 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 with-
drawal 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 share-
holder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.
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, how-
ever, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid involuntary liquidation.
35
<PAGE>
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 day of the period for which current dividend return is pre-
sented. 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 current dividend return should be considered when comparing a
Class' current return to yields published
36
<PAGE>
PERFORMANCE (CONTINUED)
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 Analyti-
cal Services, Inc. or similar independent services that monitor the perfor-
mance 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 agree-
ments between the Fund and the companies that furnish services to the Fund,
including agreements with its distributor, investment adviser and administra-
tor, custodian 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 agree-
ment, effective November 7, 1994, from its affiliate Mutual Management Corp.
(Mutual Management Corp. and SBMFM are both wholly owned subsidiaries of Hold-
ings.) Investment advisory services continue to be provided to the Fund by the
same portfolio managers who provided services under the agreement with Mutual
Management Corp. SBMFM (through predecessor entities) has been in the invest-
ment 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 May 31, 1997, in excess of $87 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfo-
lio managers 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% 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 28, 1997, SBMFM was paid investment advisory fees equal to
0.30% of the value of the average daily net assets of the Fund.
37
<PAGE>
MANAGEMENT OF THE FUND (CONTINUED)
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% in excess of $500 million. For the fiscal year ended
February 28, 1997, SBMFM was paid administration fees equal to 0.19% 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 28, 1997 is included
in the Annual Report dated February 28, 1997. 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 sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.15% of the average daily net assets of the respective Class. Smith
Barney is also paid a distribution fee with respect to Class B and Class C
shares at the rate of 0.50% and 0.55%, respectively, of the average daily net
assets attributable to those Classes. After Class B shares automatically con-
vert to Class A shares eight years after the date of original purchase, they
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
38
<PAGE>
DISTRIBUTOR (CONTINUED)
and/or carrying charges; and indirect and overhead costs of Smith Barney asso-
ciated with the sale of Fund shares, including lease, utility, communications
and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a con-
tinuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Board of Direc-
tors will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State of Maryland on February
17, 1984, and is registered with the SEC as a non-diversified, open-end manage-
ment investment company.
Each Class of the Fund represents an identical interest in the Fund's invest-
ment portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class; (d) the expenses allocable exclusively
to each Class; (e) voting rights on matters exclusively affecting a single
Class; (f) the exchange privilege of each Class; and (g) the conversion feature
of the Class B shares. The Board of Directors does not anticipate that there
will be any conflicts among the interests of the holders of the different Clas-
ses. The Directors, on an ongoing basis, will consider whether any such con-
flict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be no
meetings of shareholders for the purpose of electing Directors unless and until
such time as less than a majority of the Directors holding office have been
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
39
<PAGE>
ADDITIONAL INFORMATION (CONTINUED)
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.
--------------------------
40
<PAGE>
SMITH BARNEY
---------------------------------
A Member of TravelersGroup [LOGO]
SMITH BARNEY
CALIFORNIA
MUNICIPALS
FUND INC.
388 Greenwich Street
New York, New York 10013
FD 0209 6/97
PART B
Smith Barney
CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement Of Additional
Information
June 27, 1997
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 27, 1997, 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:
Management of the
Fund..........................................................
............................
1
Investment Objective and Management
Policies....................................................
5
Municipal Bonds (See in the Prospectus "California
Municipal Securities")..........
11
Purchase of
Shares........................................................
.......................................
19
Redemption of
Shares........................................................
..................................
20
Distributor................................................
...........................................................
21
Valuation of
Shares........................................................
.....................................
22
Exchange
Privilege.....................................................
.........................................
22
Performance Data (See in the Prospectus "The Fund's
Performance")...................
23
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes").....................
25
Additional
Information...................................................
......................................
28
Financial
Statements....................................................
........................................
28
Appendix...................................................
..........................................................
29
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:
Name
Service
Smith Barney Inc.
("Smith
Barney")...................................
.................
Distributor
Smith Barney Mutual Funds Management
Inc.
("SBMFM")..................................
.........................
Investment Adviser and
Administrator
PNC Bank, National Association
("PNC")....................................
............................
Custodian
First Data Investor Services Group, Inc.
(the "Transfer
Agent")....................................
.......
Transfer Agent
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 73). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred J. Bianchetti, Director (Age 74). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 07466.
Martin Brody, Director (Age 75). 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 59). 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 66). 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 70). 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 64). 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 63).
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 63). 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.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 39). 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 49). 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 34). 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 46). 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 June 2, 1997, 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 June 2,
1997, 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 28, 1997, the Directors of the Fund were
paid the following compensation:
Aggregate
Compensation
Aggregate
Compensation
from all Smith
Barney
Director(*)
from the Fund
Mutual Funds***
Herbert Barg
(16).........................
...
$4,700
$105,175
Alfred J. Bianchetti
(11)..................
4,500
51,500
Martin Brody
(19).........................
..
4,500
124,285
Dwight B. Crane
(22)......................
4,600
140,375
Burt N. Dorsett
(11)+........................
4,200
47,400
Elliot S. Jaffe
(11).........................
..
4,700
51,100
Stephen E. Kaufman
(13)................
4,700
92,336
Joseph J. McCann
(11)....................
4,700
52,700
Heath B. McLendon
(41).................
------
- ------
Cornelius C. Rose, Jr.
(11)..............
4,700
51,400
James J. Crisona**
(10)..................
2,300
20,575
_____________________
* 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,
1996.
+ Pursuant to Fund's deferred compensation plan, the indicated Director had
elected to defer the following payment of some or all of their
compensation: Burt N. Dorsett - $3,200. As of January 1, 1997, Mr. Dorsett
has elected not to defer his future compensation.
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 17, 1996. 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 1995, 1996 and
1997 fiscal years, the Fund incurred $1,776,849, $1,977,596 and $2,240,458,
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 17, 1996. 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% in excess of $500
million. 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 and
for the fiscal year ended February 28, 1997, the Fund paid SBMFM $1,444,276 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 1995, 1996 and 1997 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 LLP
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,
1998.
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 Ratings Group ("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 28, 1997, the Fund did not invest in
taxable Temporary Investments.
Repurchase Agreements. The Fund may enter into repurchase agreements with
banks which are the issuers of instruments acceptable for purchase by the Fund
and with certain dealers on the Federal Reserve Bank of New York's list of
reporting dealers. A repurchase agreement is a contract under which the buyer
of a security simultaneously commits to resell the security to the seller at
an agreed-upon price on an agreed-upon date. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt obligation for
a relatively short period of time (usually not more than seven days) subject
to an obligation of the seller to repurchase, and the Fund to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. Under each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities, the risk of a possible decline in the
value of the underlying securities during the period in which the Fund seeks
to assert its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or part of the income from
the agreement. In evaluating these potential risks, SBMFM, 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 1995, 1996 and 1997 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, 1996 and 1997
fiscal years, the Fund's portfolio turnover rate was 59%, 44% and 60%,
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
Beginning in the 1990-91 fiscal year, the State has faced the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others,
were severely affected. Job losses were the worst of any post-war recession
and have been estimated to exceed 800,000.
The recession has seriously affected State tax revenues. It has also
faced increased health and welfare programs. The State has also faced a
structural imbalance in its budget with the largest programs supported by the
General Fund--K-14 education (kindergarten through community college), health,
welfare and corrections--growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. The State
experienced a period of chronic budget imbalance, with expenditures exceeding
revenues for four of the last six fiscal years. Revenues declined in 1990-91
over 1989-90, the first time since the 1930s. By June 30, 1993, the State's
General Fund had an accumulated deficit, on a budget basis, of approximately
$2.8 billion. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for specific
purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction Plan to
repay this deficit over two years. The original budget for 1993-94 reflected
revenues which exceeded expenditures by approximately $2.8 billion. As a
result of continuing recession, the excess of revenues over expenditures for
the fiscal year is now expected to be less than $300 million. The accumulated
budget deficit at June 30, 1994 was not retired by June 30, 1995 as planned.
The accumulated budget deficits over the past several years, together with
expenditures for school funding which have not been reflected in the budget,
and the reduction of available internal borrowable funds, have combined to
significantly depleted the State's cash resources to pay as ongoing expenses.
In order to meet its cash needs, the State has had to rely for several years
on a series of external borrowings, including borrowings past the end of a
fiscal year. At the end of its 1995-96 fiscal year, however, the State did
not borrow moneys into the subsequent fiscal year.
Since the severe recession, California's economy has been recovering.
Employment has grown by over 500,000 in 1994 and 1995, and the prerecession
level of total employment is expected to be matched by early 1996. The
strongest growth has been in export-related industries, business services,
electronics, entertainment and tourism, all of which have offset the
recession-related losses which were heaviest in aerospace and defense-related
industries (accounting for approximately two-thirds of the job losses),
finance and insurance. Residential housing construction, with new permits for
under 100,000 annual new unites issued in 1994 and 1995, is weaker than in
previous recoveries, but has been growing slowly since 1993.
Sectors which are now contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. These trends are expected to continue, and by next year,
most of the restructuring in the finance and utilities industries should be
nearly completed. As a result of these factors, average 1994 non-farm
employment exceeded expectations and grew beyond 1993 levels.
Many California counties continue to be under severe fiscal stress.
Such stress has impacted smaller, rural counties and larger urban counties
such as Los Angeles, and Orange County, which declared bankruptcy in 1994.
Orange County has implemented significant reductions in services and
personnel, and continues to face fiscal constraints in the aftermath of its
bankruptcy.
1994-95 Budget. The 1994-95 fiscal year represented the fourth
consecutive year the Governor and Legislature were faced with a very difficult
budget environment to produce a balanced budget. Many program cuts and
budgetary adjustments have already been made in the last three years. The
Governor's May Revision to his Budget proposal recognized that the accumulated
deficit could not be repaid in one year, and proposed a two-year solution.
The May Revision sets forth revenue and expenditure forecasts and revenue and
expenditure proposals which result in operating surpluses for the budget for
both 1994-95 and 1995-96, and lead to the elimination of the accumulated
deficit, estimated at about $2 billion at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projected revenues and transfers of $41.9 billion, about $2.1 billion higher
than revenues in 1993-94. This reflects the Administration's forecast of an
improved economy. Also included in this figure is the projected receipt of
about $360 million from the Federal Government to reimburse the State for the
cost of incarcerating undocumented immigrants. The Legislature took no action
on a proposal in the Governor s January Budget to undertake expansion of the
transfer of certain programs to counties, which would also have transferred to
counties 0.5% of the State current sales tax. The Budget Act projected
Special Fund revenues of $12.1 billion, a decrease of 2.4% from 1993-94
estimated levels.
The 1994-95 Budget Act projected General Fund expenditures of $40.9
billion, an increase of $1.6 billion over 1993-94. The Budget Act also
projected 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. Reductions of approximately $1.1 billion in health and welfare programs.
2. A General Fund increase of approximately $38 million in support for the
University of California and $65 million for the California State University.
It is anticipated that student fees for the U.C. and the C.S.U will increase
up to 10%.
3. Proposition 98 funding for K-14 schools was increased by $526 million
from the 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98 funding
provides approximately $4,217 per student for K-12 schools, equal to the level
in the past three years.
4. Legislation enacted with the Budget Act clarifies laws passed in 1992
and 1993 requiring counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented programs providing less moneys to schools if there were
redevelopment agencies projects. The legislation bans this method of
transfers. If all counties had implemented this method, General Fund aid to
K12 schools would have increased by $300 million in each of the 1994-95 and
1995-96 Fiscal Years.
5. The Budget Act provides funding for anticipated growth in the State's
prison inmate population, including provisions for implementing recent
legislation (the so-called "Three Strikes" law) which requires mandatory life
sentences for certain third-time felony offenders.
6. Additional miscellaneous cuts ($500 million) and fund transfers ($255
million) totaling in the aggregate approximately $755 million.
The 1994-95 Budget Act contained no tax increases. Under legislation
enacted for the 1993-94 Budget, the renters' tax credit was suspended for 1993
and 1994. A ballot proposition to permanently restore the renters' credit
after this year failed at the June 1994 election. The Legislature enacted a
further one-year suspension of the renters' tax credit, saving about $390
million in the 1995-96 fiscal year. The 1994-95 Budget assumed that the State
will use a cash flow borrowing program in 1994-95 which combines one-year
notes and warrants. Issuance of the warrants would allow the State to defer
repayment of approximately $1 billion of its accumulated budget deficit into
the 1995-96 Fiscal Year.
May 1995 reports by the Department of Finance indicated that General
Fund revenues for the 1994-95 Fiscal Year exceeded projections, and
expenditures were lower than projected due to slower than anticipated
health/welfare caseload growth and school enrollments. The overall effect was
to improve the budget by approximately $500 million, leaving an estimated
deficit of about $630 million as of June 30, 1995.
Department of Finance analysis of the 1994-95 Fiscal Year budget
indicated that approximately $98 million was appropriated for the State to
offset costs of incarcerating illegal immigrants, in contrast to the $356
million assumed for this purpose by the State's 1994-95 Budget Act.
Approximately $33 million of these funds were estimated to be received by the
State during the 1994-95 Fiscal Year, with the remainder to be received the
following fiscal year. Departing from 1994-95 Fiscal Year assumptions, the
federal budget contains $400 million in additional funding for refugee
assistance and health costs. However, the Department of Finance did not
expect that the State would continue its efforts to obtain all or a portion of
these federal funds.
1995-96 Budget. The state began in 1995-96 Fiscal Year with
strengthening revenues based on an improving economy and the smallest nominal
"budget gap" to be closed in many years.
The 1995-96 Budget Act, signed by the Governor on August 3, 1995,
projects General Fund revenues and transfers of $44.1 billion, about $2.2
billion higher than projected revenues in 1994-95. The Budget Act projects
Special Fund revenues of $12.7 billion, an increase from $12.1 billion
projected in 1994-95.
The Department of Finances released updated projections for the 1995-96
fiscal year in May 1996, estimating that revenues and transfers to be $46.1
billion, approximately $2 billion over the original fiscal year estimate.
Expenditures also increased, to an estimated $45.4 billion, as a result of the
requirement to expend revenues for schools under Proposition 98, and, among
other things, failure of the federal government to budget new aid for illegal
immigrant costs which had been counted on to allow reductions in costs.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community colleges will increase
by about $1 billion (General Fund) and $1.2 billion total above revised 1994-
95 levels. Because of higher than projected revenues in 1994-95, an
additional $543 million is appropriated to the 1994-95 Proposition 98
entitlement. A significant component of this amount is a block grant of about
$54 per pupil for any one-time purposes. Per-pupil expenditures are projected
to increase by another $126 in 1995-96 to $4,435. A full 2.7% cost of living
allowance is funded for the first time in several years. The budget
compromise anticipated a settlement of the CTA v. Gould litigation.
2. Cuts in health and welfare costs totaling about $900 million, some of
which would require federal legislative approval.
3. A 3.5% increase in funding for the University of California ($90 million
General Fund) and the California State University system ($24 million General
Fund), with no increases in student fees.
4. The updated Budget assumes receipt of $494 million in new federal aid
for costs of illegal immigrants, in excess of federal government commitments.
5. General Fund support for the Department of Corrections is increased by
about 8% over 1994-95, reflecting estimates of increased prison population.
This amount is less than was proposed in the 1995 Governor's Budget.
1996-97 Budget. The 1996-97 Budget Act was signed by the Governor on
July 15, 1996, and projected General Fund revenues and transfer of
approximately $47.64 billion and General Fund expenditures of approximately
$47.25 billion. The Governor vetoed about $82 million of appropriations (both
General Fund and Special Fund) and the State has implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue
Anticipation Notes to mature on or before June 30, 1997. The 1996-97 Budget
Act appropriated a budget reserve in the Special Fund for Economic
Uncertainties of $305 million, as of June 30, 1997. The Department of Finance
projects that, on June 30, 1997, the State's available internal borrowable
(cash) resources will be approximately $2.9 billion, after payment of all
obligations due by that date, so that no cross-fiscal year borrowing will be
needed.
The State Legislature rejected the Governor's proposed 15% cut in
personal income taxes (to be phased over three years), but did approve a 5%
cut in bank and corporation taxes, to be effective for income years starting
on June 1, 1997. As a result, revenues for the Fiscal Year will be an
estimated $550 million higher than projected in the May Revision to the 1996-
97 Budget, and are now estimated to total $47.643 billion, a 3.3 percent
increase over the final estimated 1995-96 revenues. Special Fund revenues are
estimated to be $13.3 billion.
The Budget Act contains General Fund appropriations totaling $47.251
billion, a 4.0 percent increase over the final estimated 1995-96 expenditures.
Special Fund expenditures are budgeted at $12.6 billion.
The following are the principal features of the 1996-97 Budget Act:
1. Proposition 98 funding for schools and community college districts
increased by almost $1.6 billion (General Fund) and $1.65 billion total above
revised 1995-96 level periods. Almost half of this money was budgeted to fund
class-size reduction in kindergarten and grades 1-3. Also, for the second
year in a row, the full cost of living allowance (3.2 percent) was funded.
The Proposition 98 increases have brought K-12 expenditures to almost $4,800
per pupil (also called per ADA, or Average Daily Attendance), an almost 15%
increase over the level prevailing during the recession years. Community
colleges will receive an increase in funding of $157 million for 1996-97 out
of this $1.6 billion total.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts require federal law changes (including welfare reform), federal
waivers, or federal budget appropriations in order to be achieved. The 1996-
97 Budget Act assumes approval/action by October, 1996, with the savings to be
achieved beginning in November, 1996. The 1996-97 Budget Act was based on
continuation of previously approved assistance levels for Aid to Families with
Dependent Children and other health and welfare programs, which had been
reduced in prior years, including suspension of State authorized cost of
living increases. Part of the federal actions referred to above is approval
to maintain reduced assistance levels in 1996-97. The Legislature did not
approve the Governor's proposal for further cuts in these assistance levels.
The Budget Act does include some $92 million for a variety of preventive
programs in health and social services areas such as the prevention of teenage
pregnancy and domestic violence.
3. A 4.9 percent increase in funding for the University of California
($130 million General Fund) and the California State University system ($101
million General Fund), with no increases in student fees, maintaining the
second year of the Governor's four-year "Compact" with the State's higher
education units.
4. The 1996-97 Budget Act assumed the federal government will provide
approximately $700 million in new aid for incarceration and health care costs
of illegal immigrants. These funds reduce appropriations in these categories
that would otherwise have to be paid from the General Fund. (For purposes of
cash flow projections, the Department of Finance expects $540 million of this
amount to be received during the 1996-97 fiscal year.)
5. General Fund support for the Department of Corrections was
increased by about 7 percent over the prior year, reflecting estimates of
increased prison population.
6. With respect to aid to local governments, the principal new
programs included in the 1996-97 Budget Act are $100 million in grants to
cities and counties for law enforcement purposes, and budgeted $50 million for
competitive grants to local governments for programs to combat juvenile crime.
The 1996-97 Budget Act also assumed that legislation will be adopted to revise
the Trial Court Funding program, so that future increases in trial court costs
will be funded by the State; this change will not have a significant impact in
1996-97.
The 1996-97 Budget Act did not contain any tax increases. As noted,
there was a reduction in corporate taxes. In addition, the Legislature
approved another one-year suspension of the Renters Tax Credit, saving $520
million in expenditures.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND OTHER
INFORMATION PROVIDER BY THE STATE OF CALIFORNIA. THE STATE INDICATED THAT ITS
DISCUSSION OF THE BUDGETARY INFORMATION WAS BASED ON ESTIMATES AND PROJECTIONS
OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE
CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE ESTIMATES
AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY
NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE
NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE
ACHIEVED.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIIIB of the State Constitution (the
"Appropriations Limit"), and is prohibited from spending "appropriations
subject to limitation" in excess of the Appropriations Limit. Article XIIIB,
originally adopted in 1979, was modified substantially by Propositions 98 and
111 in 1988 and 1990, respectively. "Appropriations subject to limitation"
are authorizations to spend "proceeds of taxes", which consist of tax revenues
and certain other funds, including proceeds from regulatory licenses, user
charges or other fees to the extent that such proceeds exceed the reasonable
cost of providing the regulation, product or service. The Appropriations
Limit is based on the limit for the prior year, adjusted annually for certain
changes, and is tested over consecutive two-year periods. Any excess of the
aggregate proceeds of taxes received over such two-year period above the
combined Appropriation Limits for those two years is divided equally between
transfers to K-14 districts and refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax
revenues dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in cases of
emergency arising from civil disturbance or natural disaster declared by the
Governor and approved by two-thirds of the Legislature. If not so declared
and approved, the Appropriations Limit for the next three years must be
reduced by the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-92
revenues were smaller than expected, thus reducing the payment owed to schools
in 1991-92 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the 1991-
92 and 1992-93 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to schools
but which exceeded the reduced appropriation was treated as a non-Proposition
98 short-term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion of
the amount budgeted to K-14 schools was designated to "repay" the prior year
loan, thereby reducing cash outlays in 1992-93 by that amount. To maintain
per-average daily attendance ("ADA") funding, the 1992-93 Budget included
loans of $732 million to K-12 schools and $241 million to community colleges,
to be repaid from future Proposition 98 entitlements. The 1993-94 Budget also
provided new loans of $609 million to K-12 schools and $178 million to
community colleges to maintain ADA funding. These loans have been combined
with the 1992-93 fiscal year loans into one loan of $1.760 billion, to be
repaid from future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers' Association,
et al. v Gould, et al., ruled that the 1992-93 loans to K-12 schools and
community colleges violate Proposition 98. As part of the negotiation leading
to the 1995-96 Budget Act, an oral agreement was reached to settle this case.
The parties reached a conditional final settlement of the case in April, 1996.
The settlement required adoption of legislation satisfactory to the parties to
implement its terms, which has occurred, and final approval by the court,
which was pending in early July, 1996.
The settlement provides, among other things, that both the State and K-
14 schools share in the repayment of prior years' emergency loans to schools.
Of the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State share of the repayment will be reflected as expenditures above the
current Proposition 98 base circulation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Propositions 98
guarantee, or from "below" the current base. Repayments are to be spread over
the eight-year period beginning 1994-95 through 2002-03. Once the Director of
Finance certifies that a settlement has occurred, approximately $377 million
in appropriations from the 1995-96 fiscal year to schools will be disbursed.
Because of the complexities of Article XIIIB, the ambiguities and
possible inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the Fund
cannot predict the impact of this or related legislation on the Bonds in the
California Trust Portfolio. Other Constitutional amendments affecting state
and local taxes and appropriations have been proposed from time to time. If
any such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate revenues
as mandated by such initiatives. Propositions such as Proposition 98 and
others that may be adopted in the future, may place increasing pressure on the
State's budget over future years, potentially reducing resources available for
other State programs, especially to the extent the Article XIIIB spending
limit would restrain the State's ability to fund such other programs by
raising taxes.
State Indebtedness. As of July 1, 1996, the State had over $18.20
billion aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately $4.31
billion remained unissued as of July 1, 1996. The State also builds and
acquires capital facilities through the use of lease purchase borrowing. As
of July 1, 1996, the State had approximately $5.85 billion of outstanding
Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $20.77 billion aggregate principal amount of
revenue bonds and notes outstanding as of June 30, 1996. Revenue bonds
represent both obligations payable from State revenue-producing enterprises
and projects, which are not payable from the General Fund, and conduit
obligations payable only from revenues paid by private users of facilities
financed by such revenue bonds. Such enterprises and projects include
transportation projects, various public works and exposition projects,
education facilities (including the California State University and University
of California systems), housing health facilities and pollution control
facilities.
Litigation. The State is a party to numerous legal proceedings. In
addition, the State is involved in certain other legal proceedings that, if
decided against the State, might require the State to make significant future
expenditures or impair future revenue sources. Examples of such cases include
challenges to the State's method of taxation of certain businesses, challenges
to certain vehicle license fees, and challenges to the State's use of Public
Employee Retirement System funds to offset future State and local pension
contributions. Other cases which could significantly impact revenue or
expenditures involve reimbursement to school districts for voluntary school
desegregation and state mandated costs, challenges to Medi-Cal eligibility,
recovery for flood damages, and liability for toxic waste cleanup. Because of
the prospective nature of these proceedings, it is not presently possible to
predict the outcome of such litigation or estimate the potential impact on the
ability of the State to pay debt service on its obligations.
Ratings. During 1996, the ratings of California's general obligation
bonds was upgraded by rating agencies. Standard & Poor's Ratings Group
upgraded its rating of such debt to A+; the same rating has been assigned to
such debt by Fitch Investors Service. Moody's Investors Service has assigned
such debt an A1 rating. Any explanation of the significance of such ratings
may be obtained only from the rating agency furnishing such ratings. There is
no assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely if, in the
judgment of the particular rating agency, circumstances so warrant.
The Fund believes the information summarized above describes some of the
more significant aspects relating to the California Trust. The sources of
such information are Preliminary Official Statements and Official Statements
relating to the State's general obligation bonds and the State's revenue
anticipation notes, or obligations of other issuers located in the State of
California, or other publicly available documents. Although the Fund has not
independently verified this information, it has no reason to believe that such
information is not correct in all material respects.
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 or 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 17, 1996. For the
1995, 1996 and 1997 fiscal years, Smith Barney or its predecessor, Shearson
Lehman Brothers, received $548,572, $704,000 and $2,000, 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 1995, 1996 and 1997 fiscal years, the
Fund's distributor received $310,446, $350,000 and $241,000, 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 years ended
February 29, 1996 and February 28, 1997, the Fund's distributor received $0,
$1,000 and $5,000, 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 28, 1997, Smith Barney incurred
distribution expense totaling approximately $1,974,988, consisting of
approximately $185,576 for Mutual Fund Marketing, $17,255 for printing of
prospectuses, $165,949 for shareholder and system servicing fees, $1,642,966
to Smith Barney Financial Consultants, and $57,794 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 1995, 1996 and 1997 fiscal years, Class A shares incurred $590,964,
$676,363, and $857,927 respectively, in service fees. For the 1995, 1996 and
1997 fiscal years, the Class B shares incurred $172,009, $215,205 and
$241,584, respectively, in service fees. For the same periods, Class B shares
incurred $573,363, $717,349 and $805,279, respectively, in distribution fees.
For the period from November 14, 1994 through February 28, 1995, and for the
fiscal years ended February 29 1996 and February 28, 1997, Class C shares
incurred $229, $6,355 and $19,940 in service fees, respectively. For the
period from November 14, 1994 through February 28, 1995, and for the fiscal
years ended February 29 1996 and February 28, 1997, Class C shares incurred
$838, $21,185 and $73,113 .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, 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.
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.
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:
2.11% for the one-year period beginning on March 1, 1996 through February 28,
1997
7.31% per annum during the five-year period beginning on March 1, 1992 through
February 28, 1997
6.93% per annum during the ten-year period beginning on March 1, 1987 through
February 28, 1997
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 6.37%, 8.19% and 7.36%,
respectively.
Class B's average annual total return was as follows for the periods
indicated:
1.23% for the one-year period beginning on March 1, 1996 through February 28,
1997
7.60% for the period from inception (November 6, 1992) through February 28,
1997
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 5.73% and 7.78%, respectively.
Class C's average annual total return was as follows for the periods
indicated:
4.68% for the one-year period beginning on March 1, 1996 through February 28,
1997
12.70% for the period from inception (November 14, 1994) through February 28,
1997
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 5.68% and 12.70%, 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:
2.11% for the one-year period beginning on March 1, 1996 through February 28,
1997
42.3% for the five-year period beginning on March 1, 1992 through February 28,
1997
95.37% for the ten-year period beginning on March 1, 1987 through February 28,
1997
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 6.37%, 48.25% and 103.52%, respectively.
Class B's aggregate total return was as follows for the periods indicated:
1.23% for the one-year period beginning on March 1, 1996 through February 28,
1997
37.18% for the period from inception (November 6, 1992) through February 28,
1997
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 5.73% and 38.18%, respectively.
Class C's aggregate total return was as follows for the periods indicated:
4.68% for the one-year period beginning on February 29, 1996 through February
28, 1997
31.55% for the period from inception (November 14, 1994) through February 28,
1997
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 5.68% and 31.55%, 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 28, 1997 and semi-annual period ended August 31, 1996 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.
33
g:\funds\camu\1997\secdocs\sai97.doc
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended February 28, 1997 and
the Report of Independent Accountants dated April 18, 1997 are incorporated by
reference to the Definitive 30b2-1 filed on May 7, 1997 as Accession
#0000091155-97-241.
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 incorporated by reference to Post-Effective Amendment No. 23.
(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 June 2, 1997
Common Stock Class A - 7,877
par value $.001 per Class B - 4,166
share Class C - 411
Class Y - 2
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
(a) Smith Barney Inc. ("Smith Barney") also acts as principal
underwriter for Travelers Series Fund Inc., Smith Barney World Funds, Inc.,
Smith Barney Municipal Money Market Fund, Inc., Smith Barney Muni Funds,
Smith Barney Funds, Inc., Smith Barney Variable Account Funds; Smith Barney
Disciplined Small Cap Fund, Inc., Smith Barney Intermediate Municipal Fund,
Inc., Smith Barney Investment Trust, Smith Barney Municipal Fund, Inc., High
Income Opportunity Fund Inc., Smith Barney Adjustable Rate Government Income
Fund, Smith Barney Equity Funds, Smith Barney Income Funds, Smith Barney
Institutional Cash Management Fund Inc., Smith Barney Massachusetts
Municipals Fund, Zenix Income Fund Inc., Smith Barney Arizona Municipals Fund
Inc., Smith Barney Principal Return Fund, Municipal High Income Fund Inc.,
The Trust for TRAK Investments, Smith Barney Series Fund, Smith Barney
Concert Allocation Series Inc., Smith Barney Aggressive Growth Fund Inc.,
Smith Barney Appreciation Fund Inc., Smith Barney Money Funds, Inc., Smith
Barney Fundamental Value Fund Inc., Smith Barney Managed Governments Fund
Inc., Smith Barney Managed Municipals Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., Smith Barney Oregon Municipals Fund Inc., Smith Barney
Natural Resources Fund Inc., Smith Barney Investment Funds Inc., The Italy
Fund Inc., Smith Barney Telecommunications Trust, Managed Municipals
Portfolio Inc., Managed Municipals Portfolio II Inc., Managed High Income
Portfolio Inc., Greenwich Street California Municipal Fund Inc. and Greenwich
Street Municipal Fund Inc.
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 26th day of June, 1997.
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 David Barnett 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. McLendon
Chairman of the
Board
June 26, 1997
Heath B. McLendon
(Chief Executive
Officer)
/s/Lewis E. Daidone
Senior Vice
President and
June 26, 1997
Lewis E. Daidone
Treasurer (Chief
Financial
and Accounting
Officer)
/s/Herbert Barg
Director
June 26, 1997
Herbert Barg
/s/Alfred J. Brody
Director
June 26, 1997
Alfred J. Bianchetti
/s/Martin Brody
Director
June 26, 1997
Martin Brody
/s/Dwight B. Crane
Director
June 26, 1997
Dwight B. Crane
/s/Burt N. Dorsett
Director
June 26, 1997
Burt N. Dorsett
/s/Elliot S. Jaffe
Director
June 26, 1997
Elliot S. Jaffe
/s/Stephen E. Kaufman
Director
June 26, 1997
Stephen E. Kaufman
/s/Joseph J. McCann
Director
June 26, 1997
Joseph J. McCann
/s/Cornelius C. Rose,
Jr.
Director
June 26, 1997
Cornelius C. Rose,
Jr.
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 18, 1997 for the Smith
Barney California Municipals Fund Inc. 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 26, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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