PROSPECTUS
SMITH BARNEY
California
Municipals
Fund Inc.
JUNE 26, 1998
Prospectus begins on page one
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Prospectus June 26, 1998
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Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
1 800-451-2010
Smith Barney California Municipals Fund Inc. (the "Fund") is a
non-diversified 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
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference.
Additional information about the Fund is contained in a Statement of
Additional Information (the "SAI") dated June 26, 1998, 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 SAI 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
Mutual Management Corp.
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
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Table of Contents
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Prospectus Summary 3
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Financial Highlights 10
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Investment Objective and Management Policies 14
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California Municipal Securities 20
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Valuation of Shares 21
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Dividends, Distributions and Taxes 22
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Purchase of Shares 24
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Exchange Privilege 31
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Redemption of Shares 34
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Minimum Account Size 36
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Performance 36
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Management of the Fund 38
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Distributor 39
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Additional Information 40
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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.
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2
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Prospectus Summary
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The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. 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 current 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
California, local governments in the State of California and certain other
municipal issuers such as the Commonwealth of Puerto Rico ("California Municipal
Securities") that pay interest which is excluded from gross income for Federal
income tax purposes and exempt from California state personal income taxes.
Intermediate- 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 L
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 of at least $15,000,000. 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 "Prospectus
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
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Prospectus Summary (continued)
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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 L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. 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 L shares within 12 months of purchase. This CDSC may be waived for certain
redemptions. The Class L 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 L
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 $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of 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 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
this Class. Because the Fund's future return cannot be predicted, however, there
can be no assurance that this would be the case. Finally, Class L shares which
have a lower upfront sales charge but are subject to higher distribution fees
than Class A shares, are suitable for investors who are not investing or
intending to invest an amount which would receive a substantive sales charge
discount and who have a short-term or undetermined time frame.
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
4
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Prospectus Summary (continued)
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example, while Class L shares have a shorter CDSC period than Class B shares,
they do not have a conversion feature, and therefore, are subject to an ongoing
distribution fee. Thus, Class B shares may be more attractive than Class L
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
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
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 Taxes"
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 Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class L 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 $15,000,000. Subsequent
investments of at least $50 may be made for all Classes. The minimum investment
requirement for purchases of portfolio shares through the Systematic Investment
Plan are described below. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial requirement for Class
A, Class B and Class L shares and the subsequent investment requirement 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
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Prospectus Summary (continued)
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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
"Redemption of Shares."
MANAGEMENT OF THE FUND Mutual Management Corp. ("MMC" or the "Adviser")
(formerly known as Smith Barney Mutual Funds Management Inc.) serves as the
Fund's investment adviser and administrator. The Adviser provides investment
advisory and management services to investment companies affiliated with Smith
Barney. The Adviser is a wholly owned subsidiary of Salomon 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 including Asset Management, 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 a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid annually.
See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically in additional shares of the same Class at
current net asset value unless otherwise specified by an investor. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. Assets of the Fund may be invested in the
municipal securities of non-California municipal issuers. Dividends paid by the
Fund which are derived from interest attributable to California Municipal
Securities will be excluded from gross income for Federal income tax purposes
and exempt from California state personal income taxes (but not from California
state franchise tax or California state corporate income tax). Dividends derived
from interest on obligations of non-California municipal issuers will be exempt
from Federal income taxes, but may be subject to California state personal
income
6
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Prospectus Summary (continued)
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taxes. Dividends derived from certain municipal securities (including California
Municipal Securities), however, may be a specific tax item for Federal
alternative minimum tax purposes. The Fund may invest without limit in
securities subject to the Federal alternative minimum tax. See "Investment
Objective and Management Policies" and "Dividends, Distributions and Taxes."
The Fund is more susceptible to factors adversely affecting issuers of
California municipal securities than is a municipal bond fund that does not
emphasize these issuers. See "California Municipal Securities" in the Prospectus
and "Special Considerations Relating to California Municipal Securities" in the
SAI for further details about the risks of investing in California obligations.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
the Fund is not limited by the 1940 Act in the proportion of its assets that it
may invest in the obligations of a single issuer. The Fund's assumption of large
positions in the obligations of a small number of issuers may cause the Fund's
share price to fluctuate to a greater extent than that of a diversified company
as a result of changes in the financial condition or in the market's assessment
of the issuers. See "Investment Objective and Management Policies."
The Fund generally will invest at least 80% of its assets in securities
rated investment grade, and may invest the remainder of its assets in securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by
Standard & Poor's Rating Group ("S&P"), or have an equivalent rating by any
nationally recognized statistical rating organization ("NRSRO"), or in unrated
obligations deemed by the Adviser to be of comparable quality. Securities in the
fourth highest rating category, though considered to be investment grade, have
speculative characteristics. Securities rated as low as D are extremely
speculative and are in actual default of interest and/or principal payments.
There are several risks in connection with the use of certain portfolio
strategies by the Fund, such as the use of when-issued securities, municipal
bond index futures contracts and put and call options on interest rate futures
as hedging devices, municipal leases and securities lending. See "Investment
Objective and Management Policies -- Certain Portfolio Strategies."
7
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Prospectus Summary (continued)
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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:
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Class A Class B Class L 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 1.00% None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is lower) None* 4.50% 1.00% None
==============================================================================================
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.49% 0.49% 0.49% 0.49%
12b-1 fees** 0.15 0.65 0.70 --
Other expenses*** 0.06 0.07 0.07 0.06
==============================================================================================
TOTAL FUND OPERATING EXPENSES 0.70% 1.21% 1.26% 0.55%
==============================================================================================
</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 L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class L 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 were outstanding as
of February 28, 1998.
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
information, 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 L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 fee of 0.15% of the value of average daily net
assets of Class A shares. Smith Barney also receives, with respect to Class B
shares, an annual 12b-1 fee of 0.65% of the value of average daily net assets of
that Class, consisting of a 0.50% distribution fee and a 0.15% service fee. For
Class L 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.
8
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Prospectus Summary (continued)
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EXAMPLE The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
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."
Smith Barney California Municipals Fund Inc.
1 Year 3 Years 5 Years 10 Years*
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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 $61 $77 $124
Class B 57 68 76 132
Class L 33 40 69 152
Class Y 6 18 31 69
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A 47 $61 77 124
Class B 12 38 66 132
Class L 23 40 69 152
Class Y 6 18 31 69
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* 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
representation of past or future expenses and actual expenses may be greater or
less than those shown.
9
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Financial Highlights
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The following information for each of the years in the three-year period ended
February 28, 1998 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated
February 28, 1998. The information for the fiscal years ended February 28, 1989
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 SAI. As of February 28, 1998, no Class Y
shares were outstanding and, accordingly, no comparable information is available
at this time for that class.
For a share of each class of capital stock outstanding throughout each year:
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Class A Shares 1998 1997 1996(1) 1995
====================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.26 $16.31 $15.40 $16.15
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Income From Operations:
Net investment income 0.82 0.85 0.85 0.89
Net realized and unrealized gain (loss) 0.98 0.15 0.93 (0.56)
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Total Income From Operations 1.80 1.00 1.78 0.33
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Less Distributions From:
Net investment income (0.84) (0.85) (0.84) (0.89)
Net realized gains (0.23) (0.20) (0.03) (0.19)
Capital -- -- -- --
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Total Distributions (1.07) (1.05) (0.87) (1.08)
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Net Asset Value, End of Year $16.99 $16.26 $16.31 $15.40
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Total Return 11.44% 6.37% 11.93% 2.46%
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Net Assets, End of Year (000s) $664,471 $578,687 $582,324 $401,743
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Ratios to Average Net Assets:
Expenses 0.70% 0.71% 0.76% 0.80%
Net investment income 4.97 5.29 5.26 5.76
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Portfolio Turnover Rate 43% 60% 44% 59%
====================================================================================================================
<CAPTION>
1994(1) 1993 1992 1991 1990 1989
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.70 $15.78 $15.66 $15.61 $15.33 $15.49
- ----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.86 0.97 1.04 1.07 1.09 1.12
Net realized and unrealized gain (loss) 0.08 1.25 0.40 0.17 0.26 (0.13)
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Total Income From Operations 0.94 2.22 1.44 1.24 1.35 0.99
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.84) (0.97) (1.05) (1.07) (1.07) (1.12)
Net realized gains (0.65) (0.29) (0.27) (0.12) -- (0.03)
Capital -- (0.04) -- -- -- --
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Total Distributions (1.49) (1.30) (1.32) (1.19) (1.07) (1.15)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.15 $16.70 $15.78 $15.66 $15.61 $15.33
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Total Return 5.92% 14.76% 9.50% 8.29% 9.02% 6.67%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $425,181 $423,504 $364,809 $334,599 $328,938 $313,059
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Ratios to Average Net Assets:
Expenses 0.80% 0.70% 0.65% 0.65% 0.72% 0.67%
Net investment income 5.20 6.04 6.54 6.85 6.95 7.19
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Portfolio Turnover Rate 76% 72% 86% 53% 35% 27%
==================================================================================================================================
</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 & 11
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Financial Highlights (continued)
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For a share of each class of capital stock outstanding throughout each year:
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Class B Shares 1998 1997 1996(1) 1995 1994(1) 1993(2)
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $16.25 $16.32 $15.40 $16.15 $16.70 $15.84
- --------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.74 0.76 0.75 0.81 0.77 0.29
Net realized and
unrealized gain (loss) 0.98 0.14 0.96 (0.57) 0.09 1.15
- --------------------------------------------------------------------------------------------------------------------------------
Total Income From
Operations 1.72 0.90 1.71 0.24 0.86 1.44
- --------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.76) (0.77) (0.76) (0.80) (0.76) (0.28)
Net realized gains (0.23) (0.20) (0.03) (0.19) (0.65) (0.29)
Capital -- -- -- -- -- (0.01)
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.99) (0.97) (0.79) (0.99) (1.41) (0.58)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $16.98 $16.25 $16.32 $15.40 $16.15 $16.70
- --------------------------------------------------------------------------------------------------------------------------------
Total Return 10.88% 5.73% 11.39% 1.89% 5.40% 9.27%++
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (000s) $216,234 $173,347 $153,044 $127,888 $107,740 $37,924
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses 1.21% 1.23% 1.29% 1.32% 1.33% 1.30%+
Net investment income 4.45 4.75 4.71 5.25 4.67 5.44+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 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
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Financial Highlights (continued)
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For a share of each class of capital stock outstanding throughout each year:
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Class L Shares(1) 1998 1997 1996(2) 1995(3)
=================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.24 $16.31 $15.40 $14.19
- -------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.73 0.75 0.78 0.24
Net realized and unrealized gain 0.98 0.15 0.92 1.39*
- -------------------------------------------------------------------------------------------------
Total Income From Operations 1.71 0.90 1.70 1.63
- -------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.75) (0.77) (0.76) (0.23)
Net realized gains (0.23) (0.20) (0.03) (0.19)
- -------------------------------------------------------------------------------------------------
Total Distributions (0.98) (0.97) (0.79) (0.42)
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.97 $16.24 $16.31 $15.40
- -------------------------------------------------------------------------------------------------
Total Return 10.83% 5.68% 11.30% 11.72%++
- -------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $32,047 $16,678 $10,809 $762
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.26% 1.29% 1.39% 1.37%+
Net investment income 4.39 4.69 4.44 5.19+
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 60% 44% 59%
=================================================================================================
</TABLE>
(1) Effective June 12,1998 the former Class C Shares were renamed Class L
Shares.
(2) 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.
(3) For the period from November 14, 1994 (inception date) to February 28,
1995.
* The amount shown may not agree with the change in aggregate gains and
losses of portfolio securities due to the timing of sales and the
redemptions of Fund shares.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
13
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Investment Objective and Management Policies
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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
California state personal income tax as is consistent with prudent investment
management 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
outstanding 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
California 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 the Adviser
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 have the equivalent rating by any NRSRO
or in unrated obligations of comparable quality. Unrated obligations will be
considered to be of investment grade if deemed by the Adviser to be comparable
in quality to instruments so rated, or if other outstanding obligations of the
issuers thereof are rated Baa or better by Moody's or BBB or better by S&P. The
balance of the Fund's assets may be invested in securities rated as low as C by
Moody's or D by S&P or have the equivalent rating by any NRSRO, or deemed by the
Adviser to be 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 speculative and are in actual default of
interest and/or principal payments. A description of the rating systems of
Moody's and S&P is contained in the SAI.
The Fund's average weighted maturity will vary from time to time based on
the judgment of the Adviser. The Fund intends to focus on intermediate- and
long-term obligations, that is, obligations with remaining maturities at the
time of purchase 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
generally falls, and when interest rates fall, the value of debt securities
generally rises.
Low and Comparable Unrated Securities. While the market values of
low-rated and comparable unrated securities tend to react less to fluctuations
in interest
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Investment Objective and Management Policies (continued)
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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 recession) 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 prolonged 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
adequate, the existence of limited markets for particular low-rated and
comparable 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
financial markets. The market for certain low-rated and comparable unrated
securities has not fully weathered a major economic recession. Any such
recession, however, would likely disrupt severely the market for such securities
and adversely affect the value of the securities and the ability of the issuers
of such securities to repay principal and pay interest thereon.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding 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 covenant
to budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis.
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Investment Objective and Management Policies (continued)
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In addition to the "non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in municipal lease obligations. In evaluating municipal lease
obligations, the Adviser 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 essential by the municipality; (e) the legal
recourse of the lease obligee in the event of such a failure to appropriate
funding; (f) whether the security is backed by a credit enhancement such as
insurance; and (g) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services rather than those covered by
the lease obligation.
The Fund may invest without limits in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986 to
finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent that 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
purposes 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 "regulated 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 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.
16
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Investment Objective and Management Policies (continued)
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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
difficulties. 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 borrowed) 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 SAI.
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
obligation and the interest rate that will be received on when-issued securities
are fixed at the time the buyer enters into the commitment. California Municipal
Securities, like other investments made by the Fund, may decline or appreciate
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
purchase commitments, provided such securities have been determined by the
Adviser 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 segregated account may have a leveraging effect on the Fund's net assets.
The Fund generally will make commitments to purchase California Municipal
Securities (and other tax-exempt obligations) on a when-issued basis only with
the intention of actually acquiring the securities, but the Fund may sell such
securities before the delivery date if it is deemed advisable.
17
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Investment Objective and Management Policies (continued)
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Temporary Investments. Under normal market conditions, the Fund may hold
up to 20% of its total assets in cash or money market instruments, including
taxable money market instruments ("Temporary Investments"). In addition, when
the Adviser believes that market conditions warrant, including when acceptable
California Municipal Securities are unavailable, the Fund may take a temporary
defensive posture and invest without limitation in Temporary Investments.
Securities 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 have the equivalent rating by any NRSRO or,
if not rated, having an issue of outstanding debt securities rated within the
three highest grades of Moody's or S&P or have the equivalent rating by any
NRSRO, and certain taxable short-term instruments having quality characteristics
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
financial futures contracts and invest in options on financial futures contracts
that are traded on a domestic exchange or board of trade. Such investments, if
any, by the Fund will be made solely for the purpose of hedging against the
changes in the value of its portfolio securities due to anticipated changes in
interest rates and market conditions and where the transactions are economically
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
the Adviser to correlate with the prices of the California Municipal Securities
owned or to be purchased by the Fund.
In entering into a financial futures contract, the Fund will be required
to deposit with the broker through which it undertakes the transaction an amount
of cash or cash equivalents equal to approximately 5% of the contract amount.
This amount, which is known as "initial margin," is subject to change by the
exchange or board of trade on which the contract is traded, and members of the
exchange or board of trade may charge a higher amount. Initial margin is in the
nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. In accordance with a process known
as "marking-to-market," subsequent payments, known as "variation margin," to and
from the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable. At any time prior to the
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.
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Investment Objective and Management Policies (continued)
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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 financial
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 potential
loss related to the purchase of an option on financial futures contracts is
limited to the premium paid for the option (plus transaction costs). The value
of the option may change daily and that change would be reflected in the net
asset value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options on
financial futures contracts be engaged in for bona fide hedging purposes, or if
the Fund enters into futures contracts for speculative purposes, that the
aggregate initial margin deposits and premiums paid by the Fund will not exceed
5% of the market value of its assets. In addition, the Fund will, with respect
to its purchases of financial futures contracts, establish a segregated account
consisting of cash or cash equivalents in an amount equal to the total market
value of the futures contracts, less the amount of initial margin on deposit for
the contracts.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to brokers, dealers and
other financial organizations. Loans of portfolio securities by the Fund will be
collateralized by cash, letters of credit or obligations of the United States
government or its agencies and instrumentalities ("U.S. government securities")
which are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. By lending its portfolio
securities, the Fund will seek to generate income by continuing to receive
interest on the loaned securities, by investing the cash collateral in
short-term instruments or by obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delays in receiving additional 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 the Adviser to
be of good standing and will not be made unless, in the judgment of the Adviser,
the consideration to be earned from such loans would justify the risk.
19
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Investment Objective and Management Policies (continued)
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Zero Coupon Securities. The Fund may also invest in zero coupon bonds.
Such bonds carry an additional risk 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 bonds is sold and, if the issuer defaults,
the Fund may obtain no return at all on its investment.
Year 2000. The investment management services provided to the Fund by the
Adviser and the services provided to shareholders by Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. The Adviser and Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, the Adviser has been advised by the Fund's custodian,
transfer agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that the Adviser, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.
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California Municipal Securities
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The interest on California Municipal Securities is, in the opinion of bond
counsel to the issuers, excluded from gross income for Federal income tax
purposes and exempt from California state personal income tax, and for that
reason generally is fixed at a lower rate than it would be if it were subject to
such taxes. Interest income on certain municipal securities (including
California Municipal Securities) is a specific tax preference item for purposes
of the Federal individual and corporate alternative minimum taxes.
CLASSIFICATIONS
The two principal classifications of California Municipal Securities are
"general obligation bonds" and "revenue bonds." General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source, but not from the general taxing power. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
related facilities experience financial difficulties. In addition, certain types
of private activity bonds issued by or on
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California Municipal Securities (continued)
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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
Investors should be aware that certain California constitutional amendments,
legislative measures, executive orders, administrative regulations and voter
initiatives could result in certain adverse consequences affecting California
Municipal Securities. For instance, certain provisions of the California
Constitution and statutes that limit the taxing and spending authority of
California 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 summarized in the SAI.
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Valuation of Shares
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The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are 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 pricing service,
there is no readily obtainable market quotation (which may constitute a majority
of the portfolio securities) are carried at fair value of securities of similar
type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. 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
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Valuation of Shares (continued)
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constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
Securities and other assets that are not priced by a pricing service and for
which market quotations are not available will be valued in good faith at fair
value by or under direction of the Fund's Board of Directors. Further
information regarding the Fund's valuation policies is contained in the SAI.
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Dividends, Distributions and Taxes
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DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to declare and pay exempt-interest dividends monthly.
Dividends from net realized capital gains, if any, will be distributed annually.
The Fund may also pay additional dividends shortly before December 31 from
certain amounts of undistributed ordinary income and capital gains, in order to
avoid a Federal excise tax liability. If a shareholder does not otherwise
instruct, exempt-interest dividends and capital gain distributions will be
reinvested automatically in additional shares of the same Class at net asset
value, with no additional sales charge or CDSC.
The per share amounts of the exempt-interest dividends on Class B and
Class L shares may be lower than on Class A and Class Y shares, mainly as a
result of the distribution fees applicable to Class B and Class L shares.
Similarly, the per share amounts of exempt-interest dividends on Class A shares
may be lower than on Class Y shares, as a result of the service fee attributable
to Class A shares. Capital gain distributions, if any, will be the same across
all Classes of Fund shares (A, B, L and Y).
TAXES
The following is a summary of the material federal tax considerations
affecting the Fund and Fund shareholders. Please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other federal, state, local, or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.
The Fund intends to qualify, as it has in prior years, under Subchapter M
of the Internal Revenue Code (the "Code") for tax treatment as a regulated
investment company. In each taxable year that the Fund qualifies, so long as
such qualification is in the best interests of its shareholders, the Fund will
pay no federal income tax on its net investment income and long-term capital
gain that is distributed to shareholders. The Fund also intends to satisfy
conditions that will
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Dividends, Distributions and Taxes (continued)
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enable it to pay "exempt-interest dividends" to shareholders. Exempt-interest
dividends are generally not subject to regular federal income taxes, although
they may be considered taxable for certain state and local income (or
intangible) tax purposes. Exempt-interest dividends derived from interest on
California obligations will be exempt from California state personal income
taxes.
Exempt-interest dividends attributable to interest received by the Fund on
certain "private-activity" bonds will be treated as a specific tax preference
item to be included in a shareholder's alternative minimum tax computation. All
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum tax.
Exempt-interest dividends derived from the interest earned on private activity
bonds will not be exempt from federal income tax for those shareholders who are
"substantial users" (or persons related to "substantial users") of the
facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase, or carry Fund shares, are not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on
such shares.
Dividends paid by the Fund from interest income on taxable investments,
net realized short-term securities gains, and, all, or a portion of, any gains
realized from the sale or other disposition of certain market discount bonds are
subject to federal income tax as ordinary income. Distributions, if any, from
net realized long-term securities gains, derived from the sale of bonds held by
the Fund for more than one year, are taxable as long-term capital gains,
regardless of the length of time a shareholder has owned Fund shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Fund shares.
None of the dividends paid by the Fund will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
A shareholder's gain or loss on the disposition of Fund shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on the length of time the shares had been owned at
disposition. Losses realized by a shareholder on the disposition of Fund shares
owned for six months or less will be treated as a long-term capital loss to the
extent a capital gain dividend had been distributed on such shares.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do
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Dividends, Distributions and Taxes (continued)
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not provide the Fund with a correct taxpayer identification number (social
security or employer identification number). Withholding from taxable dividends
and capital gain distributions also is required for shareholders who otherwise
are subject to backup withholding. Any tax withheld as a result of backup
withholding does not constitute an additional tax, and may be claimed as a
credit on the shareholders' federal income tax return.
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Purchase of Shares
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GENERAL
The Fund offers four classes of shares. Class A shares are sold to
investors with an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class L shares are sold to investors with an initial sales charge and are
subject to a CDSC payable upon certain redemptions. Class Y shares are sold
without an initial sales charge or CDSC and are available only to investors
investing a minimum of $15,000,000 (except for purchases of Class Y shares by
Smith Barney Concert Allocation Series Inc., for which there is no minimum
purchase amount). Until June 25, 1999 purchases of Class L shares by investors
who were holders of Class C shares of the Fund on June 12, 1998 will not
be subject to the 1% front-end sales charge. 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 purchase is for Class A, Class B, Class L 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. Accounts held directly at First Data Investor
Services Group, Inc. ("First Data" or the "Transfer Agent") are not subject to a
maintenance fee.
Investors in Class A, Class B and Class L 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 $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
shareholders 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 L shares and the subsequent investment requirement for all
Classes is $25. For shareholders purchasing shares of the Fund through the
Systematic Investment
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Purchase of Shares (continued)
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Plan on a quarterly basis, the minimum initial investment requirement for Class
A, Class B and Class L shares and the subsequent investment requirement for all
Classes is $50. There are no minimum investment requirements for Class A shares
for employees of Travelers and its subsidiaries, including Smith Barney,
unitholders who invest distributions from a UIT sponsored by Smith Barney, and
Directors/Trustees of any of the Smith Barney Mutual Funds and their spouses and
children. The Fund reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of shares from time
to time. Shares purchased will be held in the shareholder's account by the
Fund's Transfer Agent. Share certificates are issued only upon a shareholder's
written request to the Transfer Agent. It is not recommended that the Fund be
used as a vehicle for Keogh, IRA or other qualified retirement plans.
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 value,
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 trading
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 indicated 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.
25
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are as follows:
Sales Charge
Sales Charge as % of Dealers
as % of Amount Reallowance as %
Amount of Investment* Transaction Invested of Offering Price
- -------------------------------------------------------------------------------
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* * * *
===============================================================================
* 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 L 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
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company 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
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the
26
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 proceeds 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; and (g)
purchases by investors participating 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 elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the Fund and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative-Class A Shares," and will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual Funds offered with
a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and
27
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
sales related expenses. An individual who is a member of a qualified group may
also purchase Class A shares at the reduced sales charge applicable to the group
as a whole. The sales charge is based upon the aggregate dollar value of Class A
shares offered with a sales charge that have been previously purchased and are
still owned by the group, plus the amount of the current purchase. A "qualified
group" is one which (a) has been in existence for more than six months, (b) has
a purpose other than acquiring Fund shares at a discount and (c) satisfies
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 purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. Approval of group purchase reduced sales charge plans is subject
to the discretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes (i) all
Class A shares of the Fund and other 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 during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. If the goal is not achieved within the period, the investor
must pay the difference between the sales charges applicable to the purchases
made and the charges actually paid, or an 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 application.
Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Fund and agree to purchase a total of $15,000,000 of Class Y shares of the Fund
within 13 months from the date of the Letter. If a total investment of
$15,000,000 is not made within the 13 month period, all Class Y shares purchased
to date will be transferred to Class A shares, where they will be subject to all
fees (including a service fee of 0.15%) and expenses applicable to the Fund's
Class A shares, which may include a
28
<PAGE>
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 information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class L 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 L shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class L and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC is imposed on Class B shares, the amount of the charge will depend on the
number of years since the shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of determining the number of years
since a purchase payment, all purchase payments made during a month will be
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.
Year Since Purchase
Payment was Made CDSC
- --------------------------------------------------------------------------------
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth and thereafter 0.00
================================================================================
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
proportion 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
29
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares 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.
30
<PAGE>
- --------------------------------------------------------------------------------
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
L shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made.
FUND NAME
- --------------------------------------------------------------------------------
Growth Funds
Concert Peachtree Growth Fund
Concert Social Awareness Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Balanced Fund
Smith Barney Contrarian Fund
Smith Barney Convertible Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Natural Resources Fund, Inc.
Smith Barney Premium Total Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
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 Fund
Smith Barney Funds, Inc. -- U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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
31
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income 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
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
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. -- Global 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
*** 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 B and Class Y shares of the
Fund.
** Available for exchange with Class A and Class B shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class L shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
32
<PAGE>
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L 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
respective 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. The Adviser may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Adviser 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 considered in determining what
constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares-Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
33
<PAGE>
- --------------------------------------------------------------------------------
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 redemption proceeds
will be remitted on the third business day after receipt of proper tender,
except on any days on which the NYSE is closed or as permitted under the 1940
Act in extraordinary circumstances. Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction and Smith Barney will
benefit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney California Municipals Fund Inc.
Class A, B, L or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
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 registered.
If the shares to be redeemed were issued in certificate form, the certificates
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 $10,000, must be guaranteed by an
eligible guarantor institution such as a domestic bank, savings and loan
institution, domestic credit union, member bank of the Federal Reserve System or
member firm of a national securities exchange. Written redemption requests of
$10,000 or less do not
34
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
require a signature guarantee unless more than one such redemption request is
made in any 10-day period. Redemption proceeds will be mailed to an investor's
address of record. 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 documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
the Transfer Agent at (800) 451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization Form,
including a signature guarantee, that will be provided by the Transfer Agent
upon request. (Alternatively, an investor may authorize telephone redemptions on
the new account application with a signature guarantee when making his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling the
Transfer Agent at (800) 451-2010. Such requests may be made between 9:00 a.m.
and 4:00 p.m. (New York City time) on any day the NYSE is open. Redemptions of
shares (i) by retirement plans or (ii) for which certificates have been issued
are not permitted under this program.
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the fund being acquired is identical to the registration
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.
35
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions 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 withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the shareholder's shares
subject to the CDSC.) For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Smith Barney Financial Consultant
or their Financial Consultant, Introducing Broker or dealer in the selling
group.
- --------------------------------------------------------------------------------
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,
however, 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.
- --------------------------------------------------------------------------------
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 generated by an investment in those shares over the 30-day period
identified in the advertisement
36
<PAGE>
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
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
semiannually. 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 "Dividends, 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 L and Class Y shares of the Fund. These figures are based on historical
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 presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. or similar independent services that
monitor the performance of mutual funds or other industry publications.
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Management of the Fund
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BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund,
including agreements with its distributor, investment adviser and administrator,
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
SAI contains background information regarding each Director and executive
officer of the Fund.
INVESTMENT ADVISER AND ADMINISTRATORS
The Fund's investment adviser, MMC, is a registered investment adviser
whose principal executive offices are located at 388 Greenwich Street, New
York, New York 10013. MMC was incorporated in March, 1968 under the laws of
Delaware and renders investment advice to a wide variety of individual,
institutional and investment company clients that had aggregate assets under
management as of May 31, 1998 in excess of $98 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
the Adviser 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 portfolio
managers and securities analysts who provide research services to the Fund. For
investment advisory services, the Fund pays the Adviser an investment advisory
fee at an annual rate of 0.30% of the value of the Fund's average daily net
assets. This fee is computed daily and paid monthly. For the fiscal year ended
February 28, 1998, the Adviser was paid investment advisory fees equal to 0.30%
of the value of the average daily net assets of the Fund.
MMC also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
MMC 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. This fee is computed daily
and paid monthly. For the fiscal year ended February 28, 1998, MMC 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, an Investment Officer of MMC and a Managing Director of
Smith Barney, has served as Vice President and Investment Officer of the Fund
since November 1, 1988, and is responsible for managing the day-to-day
operations of the Fund, including making investment decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended February 28, 1998 is
included in the Annual Report dated February 28, 1998. A copy of the Annual
Report may
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be obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"), the requirements of the Glass-Steagall Act and certain other laws and
regulations. Although the effects of the merger of Travelers and Citicorp and
compliance with the requirements of the BHCA and the Glass-Steagall Act are
still under review, the Adviser does not believe that its compliance with
applicable law following the merger of Travelers and Citicorp will have a
material adverse effect on its ability to continue to provide the Fund with the
same level of investment advisory services that it currently receives.
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Distributor
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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
l2b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class L 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 L 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 convert 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 L 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 persons
who provide support services in connection with the distribution of shares;
interest and/or carrying charges; and indirect and overhead costs of Smith
Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
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Distributor (continued)
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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 L shares, a
continuing 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
Directors 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.
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Additional Information
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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
management investment company.
Each Class of the Fund represents an identical interest in the Fund's
investment 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
Classes. The Directors, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
The Fund does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Fund's
outstanding shares, and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share owned
and a proportionate, fractional vote for any fractional share held of that
Class. Generally, shares of the Fund will be voted on a Fund-wide basis on all
matters except matters affecting only the interests of one Class.
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Additional Information (continued)
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PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania, 19103, serves as custodian of the Fund's
investments.
First Data, 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
consolidation to apply to their account should contact their Financial
Consultants or the Transfer Agent.
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SMITH BARNEY
A Member of Travelers Group [LOGO]
Smith Barney
California
Municipals
Fund Inc.
388 Greenwich Street
New York, New York 10013
FD 0209 6/98
