As filed with the Securities and Exchange Commission
on June 26, 1998
Registration No. 2-89548
811-3970
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 25
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 26 [X]
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212)816-6474
(Registrant's telephone number, including Area Code)
Christina T. Sydor
Secretary
Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013, 22nd Floor
(Name and address of agent for service)
(Approximate Date of Proposed Public Offering): Continuous
It is proposed that this filing becomes effective (check
appropriate
box):
[ ] Immediately upon filing pursuant to paragraph b
[X] on June 26, 1998 pursuant to paragraph b
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Title of Securities Being Registered: Shares of Common
Stock/Shares of Beneficial Interest
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Financial Highlights
Financial Highlights
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Investment Objective and
Management Policies; Additional
Information
5. Management of the Fund
Management of the Fund;
Distributor; Additional
Information;
6. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities
Being Offered
Purchase of Shares; Valuation of
Shares; Redemption of Shares;
Exchange Privilege; Minimum
Account Size; Distributor;
Additional Information
8. Redemption or Repurchase
Purchase of Shares; Redemption
of Shares; Exchange Privilege
9. Legal Proceedings
Not Applicable
Part B
Item No.
Statement Of Additional
Information Caption
10. Cover Page
Cover Page
11. Table of Contents
Table of Contents
12. General Information
Distributor; Additional
Information
13. Investment Objective and
Policies
Investment Objective and
Management Policies
14. Management of the Fund
Management of the Fund
15. Control Persons and
Principal Holders of
Securities
Management of the Fund
16. Investment Advisory and
Other Services
Management of the Fund;
Distributor
17. Brokerage Allocation
Investment Objective and
Management Policies; Distributor
18. Capital Stock and Other
Securities
Investment Objective and
Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and
Pricing of Securities
Being Offered
Purchase of Shares; Redemption
of Shares; Distributor;
Valuation of Shares; Exchange
Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART A
PROSPECTUS
SMITH BARNEY
California
Municipals
Fund Inc.
JUNE 26, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus June 26, 1998
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 10
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 14
- --------------------------------------------------------------------------------
California Municipal Securities 20
- --------------------------------------------------------------------------------
Valuation of Shares 21
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 22
- --------------------------------------------------------------------------------
Purchase of Shares 24
- --------------------------------------------------------------------------------
Exchange Privilege 31
- --------------------------------------------------------------------------------
Redemption of Shares 34
- --------------------------------------------------------------------------------
Minimum Account Size 36
- --------------------------------------------------------------------------------
Performance 36
- --------------------------------------------------------------------------------
Management of the Fund 38
- --------------------------------------------------------------------------------
Distributor 39
- --------------------------------------------------------------------------------
Additional Information 40
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in such jurisdiction.
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the 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
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
Class 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
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"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
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
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
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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*
================================================================================
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
================================================================================
* 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
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.80 1.00 1.78 0.33
- --------------------------------------------------------------------------------------------------------------------
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 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (1.07) (1.05) (0.87) (1.08)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.99 $16.26 $16.31 $15.40
- --------------------------------------------------------------------------------------------------------------------
Total Return 11.44% 6.37% 11.93% 2.46%
- --------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $664,471 $578,687 $582,324 $401,743
- --------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 60% 44% 59%
====================================================================================================================
Smith Barney California Municipals Fund Inc.
<CAPTION>
Class A Shares (continued) 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)
- ----------------------------------------------------------------------------------------------------------------------------------
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) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Class B Shares 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
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Smith Barney California Municipals Fund Inc.
<TABLE>
<CAPTION>
Class 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
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide California investors
with as high a level of dividend income exempt from Federal income taxes and
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
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
18
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
California Municipal Securities
- --------------------------------------------------------------------------------
The interest on California Municipal Securities is, in the opinion of bond
counsel to the issuers, excluded from gross income for Federal income tax
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
20
<PAGE>
- --------------------------------------------------------------------------------
California Municipal Securities (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Valuation of Shares
- --------------------------------------------------------------------------------
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
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
21
<PAGE>
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
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
22
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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
23
<PAGE>
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
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
24
<PAGE>
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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.
37
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund,
including agreements with its distributor, investment adviser and administrator,
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
38
<PAGE>
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.
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
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.
39
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on
February 17, 1984, and is registered with the SEC as a non-diversified, open-end
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.
40
<PAGE>
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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.
41
<PAGE>
SMITH BARNEY
A Member of Travelers Group [LOGO]
California
Municipals
Fund Inc.
388 Greenwich Street
New York, New York 10013
PART B
Smith Barney
CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement Of Additional
Information
June 26, 1998
This Statement of Additional Information (the "SAI") expands
upon and supplements the information contained in the current
Prospectus of Smith Barney California Municipals Fund Inc. (the
"Fund") dated June 26, 1998, as amended or supplemented from time
to time, and should be read in conjunction with the Fund's
Prospectus. The Fund's Prospectus may be obtained from your Smith
Barney Financial Consultant or by writing or calling the Fund at
the address or telephone number set forth above. This SAI,
although not in itself a prospectus, is incorporated by reference
into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in
both the Prospectus and this SAI, except where shown below:
Management of the Fund.
1
Investment Objective and Management Policies. .
4
Municipal Bonds (See in the Prospectus "California Municipal
Securities")
10
Purchase of Shares 18
Redemption of Shares 19
Distributor 20
Valuation of Shares 20
Exchange Privilege 21
Performance Data (See in the Prospectus "Performance") 22
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes") 24
Additional Information 26
Financial Statements 27
Appendix A-1
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of
the organizations that provide services to the Fund. These
organizations are as follows:
Name Service
Smith Barney Inc.
("Smith Barney" or the "Distributor")
Distributor
Mutual Management Corp. (formerly known as
Smith Barney Mutual Funds Management Inc.)
("MMC" or the "Adviser or "Administrator")
Investment Adviser and Administrator
PNC Bank, National Association
("PNC" or the "Custodian")
Custodian
First Data Investor Services Group, Inc.
("First Data" or the "Transfer Agent")
Transfer Agent
These organizations and the functions they perform for the Fund
are discussed in the Prospectus and in this SAI.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of the Fund,
together with information as to their principal business
occupations during the past five years, are set forth below. Each
Director who is an "interested person" of the Fund, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"),
is indicated by an asterisk.
Herbert Barg, Director (Age 75). Private Investor. His address
is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alfred J. Bianchetti, Director (Age 75). Retired; formerly
Senior Consultant to Dean Witter Reynolds Inc. His address is 19
Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody, Director (Age 76). Consultant, HMK Associates;
Retired Vice Chairman of the Board of Restaurant Associates Corp.
His address is HMK Associates, 30 Columbia Turnpike, Florham Park,
New Jersey 07932.
Dwight B. Crane, Director (Age 60). Professor, Harvard Business
School. His address is Harvard Business School, Soldiers Field
Road, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 67). Managing Partner of
Dorsett McCabe Management, Inc., an investment counseling firm;
Trustee of Research Corporation Technologies, Inc., a non-profit
patent-clearing and licensing firm. His address is 201 East 62nd
Street, New York, New York 10021.
Elliot S. Jaffe, Director (Age 72). Chairman of the Board and
President of The Dress Barn, Inc. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 66). Attorney. His address
is 277 Park Avenue, New York, New York 10172.
Joseph J. McCann, Director (Age 67). Financial Consultant;
Retired Financial Executive, Ryan Homes, Inc. His address is 200
Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board, President and Chief
Executive Officer (65). Managing Director of Smith Barney,
Chairman of the Board of Smith Barney Strategy Advisors Inc. and
President of MMC and Travelers Investment Adviser, Inc. ("TIA").
Mr. McLendon is Chairman or Co-Chairman of the Board and Director
of 58 investment companies associated with Salomon Smith Barney
Holdings Inc. Prior to July 1993, Senior Executive Vice President
of Shearson Lehman Brothers Inc., Vice Chairman of Shearson Asset
Management, Director of PanAgora Asset Management, Inc. and
PanAgora Asset Management Limited. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 64). President, Cornelius
C. Rose Associates, Inc., financial consultants, and Chairman and
Trustee of Performance Learning Systems, an educational
consultant. His address is Meadowbrook Village, Building 4, West
Lebanon, New Hampshire 03784.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney; Chief Financial Officer of the
Smith Barney Mutual Funds; Director and Senior Vice President of
MMC and TIA. Mr. Daidone serves as Senior Vice President and
Treasurer of 42 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Joseph P. Deane, Vice President and Investment Officer (Age
50). Investment Officer of MMC; prior to July 1993, Managing
Director of Shearson Lehman Advisors ("SLA"). Mr. Deane is also an
Investment Officer of six other Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
David Fare, Investment Officer (Age 35). Investment Officer of
MMC; prior to July 1993, Vice President of SLA. Mr. Fare is also
an Investment Officer of four other Smith Barney Mutual Funds.
His address is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 47). Managing Director of
Smith Barney; General Counsel and Secretary of MMC and TIA. Ms.
Sydor serves as Secretary of 42 Smith Barney Mutual Funds. Her
address is 388 Greenwich Street, New York, NY 10013.
As of June 5, 1998, the Directors and officers of the Fund as a
group owned less than 1% of the outstanding common stock of the
Fund. As of June 5, 1998, to the knowledge of the Fund and the
Board, no single shareholder or "group" (as that term is used in
Section 13(d) of the Securities Act of 1934) beneficially owned
more than 5% of the outstanding shares of the Fund.
No director, officer or employee of Smith Barney or any parent
or subsidiary receives compensation from the Fund for serving as
an officer or Director of the Fund. The Fund pays each Director
who is not an officer, director or employee of Smith Barney or any
of its affiliates a fee of $2,000 per annum plus $500 per in-
person meeting and $100 per telephonic meeting. Each Director
emeritus who is not an officer, director or employee of Smith
Barney or any of its affiliates receives a fee of $1,000 per annum
plus $250 per in-person meeting and $50 per telephonic meeting.
All Directors are reimbursed for travel and out-of-pocket expenses
incurred to attend such meetings. For the fiscal year ended
February 28, 1998, such fees and expenses totaled $56,488.
For the fiscal year ended February 28, 1998, the Directors of
the Fund were paid the following compensation:
Compensation Table
<TABLE>
<CAPTION>
Total
Number
Pension or of Funds
Retirement for Which
Benefits Director
Accrued as Total Serves
Aggregate Part of Compensation within
Name Compensation Fund's from Fund Fund
of Director From the Fund Expenses Complex* Complex
<S> <C> <C> <C> <C>
Herbert Barg $4,600 $0 $101,600 16
Alfred J. Bianchetti 4,600 0 49,600 11
Martin Brody 3,500 0 119,814 19
Dwight B. Crane 4,100 0 133,850 22
Burt N. Dorsett 4,600 0 49,600 11
Elliot S. Jaffe 4,000 0 48,500 11
Stephen E. Kaufman 4,600 0 91,964 13
Joseph J. McCann 4,600 0 49,600 11
Heath B. McLendon** -- 0 0 58
Cornelius C. Rose, Jr. 4,600 0 49,600 11
</TABLE>
________________________________________
* Reflects compensation paid during the calendar year ended
December 31, 1997.
** Designates a director who is an "interested person" of the Fund.
Upon attainment of age 80, Directors are required to change to
emeritus status. Directors Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they
are paid 50% of the annual retainer fee and meeting fees
otherwise applicable to the Fund's directors, together with
reasonable out-of-pocket expenses for each meeting attended.
During the Fund's last fiscal year, aggregate compensation paid
by the Fund to Directors achieving emeritus status totaled
$2,300.
Investment Adviser And Administrator--MMC
MMC serves as investment adviser to the Fund pursuant to a
written agreement (the "Advisory Agreement"), which was approved
by the Fund's Board of Directors, including a majority of the
Directors who are not interested persons of the Fund or Smith
Barney (the "Independent Directors"). The services provided by
the Adviser under the Advisory Agreement are described in the
Prospectus under "Management of the Fund." The Adviser pays the
salary of any officer and employee who is employed by both it and
the Fund. The Adviser bears all expenses in connection with the
performance of its services. The Adviser is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"),
which in turn is a wholly owned subsidiary of Travelers Group Inc.
("Travelers").
As compensation for investment advisory services, the Fund pays
the Adviser a fee computed daily and paid monthly at an annual
rate of 0.30% of the value of its average daily net assets. For
the 1996, 1997 and 1998 fiscal years, the Fund incurred
$1,977,596, $2,240,458 and $2,479,000 respectively, in investment
advisory fees.
MMC also serves as administrator to the Fund pursuant to a
written agreement (the "Administration Agreement"), which was
approved by the Fund's Board of Directors, including a majority of
the Independent Directors. The services provided by MMC under the
Administration Agreement are described in the Prospectus under
"Management of the Fund." MMC pays the salary of any officer and
employee who is employed by both it and the Fund and bears all
expenses in connection with the performance of its services.
As compensation for administrative services rendered to the
Fund, the Adviser receives a fee computed daily and paid monthly
at the following annual percentage of average daily net assets:
0.20% up to $500 million; and 0.18% in excess of $500 million.
For the 1996, 1997 and 1998 fiscal years, the Fund paid MMC
$1,172,244, $1,444,276 and $1,587,128, respectively in
administration fees.
The Fund bears expenses incurred in its operations, including:
taxes, interest, brokerage fees and commissions, if any; fees of
Directors who are not officers, directors, shareholders or
employees of Smith Barney or MMC; Securities Exchange Commission
("SEC") fees and state Blue Sky qualification fees; charges of
custodian; transfer and dividend disbursing agent fees; certain
insurance premiums; outside auditing and legal expenses; costs of
maintaining corporate existence; costs of investor services
(including allocated telephone and personnel expenses); costs of
preparation and printing of prospectuses for regulatory purposes
and for distribution to existing shareholders; costs of
shareholders' reports and shareholder meetings; and meetings of
the officers or Board of Directors of the Fund.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Fund.
The Independent Directors of the Fund have selected Stroock &
Stroock & Lavan LLP as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, has been selected as the Fund's independent auditor to
examine and report on the Fund's financial statements and
highlights for the fiscal year ended February 28, 1999.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and
the policies it employs to achieve that objective. The following
discussion supplements the description of the Fund's investment
policies in the Prospectus. For purposes of this SAI, obligations
of non-California municipal issuers, the interest on which is
excluded from gross income for Federal income tax purposes,
together with obligations of the State of California, local
governments in the State of California and certain other municipal
issuers such as the Commonwealth of Puerto Rico ("California
Municipal Securities"), are collectively referred to as "Municipal
Bonds."
Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") and other
nationally recognized statistical ratings organizations ("NRSROs")
represent the opinions of those agencies as to the quality of the
Municipal Bonds and short-term investments which they rate. It
should be emphasized, however, that such ratings are relative and
subjective, are not absolute standards of quality and do not
evaluate the market risk of securities. These ratings will be used
by the Fund as initial criteria for the selection of portfolio
securities, but the Fund also will rely upon the independent
advice of the Adviser to evaluate potential investments. Among
the factors that will be considered are the long-term ability of
the issuer to pay principal and interest and general economic
trends. To the extent the Fund invests in lower-rated and
comparable unrated securities, the Fund's achievement of its
investment objective may be more dependent on the Adviser's credit
analysis of such securities than would be the case for a portfolio
consisting entirely of higher-rated securities. The Appendix
contains information concerning the ratings of Moody's, S&P and
other NRSROs and their significance.
Subsequent to its purchase by the Fund, an issue of Municipal
Bonds may cease to be rated or its rating may be reduced below the
rating given at the time the securities were acquired by the Fund.
Neither event will require the sale of such Municipal Bonds by the
Fund, but the Adviser will consider such event in its
determination of whether the Fund should continue to hold the
Municipal Bonds. In addition, to the extent that the ratings
change as a result of changes in such organizations or their
rating systems or due to a corporate restructuring of Moody's or
S&P or other NRSRO's, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with its
investment objective and policies.
The Fund generally may invest up to 20% of its total assets in
securities rated below A, MIG3 or Prime-1 (P-1) by Moody's or A,
SP-2 or A-3 by S&P or the equivalent rating from an NRSRO, or in
unrated securities of comparable quality. Such securities (a) will
likely have some quality and protective characteristics that, in
the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and
(b) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with
the terms of the obligation.
Zero coupon securities involve special considerations. Zero
coupon securities are debt obligations which do not entitle the
holder to any periodic payments of interest prior to maturity of a
specified cash payment date when the securities begin paying
current interest (the "cash payment date") and therefore are
issued and traded at a discount from their face amounts or par
values. The discount varies depending on the time remaining until
maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of
the issuer, decreases as the final maturity or cash payment date
of the security approaches. The market prices of zero coupon
securities generally are more volatile than the market prices of
other debt securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree
than do debt securities having similar maturities and credit
quality. The credit risk factors pertaining to low-rated
securities also apply to low-rated zero coupon bonds. Such zero
coupon bonds carry an additional risk in that, unlike bonds which
pay interest throughout the period to maturity, the Fund will
realize no cash until the cash payment date unless a portion of
such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investment.
Current Federal income tax laws may require the holder of a
zero coupon security to accrue income with respect to that
security prior to the receipt of cash payments. To maintain its
qualification as a registered investment company and avoid
liability for Federal income taxes, the Fund may be required to
distribute income accrued with respect to zero coupon securities
and may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate cash to satisfy
these distribution requirements.
Temporary Investments
When the Fund is maintaining a defensive position, the Fund may
invest in short-term investments ("Temporary Investments")
consisting of: (a) tax-exempt securities in the form of notes of
municipal issuers having, at the time of purchase, a rating within
the three highest grades of Moody's, S&P or the equivalent rating
from an NRSRO or, if not rated, having an issue of outstanding
Municipal Bonds rated within the three highest grades by Moody's,
S&P or the equivalent rating from an NRSRO; and (b) the following
taxable securities: obligations of the United States government,
its agencies or instrumentalities ("U.S. government securities"),
repurchase agreements, other debt securities rated within the
three highest grades by Moody's, S&P or the equivalent rating from
an NRSRO, commercial paper rated in the highest grade by either of
such rating services, and certificates of deposit of domestic
banks with assets of $1 billion or more. The Fund may invest in
Temporary Investments for defensive reasons in anticipation of a
market decline. At no time will more than 20% of the Fund's total
assets be invested in Temporary Investments unless the Fund has
adopted a defensive investment policy. The Fund intends, however,
to purchase tax-exempt Temporary Investments pending the
investment of the proceeds of the sale of portfolio securities or
shares of the Fund's common stock, or in order to have highly
liquid securities available to meet anticipated redemptions. For
the fiscal year ended February 28, 1998, the Fund did not invest
in taxable Temporary Investments.
Repurchase Agreements. The Fund may enter into repurchase
agreements with banks which are the issuers of instruments
acceptable for purchase by the Fund and with certain dealers on
the Federal Reserve Bank of New York's list of reporting dealers.
A repurchase agreement is a contract under which the buyer of a
security simultaneously commits to resell the security to the
seller at an agreed-upon price on an agreed-upon date. Under the
terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period of time
(usually not more than seven days) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during
the Fund's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during
the Fund's holding period. Under each repurchase agreement, the
selling institution will be required to maintain the value of the
securities subject to the repurchase agreement at not less than
their repurchase price. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during
the period in which the Fund seeks to assert its rights to them,
the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the
agreement. In evaluating these potential risks, the Adviser,
acting under the supervision of the Fund's Board of Directors,
reviews on an ongoing basis the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund
enters into repurchase agreements.
Investments in Financial Futures Contracts and Options on
Financial Futures Contracts
The Fund may invest in financial futures contracts and options
on financial futures contracts that are traded on a domestic
exchange or board of trade. Such investments may be made by the
Fund solely for the purpose of hedging against changes in the
value of its portfolio securities due to anticipated changes in
interest rates and market conditions, and not for purposes of
speculation. Further, such investments will be made only in
unusual circumstances, such as when the Adviser anticipates an
extreme change in interest rates or market conditions.
Municipal Bond Index Futures Contracts. A municipal bond index
futures contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to a
specific dollar amount multiplied by the difference between the
value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally
written. No physical delivery of the underlying municipal bonds in
the index is made. Municipal bond index futures contracts based on
an index of 40 tax-exempt, long-term municipal bonds with an
original issue size of at least $50 million and a rating of A- or
higher by S&P or A or higher by Moody's began trading in mid-1985.
The purpose of the acquisition or sale of a municipal bond
index futures contract by the Fund, as the holder of long-term
municipal securities, is to protect the Fund from fluctuations in
interest rates on tax-exempt securities without actually buying or
selling long-term municipal securities.
Unlike the purchase or sale of a Municipal Bond, no
consideration is paid or received by the Fund upon the purchase or
sale of a futures contract. Initially, the Fund will be required
to deposit with the broker an amount of cash or cash equivalents
equal to approximately 10% of the contract amount (this amount is
subject to change by the board of trade on which the contract is
traded and members of such board of trade may charge a higher
amount). This amount is known as initial margin and is in the
nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures
contract, assuming that all contractual obligations have been
satisfied. Subsequent payments, known as variation margin, to and
from the broker, will be made on a daily basis as the price of the
index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as
marking-to-market. At any time prior to the expiration of the
contract, the Fund may elect to close the position by taking an
opposite position, which will operate to terminate the Fund's
existing position in the futures contract.
There are several risks in connection with the use of futures
contracts as a hedging device. Successful use of futures contracts
by the Fund is subject to the Adviser's ability to predict
correctly movements in the direction of interest rates. Such
predictions involve skills and techniques which may be different
from those involved in the management of a long-term municipal
bond portfolio. In addition, there can be no assurance that there
will be a correlation between movements in the price of the
municipal bond index and movements in the price of the Municipal
Bonds which are the subject of the hedge. The degree of
imperfection of correlation depends upon various circumstances,
such as variations in speculative market demand for futures
contracts and municipal securities, technical influences on
futures trading, and differences between the municipal securities
being hedged and the municipal securities underlying the futures
contracts, in such respects as interest rate levels, maturities
and creditworthiness of issuers. A decision of whether, when and
how to hedge involves the exercise of skill and judgment and even
a well-conceived hedge may be unsuccessful to some degree because
of market behavior or unexpected trends in interest rates.
Although the Fund intends to purchase or sell futures contracts
only if there is an active market for such contracts, there is no
assurance that a liquid market will exist for the contracts at any
particular time. Most domestic futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit
establishes the maximum amount the price of a futures contract may
vary either up or down from the previous day's settlement price at
the end of a trading session. Once the daily limit has been
reached in a particular contract, no trades may be made that day
at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and, therefore, does not
limit potential losses because the limit may prevent the
liquidation of unfavorable positions. It is possible that futures
contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses. In such event, it will
not be possible to close a futures position and, in the event of
adverse price movements, the Fund would be required to make daily
cash payments of variation margin. In such circumstances, an
increase in the value of the portion of the portfolio being
hedged, if any, may partially or completely offset losses on the
futures contract. As described above, however, there is no
guarantee that the price of Municipal Bonds will, in fact,
correlate with the price movements in the municipal bond index
futures contract and thus provide an offset to losses on a futures
contract.
If the Fund has hedged against the possibility of an increase
in interest rates adversely affecting the value of the Municipal
Bonds held in its portfolio and rates decrease instead, the Fund
will lose part or all of the benefit of the increased value of the
Municipal Bonds it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices
which reflect the decline in interest rates. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
When the Fund purchases municipal bond index futures contracts,
an amount of cash and U.S. government securities or other high
grade debt securities equal to the market value of the futures
contracts will be deposited in a segregated account with the
Fund's custodian (and/or such other persons as appropriate) to
collateralize the positions and thereby insure that the use of
such futures contracts is not leveraged. In addition, the ability
of the Fund to trade in municipal bond index futures contracts and
options on interest rate futures contracts may be materially
limited by the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), applicable to a regulated investment
company. See "Taxes."
Options on Financial Futures Contracts. The Fund may purchase
put and call options on futures contracts which are traded on a
domestic exchange or board of trade as a hedge against changes in
interest rates, and may enter into closing transactions with
respect to such options to terminate existing positions. The Fund
will sell put and call options on interest rate futures contracts
only as part of closing sale transactions to terminate its options
positions. There is no guarantee that such closing transactions
can be effected.
Options on futures contracts, as contrasted with the direct
investment in such contracts, gives the purchaser the right, in
return for the premium paid, to assume a position in futures
contracts at a specified exercise price at any time prior to the
expiration date of the options. Upon exercise of an option, the
delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures contract margin
account, which represents the amount by which the market price of
the futures contract exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on
the futures contract. The potential loss related to the purchase
of an option on interest rate futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the
value of the option is fixed at the point of sale, there are no
daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change
daily and that change would be reflected in the net asset value of
the Fund.
There are several risks relating to options on futures
contracts. The ability to establish and close out positions on
such options will be subject to the existence of a liquid market.
In addition, the Fund's purchase of put or call options will be
based upon predictions as to anticipated interest rate trends by
the Adviser, which could prove to be inaccurate. Even if the
Adviser's expectations are correct there may be an imperfect
correlation between the change in the value of the options and of
the Fund's portfolio securities.
Investment Restrictions
The Fund has adopted the following investment restrictions for
the protection of shareholders. Restrictions 1 through 6 below may
not be changed without the approval of the holders of a majority
of the outstanding shares of the Fund, defined as the lesser of
(a) 67% of the Fund's shares present at a meeting if the holders
of more than 50% of the outstanding shares are present in person
or by proxy or (b) more than 50% of the Fund's outstanding shares.
The remaining restrictions may be changed by the Fund's Board of
Directors at any time.
The Fund may not:
1. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as
permitted under the 1940 Act and the rules, regulations and
orders thereunder.
2. Invest more than 25% of its total assets in securities,
the issuers of which are in the same industry. For purposes of
this limitation, U.S. government securities and securities of
state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
3. Borrow money, except that (a) the Fund may borrow from
banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, and
(b) the Fund may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques.
To the extent that it engages in transactions described in (a)
and (b), the Fund will be limited so that no more than 33 1/3%
of the value of its total assets (including the amount
borrowed), valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued at the
time the borrowing is made, is derived from such transactions.
4. Make loans. This restriction does not apply to: (a)
the purchase of debt obligations in which the Fund may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the 1940 Act.
5. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Fund may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
6. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Fund from (a) investing in securities of issuers
engaged in the real estate business or the business of investing
in real estate (including interests in limited partnerships
owning or otherwise engaging in the real estate business or the
business of investing in real estate) and securities which are
secured by real estate or interests therein; (b) holding or
selling real estate received in connection with securities it
holds or held; (c) trading in futures contracts and options on
futures contracts (including options on currencies to the extent
consistent with the Funds' investment objective and policies); or
(d) investing in real estate investment trust securities.
7. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of
purchases and sales of portfolio securities) or sell any
securities short (except "against the box"). For purposes of
this restriction, the deposit or payment by the Fund of
underlying securities and other assets in escrow and collateral
agreements with respect to initial or maintenance margin in
connection with futures contracts and related options and options
on securities, indexes or similar items is not considered to be
the purchase of a security on margin.
8. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total assets in
the securities of issuers having a record, including
predecessors, of less than three years of continuous operation,
except U.S. government securities. For purposes of this
restriction, issuers include predecessors, sponsors,
controlling persons, general partners, guarantors and
originators of underlying assets.
11. Invest in companies for the purpose of exercising
control.
12. Engage in the purchase or sale of put, call, straddle or
spread options or in the writing of such options, except that
the Fund may purchase and sell options on interest rate futures
contracts.
Certain restrictions listed above permit the Fund to engage in
investment practices that the Fund does not currently pursue. The
Fund has no present intention of altering its current investment
practices as otherwise described in the Prospectus and this SAI
and any future change in those practices would require Board
approval and appropriate notice to shareholders. If a percentage
restriction is complied with at the time of an investment, a later
increase or decrease in the percentage of assets resulting from a
change in the values of portfolio securities or in the amount of
the Fund's assets will not constitute a violation of such
restriction. In order to permit the sale of the Fund's shares in
certain states, the Fund may make commitments more restrictive
than the restrictions described above. Should the Fund determine
that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment by
terminating sales of its shares in the state involved.
Portfolio Transactions
Newly issued securities normally are purchased directly from
the issuer or from an underwriter acting as principal. Other
purchases and sales usually are placed with those dealers from
which it appears the best price or execution will be obtained;
those dealers may be acting as either agents or principals. The
purchase price paid by the Fund to underwriters of newly issued
securities usually includes a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers
normally are executed at a price between the bid and asked prices.
The Fund paid no brokerage commissions for the 1996, 1997 and 1998
fiscal years.
Allocation of transactions, including their frequency, to
various dealers is determined by the Adviser in its best judgment
and in a manner deemed fair and reasonable to shareholders. The
primary considerations are availability of the desired security
and the prompt execution of orders in an effective manner at the
most favorable prices. Subject to these considerations, dealers
that provide supplemental investment research and statistical or
other services to the Adviser may receive orders for portfolio
transactions by the Fund. Information so received enables the
Adviser to supplement its own research and analysis with the views
and information of other securities firms. Such information may be
useful to the Adviser in serving both the Fund and other clients,
and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the
Adviser in carrying out its obligations to the Fund.
The Fund will not purchase Municipal Bonds during the existence
of any underwriting or selling group relating thereto of which
Smith Barney is a member, except to the extent permitted by the
SEC. Under certain circumstances, the Fund may be at a
disadvantage because of this limitation in comparison with other
investment companies which have a similar investment objective but
which are not subject to such limitation.
While investment decisions for the Fund are made independently
from those of the other accounts managed by the Adviser,
investments of the type the Fund may make also may be made by
those other accounts. When the Fund and one or more other accounts
managed by the Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by
the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained or disposed of by the
Fund.
Portfolio Turnover
The Fund's portfolio turnover rate (the lesser of purchases or
sales of portfolio securities during the year, excluding purchases
or sales of short-term securities, divided by the monthly average
value of portfolio securities) generally is not expected to exceed
100%, but the portfolio turnover rate will not be a limiting
factor whenever the Fund deems it desirable to sell or purchase
securities. Securities may be sold in anticipation of a rise in
interest rates (market decline) or purchased in anticipation of a
decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of
comparable quality may be purchased at approximately the same time
in order to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the
two securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or
the general movement of interest rates, such as changes in the
overall demand for or supply of various types of tax-exempt
securities. For the 1996, 1997 and 1998 fiscal years, the Fund's
portfolio turnover rate was 44%, 60% and 43%, respectively.
MUNICIPAL BONDS
General Information
Municipal Bonds generally are understood to include debt
obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities,
refunding of outstanding obligations, payment of general operating
expenses and extensions of loans to public institutions and
facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Bonds if the
interest paid thereon qualifies as excluded from gross income (but
not necessarily from alternative minimum taxable income) for
Federal income tax purposes in the opinion of bond counsel to the
issuer.
The yield on Municipal Bonds is dependent upon a variety of
factors, including general economic and monetary conditions,
general money market conditions, general conditions of the
Municipal Bond market, the financial condition of the issuer, the
size of a particular offering, the maturity of the obligation
offered and the rating of the issue.
Municipal Bonds also are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy
taxes. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of any one or
more issuers to pay, when due, the principal of and interest on
its or their Municipal Bonds may be materially affected.
When-Issued Securities
The Fund may purchase Municipal Bonds on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated
price and yield). The payment obligation and the interest rate
that will be received on the Municipal Bonds purchased on a when-
issued basis are each fixed at the time the buyer enters into the
commitment. Although the Fund will purchase Municipal Bonds on a
when-issued basis only with the intention of actually acquiring
the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of
investment strategy.
Municipal Bonds are subject to changes in value based upon the
public's perception of the creditworthiness of the issuers and
changes, real or anticipated, in the level of interest rates. In
general, Municipal Bonds tend to appreciate when interest rates
decline and depreciate when interest rates rise. Purchasing
Municipal Bonds on a when-issued basis, therefore, can involve the
risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the
transaction itself. To account for this risk, a separate account
of the Fund consisting of cash or liquid debt securities equal to
the amount of the when-issued commitments will be established at
the Fund's custodian bank. For the purpose of determining the
adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market
or fair value of such securities declines, additional cash or
securities will be placed in the account on a daily basis so the
value of the account will equal the amount of such commitments by
the Fund. Placing securities rather than cash in the segregated
account may have a leveraging effect on the Fund's net assets.
That is, to the extent the Fund remains substantially fully
invested in securities at the same time it has committed to
purchase securities on a when-issued basis, there will be greater
fluctuations in its net assets than if it had set aside cash to
satisfy its purchase commitments. Upon the settlement date of the
when-issued securities, the Fund will meet obligations from then-
available cash flow, sale of securities held in the segregated
account, sale of other securities or, although it normally would
not expect to do so, from the sale of the when-issued securities
themselves (which may have a value greater or less than the Fund's
payment obligations). Sales of securities to meet such obligations
may involve the realization of capital gains, which are not exempt
from Federal income taxes or California state personal income tax.
When the Fund engages in when-issued transactions, it relies on
the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Special Considerations Relating to California Municipal Securities
Risk Factors. Beginning in the 1990-91 fiscal year, the State
has faced the worst economic, fiscal and budget conditions since
the 1930s. Construction, manufacturing (especially aerospace),
and financial services, among others, were severely affected. Job
losses were the worst of any post-war recession and have been
estimated to exceed 800,000.
The recession has seriously affected State tax revenues. It
also caused increased expenditures for health and welfare
programs. The State has also faced a structural imbalance in its
budget with the largest programs supported by the General Fund--K-
12 schools and community colleges, health, welfare and
corrections-growing at rates higher than the growth rates for the
principal revenue sources of the General Fund. (The General Fund,
the State's main operating fund, consists of revenues which are
not required to be credited to any other fund.) The State
experienced recurring budget deficits. The State Controller
reported that expenditures exceeded revenues for four of the last
six fiscal years ending with 1992-93, and were essentially equal
in 1993-94. According to the Department of Finance, the State
suffered a continuing budget deficit of approximately $2.8 billion
in the Special Fund for Economic Uncertainties. (Special Funds
account for revenues obtained from specific revenue sources, and
which are legally restricted to expenditures for specific
purposes.) The 1993-94 Budget Act incorporated a Deficit
Reduction Plan to repay this deficit over two years. The original
budget for 1993-94 reflected revenues which exceeded expenditures
by approximately $2.8 billion. As a result of continuing
recession, the excess of revenues over expenditures for the 1993-
94 fiscal year was less than $300 million. The accumulated budget
deficit at June 30, 1994 was not able to be retired by June 30,
1995 as planned. When the economy failed to recover sufficiently
in 1993-94, a second two-year plan was implemented in 1994-95.
The accumulated budget deficits over the past several years,
together with expenditures for school funding which have not been
reflected in the budget, and the reduction of available internal
borrowable funds, have combined to significantly depleted the
State's cash resources to pay its ongoing expenses. In order to
meet its cash needs, the State has had to rely for several years
on a series of external borrowings, including borrowings past the
end of a fiscal year. At the end of its 1995-96 fiscal year,
however, the State did not borrow moneys into "1995-96 Budget" the
subsequent fiscal year. For a discussion of the 1995-96 State
Budget, 1996-97 State Budget, the 1997-98 State Budget and the
Proposed 1998-99 State Budget, see below.
Many California counties continue to be under severe fiscal
stress. Such stress has impacted smaller, rural counties and
larger urban counties such as Los Angeles, and Orange County,
which declared bankruptcy in 1994. Orange County has implemented
significant reductions in services and personnel, and continues to
face fiscal constraints in the aftermath of its bankruptcy.
However, California has experienced recent economic expansion,
with growth in employment and in early 1998 the state recorded its
lowest employment rate since 1990. There can be no assurance this
growth trend will continue.
1995-96 Budget. The state began the 1995-96 Fiscal Year with
strengthening revenues based on an improving economy and the
smallest nominal "budget gap" to be closed in many years.
The 1995-96 Budget Act, signed by the Governor on August 3,
1995, projected General Fund revenues and transfers of $44.1
billion, about $2.2 billion higher than projected revenues in
1994-95. The Budget Act projected Special Fund revenues of $12.7
billion, an increase from $12.1 billion projected in 1994-95.
The Department of Finance released updated projections for the
1995-96 fiscal year in May, 1996, estimating that revenues and
transfers to be $46.1 billion, approximately $2 billion over the
original fiscal year estimate. Expenditures also increased, to an
estimated $45.4 billion, as a result of the requirement to expend
revenues for schools under Proposition 98, and, among other
things, failure of the federal government to budget new aid for
illegal immigrant costs which had been counted on to allow
reductions in costs.
The principal features of the Budget Act were the following:
1. Proposition 98 funding for schools and community colleges
will increase by about $1 billion (General Fund) and $1.2 billion
total above revised 1994-95 levels. Because of higher than
projected revenues in 1994-95, an additional $543 million is
appropriated to the 1994-95 Proposition 98 entitlement. A
significant component of this amount is a block grant of about $54
per pupil for any one-time purpose. Per-pupil expenditures are
projected to increase by another $126 in 1995-96 to $4,435. A
full 2.7% cost of living allowance is funded for the first time in
several years. The budget compromise anticipated a settlement of
the CTA v. Gould litigation.
2. Cuts in health and welfare costs totaling about $900
million, some of which would require federal legislative approval.
3. A 3.5% increase in funding for the University of California
($90 million General Fund) and the California State University
system ($24 million General Fund), with no increases in student
fees.
4. The updated Budget assumes receipt of $494 million in new
federal aid for costs of illegal immigrants, in excess of federal
government commitments.
5. General Fund support for the Department of Corrections is
increased by about 8 percent over 1994-95, reflecting estimates of
increased prison population. This amount is less than was
proposed in the 1995 Governor's Budget.
1996-97 Budget. The 1996-97 Budget Act was signed by the
Governor on July 15, 1996, and projected General Fund revenues and
transfers of approximately $47.64 billion and General Fund
expenditures of approximately $47.25 billion. The Governor vetoed
about $82 million of appropriations (both General Fund and Special
Fund) and the State has implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue
Anticipation Notes that matured on or before June 30, 1997. The
1996-97 Budget Act appropriated a budget reserve in the Special
Fund for Economic Uncertainties of $305 million, as of June 30,
1997.
The Budget Act contained General Fund appropriations totaling
$47.251 billion, a 4.0 percent increase over the final estimated
1995-96 expenditures. Special Fund expenditures were budgeted at
$12.6 billion.
The following were the principal features of the 1996-97 Budget
Act:
1. Proposition 98 funding for schools and community college
districts increased by almost $1.6 billion (General Fund) and
$1.65 billion total above revised 1995-96 level periods. Almost
half of this money was budgeted to fund class-size reduction in
kindergarten and grades 1-3.
2. Proposed cuts in health and welfare totaling $660 million.
All of these cuts require federal law changes (including welfare
reform), federal waivers, or federal budget appropriations in
order to be achieved. The 1996-97 Budget Act assumes
approval/action by October, 1996, with the savings to be achieved
beginning in November, 1996. The 1996-97 Budget Act was based on
continuation of previously approved assistance levels for Aid to
Families with Dependent Children and other health and welfare
programs, which had been reduced in prior years, including
suspension of State authorized cost of living increases.
3. A 4.9 percent increase in funding for the University of
California ($130 million General Fund) and the California State
University system ($101 million General Fund), with no increases
in student fees, maintaining the second year of the Governor's
four-year "Compact" with the State's higher education units.
4. General Fund support for the Department of Corrections was
increase by about 7 percent over the prior year, reflecting
estimates of increase prison population.
5. With respect to aid to local governments, the principal new
programs included in the 1996-97 Budget Act are $100 million in
grants to cities and counties for law enforcement purposes, and
budgeted $50 million for competitive grants to local governments
for programs to combat juvenile crime.
The 1996-97 Budget Act did not contain any tax increases. As
noted, there was a reduction in corporate taxes. In addition, the
Legislature approved another one-year suspension of the Renters
Tax Credit, saving $520 million in expenditures.
1997-98 Budget. On January 9, 1997, the Governor announced his
proposed 1997-98 State budget detailing plans to cut welfare,
increase education spending and provide certain tax cuts to
businesses and banks. The total spending plan in the amount of
approximately $66.6 billion represents an increase of
approximately 4% from the 1996-97 State Budget, with an increase
in the State's General Fund to approximately $50.3 billion. The
Governor announced a proposal to restructure the State's welfare
system, placing strict time limits on the provision of assistance
and introducing penalties, and included a plan to increase
spending for elementary and secondary schools.
On August 11, 1997, the State Legislature approved a 1997-98
State Budget of approximately $68 billion, which included
approximately $32 billion for public schools, an increase of
approximately $4 billion over the prior year. The Budget also
included approximately $100 million for local law enforcement and
approximately $75 million in spending to subsidize hospitals that
care for large numbers of uninsured patients, as well as
approximately $40 million for legal immigrants and an increase of
approximately $223 million in welfare spending, including job
training. The education portion of the State Budget approved by
the Legislature for 1997-98 included approximately $850 million to
expand the class-size reduction program and full statutory funding
of the Revenue Limit COLA comprising a 2.65% COLA, consistent with
the May Revision. Revenue Limit Equalization is as funded in the
amount of approximately $261 million for the school district
revenue limit equalization for 1996-97.
The final State Budget was signed by the Governor on August 18,
1997 after using his line-item veto authority to veto, with
reservation until an acceptable school testing bill is passed, a
significant amount of education funding from the State Budget
approved by the Legislature. Vetoes, which would be restored if a
testing bill acceptable to the Governor is passed, include
approximately $955,000 in Department of Education spending, and
approximately $900 million in local assistance. Vetoes not
relating to the testing issue, but which need legislation in order
to restore the vetoed funds, included more than $20 million in
Department of Education spending. The final State Budget also
provided approximately $377 million for child care programs
administered by the Department of Education and the Department of
Social Services, approximately $160 million for welfare-to-work
programs, approximately $25 million in adult education funding and
approximately $50 million to California community colleges,
approximately $100 million to cities and counties to enhance local
law enforcement, approximately $55 million in federal funds to
local government for the construction of detention facilities and
approximately $1.2 billion in deferred general fund contributions
to the Public Employees Retirement System. The Final State Budget
did not include the Governor's proposed 10% tax cut for banks and
corporations.
Proposed 1998-99 Budget. In 1997, California experienced
employment growth exceeding 3 percent-approximately 400,000 new
jobs-and income rose by more than 7 percent. The State's
unemployment rate fell during 1997 to a low of 5.8 percent in
November. In fiscal year, 1996-97, the State's General Fund
collections grew by over 6 percent to reach $49.2 billion, and
revenue for the 1997-98 and 1998-99 fiscal years is expected to
reach $52.9 billion and $55.4 billion, respectively. This
represents an annual growth of $3.7 billion (7.5 percent) for the
1997-98 fiscal year and $2.5 billion (4.7 percent) for 1998-99
fiscal year.
The 1998-99 Governor's Budget provides $50 million in General
Fund and $200 million in a proposed bond issue to capitalize the
infrastructure and Development Bank, which will provide capital to
local governments to help businesses locate and expand in
California, and $3 million for the small business loan guarantee
program. The Budget also includes an Early Childhood Development
Initiative, which is designed to improve the health and
development of children from birth to age three and provides
additional funds for anti-gang programs and for the apprehension
of sexual predators. The Budget proposes an approximately $7
billion investment plan to maintain and build the State's system
of schools, water supply, prisons, natural resources, and other
infrastructure.
In addition, the Budget includes approximately $40 billion to
be devoted to California's 999 school districts and 58 county
offices of education, resulting on estimated total per-pupil
expenditures from all sources of $6,620 in fiscal year 1997-98 and
$6,749 in 1998-99. Projected state revenues will contribute to a 7
percent increase in Proposition 98 General Fund support for K-12
education in 1998-99. This level of resources results in K-12
Proposition 98 per-pupil expenditures of $5,636 in 1998-99, up
from $5,114 in 1996-97 and $5,414 in 1997-98. In addition,
approximately $350 million has been allocated to lengthen the
school year to 180 days while maintaining sufficient funds for
staff development days. The State Budget includes a 2.22% COLA for
revenue limit, special education, and child development in an
amount of $657.4 million which includes school district and county
office of education apportionments ($470.6 million), summer school
($4.0 million), special education ($57.8 million), child
development ($14.6 million), class size reduction ($33.6 million),
and categorical program COLA and growth ($73.7 million);
enrollment growth funding of $564.5 million; class size reduction
funding in the amount of $547 billion for all pupils in grades K-3
at $818 per pupil; and approximately $2 billion in state bonds for
the 1998 election and $2.0 billion for each two years thereafter
in 2000, 2002, and 2004, and an additional $135 million for
deferred maintenance to be matched locally.
Future Budgets. It cannot be predicted what actions will be
taken in the future by the State Legislature and the Governor to
deal with changing State revenues and expenditures. The State
budget will be affected by national and state economic conditions
and other factors.
THE FOREGOING DISCUSSION IS BASED ON OFFICIAL STATEMENTS AND
OTHER INFORMATION PROVIDED BY THE STATE OF CALIFORNIA. THE STATE
INDICATED THAT ITS DISCUSSION OF THE BUDGETARY INFORMATION IS
BASED ON ESTIMATES AND PROJECTIONS OF REVENUES AND EXPENDITURES
FOR THE CURRENT FISCAL YEAR AND MUST NOT BE CONSTRUED AS
STATEMENTS OF FACT; THAT THE ESTIMATES AND PROJECTIONS ARE BASED
UPON VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS
FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE
NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL
BE ACHIEVED.
Voter Initiative. "Proposition 218" or the "Right to Vote on
Taxes Act" (the "Proposition") was approved by the California
electorate at the November, 1996 general election. Officially
titled "Voter Approval for Local Government Taxes, Limitation on
Fees, Assessments and Charges Initiative Constitutional Amendment,
" the Act was approved by a majority of the voters voting at the
election and adds Articles XIIIC and XIIID to the California
Constitution.
The Proposition, among other things, requires local governments
to follow certain procedures in imposing or increasing any fee or
charge as defined. "Fee" or "charge" is defined to mean "any levy
other than an ad valorem tax, a special tax or an assessment
imposed by an agency upon a parcel or upon a person as an incident
of property ownership, including user fees or charges for a
property related service."
The procedure required by the Proposition to impose or increase
any fee or charge include a public hearing upon the proposed fee
or charge and the opportunity to present written protests by the
owners of the parcels subject to the proposed fee or charge. If
written protests against the proposed fee or charge are presented
by a majority of owners of the identified parcels, the local
government shall not impose the fee or charge.
The Proposition further provides as follows:
"Except for fees or charges for sewer, water, and refuse
collection services, no property related fee or charge shall be
imposed or increased unless and until such fee or charge is
submitted and approved by a majority vote of the property owners
of the property subject to the fee or charge or, at the option of
the agency, by a two-thirds vote of the electorate residing in the
affected area."
Additionally, the Proposition provides, with respect to standby
charges, as follows:
"No fee or charge may be imposed for a service unless that
service is actually used by, or immediately available to , the
owner of the property in question. Fees or charges based on
potential or future use of a service are not permitted. Standby
charges, whether characterized as charges or assessments, shall be
classified as assessments and shall not be imposed without
compliance with Section 4 of this Article."
The Proposition provides that beginning July 1, 1997, all fees
or charges shall comply with the Proposition's requirements.
The Proposition is silent with respect to future increases of
pre-existing fees or charges which are pledged to payments of
indebtedness or obligations previously incurred by the local
government. Presumably, the Proposition cannot preempt
outstanding contractual obligations protected by the contract
impairment clause of the federal constitution. However, with
respect to any given situation or case, litigation may be the
method which will settle any question concerning the authority of
a local government to increase fees or charges outside of the
strictures of the Proposition in order to meet contractual
obligations.
Proposition 218 also contains a new provision subjecting
"matters of reducing or repealing any local tax, assessments and
charges" to the initiative power. This means that no city or
local agency revenue source is safe from reduction or repeal
pursuant to the initiative process.
Litigation concerning various elements of the Proposition may
ultimately ensue clarifying legislation may be enacted.
Future Initiatives. Articles XIIIA, XIIIB, XIIIC and XIIID
were each adopted as measures that qualified for the ballot
pursuant to the State's initiative process. From time to time,
other initiative measures could be adopted which could affect
revenues of the State or public agencies within the State.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIIIB of the State
Constitution (the "Appropriations Limit"), and is prohibited from
spending "appropriations subject to limitation" in excess of the
Appropriations Limit. Article XIIIB, originally adopted in 1979,
was modified substantially by Propositions 98 and 111 in 1988 and
1990, respectively. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes", which consist of tax
revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that
such proceeds exceed the reasonable cost of providing the
regulation, product or service. The Appropriations Limit is based
on the limit for the prior year, adjusted annually for certain
changes, and is tested over consecutive two-year periods. Any
excess of the aggregate proceeds of taxes received over such two-
year period above the combined Appropriation Limits for those two
years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs
of certain bonds, court or federally mandated costs, and, pursuant
to Proposition 111, qualified capital outlay projects and
appropriations or revenues derived from any increase in gasoline
taxes and motor vehicle weight fees above January 1, 1990 levels.
Some recent initiatives were structured to create new tax revenues
dedicated to specific uses and expressly exempted from the Article
XIIIB limits. The Appropriations Limit may also be exceeded in
cases of emergency arising from civil disturbance or natural
disaster declared by the Governor and approved by two-thirds of
the Legislature. If not so declared and approved, the
Appropriations Limit for the next three years must be reduced by
the amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8,
1988, also establishes a minimum level of state funding for school
and community college districts and requires that excess revenues
up to a certain limit be transferred to schools and community
college districts instead of returned to the taxpayers.
Determination of the minimum level of funding is based on several
tests set forth in Proposition 98. During fiscal year 1991-92
revenues were smaller than expected, thus reducing the payment
owed to schools in 1991-92 under alternate "test" provisions. In
response to the changing revenue situation, and to fully fund the
Proposition 98 guarantee in the 1991-92 and 1992-93 fiscal years
without exceeding it, the Legislature enacted legislation to
reduce 1991-92 appropriations. The amount budgeted to schools but
which exceeded the reduced appropriation was treated as a non-
Proposition 98 short-term loan in 1991-92. As part of the 1992-93
Budget, $1.083 billion of the amount budgeted to K-14 schools was
designated to "repay" the prior year loan, thereby reducing cash
outlays in 1992-93 by that amount. To maintain per-average daily
attendance ("ADA") funding, the 1992-93 Budget included loans of
$732 million to K-12 schools and $241 million to community
colleges, to be repaid from future Proposition 98 entitlements.
The 1993-94 Budget also provided new loans of $609 million to K-12
schools and $178 million to community colleges to maintain ADA
funding. These loans have been combined with the 1992-93 fiscal
year loans into one loan of $1.760 billion, to be repaid from
future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools.
A Sacramento County Superior Court in California Teachers'
Association, et al. v Gould, et al., ruled that the 1992-93 loans
to K-12 schools and community colleges violate Proposition 98. As
part of the negotiations leading to the 1995-96 Budget Act, an
oral agreement was reached to settle this case. The parties
reached a conditional final settlement of the case in April, 1996.
The settlement required adoption of legislation satisfactory to
the parties to implement its terms, which has occurred, and final
approval by the court, which was pending in early July, 1996.
The settlement provides, among other things, that both the
State and K-14 schools share in the repayment of prior years'
emergency loans to schools. Of the total $1.76 billion in loans,
the State will repay $935 million by forgiveness of the amount
owed, while schools will repay $825 million. The State share of
the repayment will be reflected as expenditures above the current
Proposition 98 base circulation. The schools' share of the
repayment will count as appropriations that count toward
satisfying the Propositions 98 guarantee, or from "below" the
current base. Repayments are to be spread over the eight-year
period beginning 1994-95 through 2002-03. Once the Director of
Finance certifies that a settlement has occurred, approximately
$377 million in appropriations from the 1995-96 fiscal year to
schools will be disbursed.
Because of the complexities of Article XIIIB, the ambiguities
and possible inconsistencies in its terms, the applicability of
its exceptions and exemptions and the impossibility of predicting
future appropriations, the Fund cannot predict the impact of this
or related legislation on the bonds in the California Trust
Portfolio. Other Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to
time. If any such initiatives are adopted, the State could be
pressured to provide additional financial assistance to local
governments or appropriate revenues as mandated by such
initiatives. Propositions such as Proposition 98 and others that
may be adopted in the future, may place increasing pressure on the
State's budget over future years, potentially reducing resources
available for other State programs, especially to the extent the
Article XIIIB spending limit would restrain the State's ability to
fund such other programs by raising taxes.
State Indebtedness. As of September 1, 1997, the State had
over $17.6 billion aggregate amount of its general obligation
bonds outstanding. General obligation bond authorizations in an
aggregate amount of approximately $8.26 billion remained unissued
as of September l, 1997. As of September 1, 1997, the State
Finance Committee had authorized the issuance of approximately
$3.6 billion of general obligation commercial paper notes, but as
of that date only $1.2 billion aggregate principal amount of which
was issued and outstanding. The State also builds and acquires
capital facilities through the use of lease purchase borrowing.
As of September 1, 1997, the State had approximately $6.1 billion
of outstanding General Fund-supported Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $20.86 billion aggregate principal
amount of revenue bonds and notes outstanding as of September 1,
1997. Revenue bonds represent both obligations payable from State
revenue-producing enterprises and projects, which are not payable
from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such
revenue bonds. Such enterprises and projects include
transportation projects, various public works and exposition
projects, education facilities (including the California State
University and University of California systems), housing health
facilities and pollution control facilities.
Litigation. The State is a party to numerous legal
proceedings. In addition, the State is involved in certain other
legal proceedings that, if decided against the State, might
require the State to make significant future expenditures or
impair future revenue sources. Examples of such cases include
challenges to certain vehicle license fees and challenges to the
State's use of Public Employee Retirement System funds to offset
future State and local pension contributions. Other cases which
could significantly impact revenue or expenditures involve
challenges of payments of wages under the Fair Labor Standards
Act, the method of determining gross insurance premiums involving
health insurance, property tax challenges, challenges of transfer
of moneys from State Treasury special fund accounts to the State's
General Fund pursuant to its Budget Acts for certain fiscal years.
Because of the prospective nature of these proceedings, it is not
presently possible to predict the outcome of such litigation or
estimate the potential impact on the ability of the State to pay
debt service on its obligation.
Ratings. During 1996, the ratings of California's general
obligation bonds was upgraded by the following agencies. Recently
Standard & Poor's Ratings Group upgraded its rating of such debt
to A+; the same rating has been assigned to such debt by Fitch
Investors Service. Moody's Investors Service has assigned such
debt an A1 rating. Any explanation of the significance of such
ratings may be obtained only from the rating agency furnishing
such ratings. There is no assurance that such ratings will
continue for any given period of time or that they will not be
revised downward or withdrawn entirely if, in the judgment of the
particular rating agency, circumstances so warrant.
The Fund believes the information summarized above describes
some of the more significant aspects relating to the California
Trust. The sources of such information are Preliminary Official
Statements and Official Statements relating to the State's general
obligation bonds and the State's revenue anticipation notes, or
obligations of other issuers located in the State of California,
or other publicly available documents. Although the Fund has not
independently verified this information, it has no reason to
believe that such information is not correct in all material
respects.
Additional Considerations. With respect to Municipal Securities
issued by the State of California and its political sub-divisions,
(i.e., California Municipal Obligations), the Fund cannot predict
what legislation, if any, may be proposed in the California State
Legislature as regards the California State personal income tax
status of interest on such obligations, or which proposals, if
any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of California
Municipal Obligations for investment by the Fund and the value of
the Fund's portfolio. In such an event, the Directors would
reevaluate the Fund's investment objective and policies and
consider changes in its structure or possible dissolution.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in
the Prospectus applies to purchases made by any "purchaser," which
is defined to include the following: (a) an individual; (b) an
individual's spouse and his or her children purchasing shares for
his or her own account; (c) a trustee or other fiduciary
purchasing shares for a single trust estate or single fiduciary
account; (d) a trustee or other professional fiduciary (including
a bank, or an investment adviser registered with the SEC under the
Investment Advisers Act of 1940, as amended) purchasing shares of
the Fund for one or more trust estates or fiduciary accounts.
Purchasers who wish to combine purchase orders to take advantage
of volume discounts should contact a Smith Barney Financial
Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule in the
Prospectus, apply to any purchase of Class A shares if the
aggregate investment in Class A shares of the Fund and in Class A
shares of other Smith Barney Mutual Funds that are offered with a
sales charge, including the purchase being made, of any purchaser
is $25,000 or more. The reduced sales charge is subject to
confirmation of the shareholder's holdings through a check of
appropriate records. The Fund reserves the right to terminate or
amend the combined right of accumulation at any time after written
notice to shareholders. For further information regarding the
right of accumulation, shareholders should contact a Smith Barney
Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis.
The public offering price for a Class A, Class L (effective June
12, 1998 the former Class C shares were renamed Class L shares)
and Class Y share of the Fund is equal to the net asset value per
share at the time of purchase, plus for Class A and Class L shares
an initial sales charge based on the aggregate amount of the
investment. The public offering price for a Class B share (and
Class A share purchases, including applicable rights of
accumulation, equaling or exceeding $500,000) is equal to the net
asset value per share at the time of purchase and no sales charge
is imposed at the time of purchase. A contingent deferred sales
charge ("CDSC"), however, is imposed on certain redemptions of
Class B and Class L shares, and Class A shares when purchased in
amounts equaling or exceeding $500,000. The method of computation
of the public offering price is shown in the Fund's financial
statements, incorporated by reference in their entirety into this
SAI.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the New York Stock
Exchange, Inc. ("NYSE") is closed (other than for customary
weekend and holiday closings), (b) when trading in the markets the
Fund normally utilizes is restricted, or an emergency exists, as
determined by the SEC, so that disposal of the Fund's investments
or determination of net asset value is not reasonably practicable
or (c) for such other periods as the SEC by order may permit for
protection of the Fund's shareholders.
Distributions in Kind
If the Board of Directors of the Fund determines that it would
be detrimental to the best interests of the remaining shareholders
to make a redemption payment wholly in cash, the Fund may pay, in
accordance with SEC rules, any portion of a redemption in excess
of the lesser of $250,000 or 1.00% of the Fund's net assets by a
distribution in kind of portfolio securities in lieu of cash.
Securities issued as a distribution in kind may incur brokerage
commissions when shareholders subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal Plan") is
available to shareholders who own shares with a value of at least
$10,000 and who wish to receive specific amounts of cash monthly
or quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as may be
necessary to cover the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences.
(With respect to Withdrawal Plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of the shareholder's
shares that are subject to a CDSC). To the extent withdrawals
exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a reduction in
the value of the shareholder's investment, and continued
withdrawal payments may reduce the shareholder's investment and
ultimately exhaust it. Withdrawal payments should not be
considered as income from investment in the Fund. Furthermore, as
it generally would not be advantageous to a shareholder to make
additional investments in the Fund at the same time he or she is
participating in the Withdrawal Plan, purchases by such
shareholder in amounts of less than $5,000 ordinarily will not be
permitted. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value in
additional shares of the Fund.
Shareholders who wish to participate in the Withdrawal Plan and
who hold their shares in certificate form must deposit their share
certificates with the Transfer Agent as agent for Withdrawal Plan
members. For additional information, shareholders should contact
a Smith Barney Financial Consultant or their Financial Consultant,
the Introducing Broker or dealer in the selling group. A
shareholder who purchases shares directly through the Transfer
Agent may continue to do so and applications for participation in
the Withdrawal Plan must be received by the Transfer Agent no
later than the eighth day of the month to be eligible for
participation beginning with that month's withdrawal.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts
basis pursuant to a written agreement (the "Distribution
Agreement"), which was approved by the Fund's Board of Directors.
For the 1996, 1997 and 1998 fiscal years, Smith Barney received
$704,000, $677,000 and $1,357,000, respectively, in sales charges
for the sale of the Fund's Class A shares, and did not reallow any
portion thereof to dealers. For the 1998 fiscal year, Smith
Barney received $38,000 of CDSC on redemption of the Fund's Class
A shares. For the 1996, 1997 and 1998 fiscal years, the Fund's
distributor received $350,000, $241,000 and $263,000,
respectively, representing CDSC on redemption of the Fund's Class
B shares. For the 1996, 1997 and 1998 fiscal years, the Fund's
distributor received $1,000, $5,000 and $5,000, respectively,
representing CDSC on redemption of the Fund's Class L shares.
When payment is made by the investor before the settlement
date, unless otherwise noted by the investor, the funds will be
held as a free credit balance in the investor's brokerage account,
and Smith Barney may benefit from the temporary use of the funds.
The investor may designate another use for the funds prior to the
settlement date, such as an investment in a money market fund
(other than the Smith Barney Exchange Reserve Fund) of the Smith
Barney Mutual Funds. If the investor instructs Smith Barney to
invest in a Smith Barney money market fund, the amount of the
investment will be included as part of the average daily net
assets of both the Fund and the money market fund, and affiliates
of Smith Barney that serve the funds in an investment advisory or
administrative capacity will benefit from the fact they are
receiving fees from both such investment companies for managing
these assets, computed on the basis of their average daily net
assets. The Fund's Board of Directors has been advised of the
benefits to Smith Barney resulting from these settlement
procedures and will take such benefits into consideration when
reviewing the Advisory, Administration and Distribution Agreements
for continuance.
For the calendar year ended December 31, 1997, Smith Barney
incurred distribution expense totaling approximately $3,792,927
consisting of approximately $229,676 for Mutual Fund Marketing,
$15,369 for printing of prospectuses, $1,275,677 for support
services, $2,199,620 to Smith Barney Financial Consultants, and
$72,585 in accruals for interest on the excess of Smith Barney
expenses incurred in the distribution of the Fund's shares over
the sum of the distribution fees and CDSC received by Smith Barney
from the Fund.
Distribution Arrangements
To compensate Smith Barney for the services it provides and for
the expense it bears under the Distribution Agreement, the Fund
has adopted a services and distribution plan (the "Plan") pursuant
to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays
Smith Barney a service fee, accrued daily and paid monthly,
calculated at the annual rate of 0.15% of the value of the Fund's
average daily net assets attributable to the Class A, Class B and
Class L shares. In addition, the Fund pays Smith Barney a
distribution fee with respect to the Class B and Class L shares
primarily intended to compensate Smith Barney for its initial
expense of paying its Financial Consultants a commission upon
sales of those shares. The Class B distribution fee is calculated
at the annual rate of 0.50% of the value of the Fund's average net
assets attributable to the shares of the Class. The Class L
distribution fee is calculated at the annual rate of 0.55% of the
value of the Fund's average net assets attributable to the shares
of the Class.
The following service and distribution fees were incurred
during the fiscal years ended as indicated:
Distribution
Plan Fees
2/28/98 2/28/97 2/29/96
Class A $915,346 $857,927 $676,363
Class B 1,244,383 1,046,863 932,554
Class L 166,306 93,053 27,540
Under its terms, the Plan continues from year to year, provided
such continuance is approved annually by vote of the Fund's Board
of Directors, including a majority of the Independent Directors
who have no direct or indirect financial interest in the operation
of the Plan or in the Distribution Agreement. The Plan may not be
amended to increase the amount of the service and distribution
fees without shareholder approval, and all amendments of the Plan
also must be approved by the Directors and Independent Directors
in the manner described above. The Plan may be terminated with
respect to a Class at any time, without penalty, by vote of a
majority of the Independent Directors or by vote of a majority of
the outstanding voting securities of the Class (as defined in the
1940 Act). Pursuant to the Plan, Smith Barney will provide the
Board of Directors periodic reports of the amounts expended under
the Plan and the purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each
day, Monday through Friday, except days on which the NYSE is
closed. The NYSE currently is scheduled to be closed on New Year's
Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when
one of these holidays falls on a Saturday or Sunday, respectively.
Because of the differences in distribution fees and Class-specific
expenses, the per share net asset value of each Class may differ.
The following is a description of the procedures used by the Fund
in valuing its assets.
The valuation of the Fund's assets is made by the Adviser after
consultation with an independent pricing service (the "Service")
approved by the Fund's Board of Directors. When, in the judgment
of the Service, quoted bid prices for investments are readily
available and representative of the bid side of the market, these
investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the
Service, there is no readily obtainable market quotation (which
may constitute a majority of the portfolio securities) are carried
at fair value as determined by the Service. For the most part,
such investments are liquid and may be readily sold. The Service
may employ electronic data processing techniques and/or a matrix
system to determine valuations. The procedures of the Service are
reviewed periodically by the officers of the Fund under the
general supervision and responsibility of the Board of Directors,
which may replace any such Service at any time if it determines it
to be in the best interest of the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of certain Smith Barney
Mutual Funds may exchange all or part of their shares for shares
of the same class of other Smith Barney Mutual Funds, to the
extent such shares are offered for sale in the shareholder's state
of residence, on the basis of relative net asset value per share
at the time of exchange as follows:
A. Class A 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 of the Smith Barney Mutual
Fund Complex may do so without imposition of any charge.
B. Class B shares of any fund may be exchanged without a
sales charge. Class B shares of the Fund exchanged for Class B
shares of another fund will be subject to the higher applicable
CDSC of the two funds. 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.
C. Upon 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.
Dealers other than Smith Barney must notify the Transfer Agent
of the investor's prior ownership of Class A shares of Smith
Barney High Income Fund and the account number in order to
accomplish an exchange of shares of the Smith Barney High Income
Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares
of the same Class in a fund with different investment objectives
when they believe that a shift between funds is an appropriate
investment decision. This privilege is available to shareholders
residing in any state in which the fund shares being acquired may
legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund
into which an exchange is being considered. Prospectuses may be
obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are redeemed
at the then-current net asset value and, subject to any applicable
CDSC, the proceeds immediately invested, at a price as described
above, in shares of the fund being acquired. Smith Barney reserves
the right to reject any exchange request. The exchange privilege
may be modified or terminated at any time after written notice to
shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return of
a Class in advertisements or in reports and other communications
to shareholders. The Fund may include comparative performance
information in advertising or marketing the Fund's shares. Such
performance information may be included in the following financial
publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. To the
extent any advertisement or sales literature of the Fund describes
the expenses or performance of any Class, it will also disclose
such information for the other Classes.
Average Annual Total Return
"Average annual total return" figures are computed according to
a formula prescribed by the SEC. The formula can be expressed as
follows:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning
of a 1-, 5- or 10-year period at the end
of the 1-, 5- or 10-year period (or
fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's average annual total return was as follows for the
periods indicated:
6.97% for the one-year period beginning on March 1, 1997
through February 28, 1998
6.75% per annum during the five-year period beginning on March
1, 1993 through February 28, 1998
8.01% per annum during the ten-year period beginning on March
1, 1988 through February 28, 1998
The average annual total return figures assume that the maximum
4.00% sales charge has been deducted from the investment at the
time of purchase. If the maximum sales charge had not been
deducted, Class A's average annual total return for those same
periods would have been 11.44%, 7.63% and 8.45%, respectively.
Class B's average annual total return was as follows for the
periods indicated:
6.38% for the one-year period beginning on March 1, 1997
through February 28, 1998
6.91% per annum during the five-year period beginning March 1,
1993 through February 28, 1998
8.44% for the period from inception (November 6, 1992) through
February 28, 1998
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum CDSC had not been deducted, Class
B's average annual total return for those same periods would have
been 10.88%, 7.07% and 8.44%, respectively.
Class L's average annual total return was as follows for the
periods indicated:
9.83% for the one-year period beginning on March 1, 1997
through February 28, 1998
12.21% for the period from inception (November 14, 1994)
through February 28, 1998
The average annual total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum CDSC had not been deducted, Class
L's average annual total return for those same periods would have
been 10.83% and 12.21%, respectively.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative
change in the value of an investment in the Class for the
specified period and are computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning
of a 1-, 5- or 10-year period at the end
of the 1-, 5- or 10-year period (or
fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
Class A's aggregate total return was as follows for the periods
indicated:
6.97% for the one-year period beginning on March 1, 1997
through February 28, 1998
38.64% for the five-year period beginning on March 1, 1993
through February 28, 1998
116.06% for the ten-year period beginning on March 1, 1988
through February 28, 1998
These aggregate total return figures assume the maximum 4.00%
sales charge has been deducted from the investment at the time of
purchase. If the maximum sales charge had not been deducted, Class
A's aggregate total return for those same periods would have been
11.44%, 44.45% and 125.12%, respectively.
Class B's aggregate total return was as follows for the periods
indicated:
6.38% for the one-year period beginning on March 1, 1997
through February 28, 1998
39.70% for the five-year period beginning on March 1, 1993
through February 28, 1998
53.74% for the period from inception (November 6, 1992) through
February 28, 1998
These aggregate total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum applicable CDSC had not been
deducted, Class B's aggregate total return for those same periods
would have been 10.88%, 40.70% and 53.74%, respectively.
Class L's aggregate total return was as follows for the periods
indicated:
9.83% for the one-year period beginning on February 29, 1997
through February 28, 1998
46.14% for the period from inception (November 14, 1994)
through February 28, 1998
These aggregate total return figures assume that the maximum
applicable CDSC has been deducted from the investment at the time
of redemption. If the maximum CDSC had not been deducted, Class
L's aggregate total return for those same periods would have been
10.83% and 46.14%, respectively.
Performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio and operating
expenses and the expenses exclusively attributable to the Class.
Consequently, any given performance quotation should not be
considered representative of the Class' performance for any
specified period in the future. Because the performance will vary,
it may not provide a basis for comparing an investment in the
Class with certain bank deposits or other investments that pay a
fixed yield for a stated period of time. Investors comparing a
Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective
investment companies' portfolio securities.
It is important to note that the total return figures set forth
above are based on historical earnings and are not intended to
indicate future performance. Each Class' net investment income
changes in response to fluctuation in interest rates and the
expenses of the Fund.
TAXES
The following is a summary of selected Federal income tax
considerations that may affect the Fund and its shareholders. This
summary is not intended as a substitute for individual tax advice
and investors are urged to consult their own tax advisors as to
the tax consequences of an investment in the Fund.
As described above and in the Prospectus, the Fund is designed
to provide shareholders with current income which is excluded from
gross income for Federal income tax purposes and exempt from
California state personal income taxes. The Fund is not intended
to constitute a balanced investment program and is not designed
for investors seeking capital gains or maximum tax-exempt income
irrespective of fluctuations in principal. Investment in the Fund
would not be suitable for tax-exempt institutions, qualified
retirement plans, H.R. 10 plans and individual retirement accounts
because such investors would not gain any additional tax benefit
from the receipt of tax-exempt income.
The Fund has qualified and intends to continue to qualify each
year as a "regulated investment company" under the Code. Provided
that the Fund (a) qualifies as a regulated investment company and
(b) distributes at least 90% of its taxable net investment income
and net realized short-term capital gains and 90% of its tax-
exempt interest income (reduced by certain expenses), the Fund
will not be liable for Federal and California state income or
franchise taxes to the extent its taxable net investment income
and its net realized short-and long-term capital gains, if any,
are distributed to its shareholders.
Because the Fund will distribute exempt-interest dividends,
interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for Federal and California
state income tax purposes. If a shareholder receives exempt-
interest dividends with respect to any share and if such share is
held by the shareholder for six months or less, then for Federal
and California state income tax purposes, any loss on the sale or
exchange of such share, to the extent of such exempt-interest
dividend, may be disallowed. In addition, the Code may require a
shareholder, if he or she receives exempt-interest dividends, to
treat as taxable income a portion of certain otherwise non-taxable
social security and railroad retirement benefit payments.
Furthermore, that portion of any exempt-interest dividends paid by
the Fund which represents income derived from private activity
bonds held by the Fund may not retain its Federal tax-exempt
status in the hands of a shareholder who is a "substantial user"
of a facility financed by such bonds or a "related person"
thereof. Similar rules are applicable for California state
personal income tax purposes. Moreover (a) some or all of the
Fund's dividends and distributions may be a specific tax
preference item, or a component of an adjustment item, for
purposes of the Federal individual and corporate alternative
minimum taxes and (b) the receipt of the Fund's dividends and
distributions may affect a corporate shareholder's Federal
"environmental" tax liability if such tax is reinstated as
proposed by President Clinton. In addition, the receipt of Fund
dividends and distributions may affect a foreign corporate
shareholder's Federal "branch profits" tax liability and the
Federal and California state "excess net passive income" tax
liability of a shareholder of a Subchapter S corporation.
Shareholders should consult their own tax advisors as to whether
they are (a) substantial users with respect to a facility or
related to such users within the meaning of the Code and (b)
subject to a Federal alternative minimum tax, the Federal
environmental tax, the Federal branch profits tax or the Federal
and California state excess net passive income tax.
As described above and in the Fund's Prospectus, the Fund may
invest in exchange-traded municipal bond index futures contracts
and options on interest rates futures contracts. As a general
rule, these investment activities will increase or decrease the
amount of long-and short-term capital gains or losses realized by
the Fund and, accordingly, will affect the amount of capital gains
distributed to the Fund's shareholders. For Federal and California
state income tax purposes, gain or loss on the futures contracts
and options (collectively referred to herein as "section 1256
contracts") is taxed pursuant to a special "mark-to-market
system." Under the mark-to-market system, these instruments are
treated as if sold at the Fund's fiscal year end for their fair
market value. As a result, the Fund will be recognizing gains or
losses before they are actually realized. As a general rule, gain
or loss on section 1256 contracts is treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss, and,
accordingly, the mark-to-market system generally will affect the
amount of capital gains or losses taxable to the Fund and the
amount of distributions taxable to a shareholder. Moreover, if the
Fund invests in both section 1256 contracts and offsetting
positions in such contracts which together constitute a straddle,
then the Fund may be required to defer certain realized losses.
The Fund expects that its activities with respect to section 1256
contracts and offsetting positions in such contracts will not
cause it to be treated as recognizing a materially greater amount
of capital gains than actually realized and will permit it to use
substantially all of the losses of the Fund for the fiscal years
in which such losses actually occur.
Long term capital gains, if any, realized by the Fund will be
distributed annually as described in the Prospectus. Such
distributions ("capital gain dividends") will be taxable to
shareholders as long-term capital gains, regardless of how long
they have held Fund shares, and will be designated as capital gain
dividends in a written notice mailed to shareholders after the
close of the Fund's taxable year. If a shareholder receives a
capital gain dividend with respect to any share and if the share
has been held by the shareholder for six months or less, then any
loss (to the extent not disallowed pursuant to the other six-month
rule described above relating to exempt-interest dividends) on the
sale or exchange of such share will be treated as a long-term
capital loss to the extent of the capital gain dividend.
If a shareholder incurs a sales charge when acquiring shares of
the Fund, disposes of those shares within 90 days and then
acquires shares in a mutual fund for which the otherwise
applicable sales charge is reduced by reason of a reinvestment
right (i.e., exchange privilege), the original sales charge will
not be taken into account when computing gain or loss on the
original shares to the extent the subsequent sales charge is
reduced. The portion of the original sales charge that does not
increase the shareholder's tax basis in the original shares will
be treated as incurred with respect to the second acquisition and,
as a general rule, will increase the shareholder's tax basis in
the newly acquired shares. Furthermore, the same rule also applies
to a disposition of the newly acquired shares made within 90 days
of the second acquisition. This provision prevents a shareholder
from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Each shareholder will receive after the close of the calendar
year an annual statement as to the Federal income tax and
California state personal income tax status of his or her
dividends and distributions from the Fund for the prior calendar
year. Dividends attributable to California Municipal Securities
and any other obligations which, when held by an individual, the
interest therefrom would be exempt from taxation by California,
will be exempt from California state personal income taxation
("California exempt-interest dividends"). Any dividends
attributable to interest on municipal obligations that are not
California Municipal Securities generally will be taxable as
ordinary dividends for California state personal income tax
purposes even if such dividends are excluded from gross income for
Federal income tax purposes. These statements also will designate
the amount of exempt-interest dividends that is a specific
preference item for purposes of the Federal individual and
corporate alternative minimum taxes. Each shareholder also will
receive, if appropriate, written notice after the close of the
Fund's taxable year as to the Federal income tax status of his or
her dividends and distributions. Shareholders should consult
their tax advisors as to any other state and local taxes that may
apply to these dividends and distributions. The dollar amount of
dividends excluded or exempt from Federal income taxation or
California state personal income taxation and the dollar amount
subject to Federal income taxation or California state personal
income taxation, if any, will vary for each shareholder depending
upon the size and duration of each shareholder's investment in the
Fund.
Investors considering buying shares of the Fund just prior to a
record date for a capital gain distribution should be aware that,
regardless of whether the price of the Fund shares to be purchased
reflects the amount of the forthcoming distribution payment, any
such payment will be a taxable distribution payment.
If a shareholder fails to furnish the Fund with a correct
taxpayer identification number, fails to fully report dividend or
interest income or fails to certify to the Fund that he or she has
provided a correct taxpayer identification number and that he or
she is not subject to "backup withholding," then the shareholder
may be subject to a 31% backup withholding tax with respect to (a)
any taxable dividends and distributions and (b) the proceeds of
any redemption of Fund shares. An individual's taxpayer
identification number is his or her social security number. The
backup withholding tax is not an additional tax and may be
credited against a shareholder's regular Federal income tax
liability.
The foregoing is only a summary of certain tax considerations
generally affecting the Fund and its shareholders, and is not
intended as a substitute for careful tax planning. Further, it
should be noted that, for California state tax purposes, the
portion of any Fund dividends constituting California exempt-
interest dividends is exempt from income for California state
personal income tax purposes only. Dividends (including California
exempt-interest dividends) paid to shareholders subject to
California state franchise tax or California state corporate
income tax may therefore be taxed as ordinary dividends to such
shareholders, notwithstanding that all or a portion of such
dividends is exempt from California state personal income tax.
Potential shareholders in the Fund, including, in particular,
corporate shareholders which may be subject to either California
franchise tax or California corporate income tax, should consult
their tax advisors with respect to (a) the application of such
corporate and franchise taxes to the receipt of Fund dividends and
as to their own California state tax situation in general, (b) the
application of other state and local taxes to the receipt of Fund
dividends and distributions and (c) their own specific tax
situations.
ADDITIONAL INFORMATION
The Fund was incorporated on February 17, 1984 under the name
Shearson California Municipals Inc. On December 15, 1988, November
19, 1992, July 30, 1993 and October 14, 1994, the Fund changed its
name to SLH California Municipals Fund Inc., Shearson Lehman
Brothers California Municipals Fund Inc., Smith Barney Shearson
California Municipals Fund Inc. and Smith Barney California
Municipals Fund Inc., respectively.
PNC, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, serves as the custodian of the Fund. Under the
custody agreement with the Fund, PNC holds the Fund's portfolio
securities and keeps all necessary accounts and records. For its
services, PNC receives a monthly fee based upon the month-end
market value of securities held in custody and also receives
certain securities transaction charges. The assets of the Fund are
held under bank custodianship in compliance with the 1940 Act.
First Data, located at Exchange Place, Boston, Massachusetts
02109, serves as the Transfer Agent of the Fund. Under the
transfer agency agreement, the Transfer Agent maintains the
shareholder account records for the Fund, handles certain
communications between shareholders and the Fund and distributes
dividends and distributions payable by the Fund. For these
services, the Transfer Agent receives a monthly fee computed on
the basis of the number of shareholder accounts it maintains for
the Fund during the month, and is reimbursed for certain out-of-
pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended February 28,
1998 is incorporated herein by reference in its entirety.
APPENDIX A
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political
subdivisions. Ratings are assigned to general obligation and revenue bonds.
General obligation bonds are usually secured by all resources available to
the municipality and the factors outlined in the rating definitions below are
weighed in determining the rating. Because revenue bonds in general are
payable from specifically pledged revenues, the essential element in the
security for a revenue bond is the quantity and quality of the pledged
revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality
of general obligation bond credit is usually appropriate in the rating
analysis of a revenue bond, other factors are important, including
particularly the competitive position of the municipal enterprise under review
and the basic security covenants. Although a rating reflects S&P's judgment as
to the issuer's capacity for the timely payment of debt service, in certain
instances it may also reflect a mechanism or procedure for an assured and
prompt cure of a default, should one occur, i.e., an insurance program,
Federal or state guarantee or the automatic withholding and use of state aid
to pay the defaulted debt service.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and
repay principal.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal, and in the majority of instances they differ from AAA issues only
in small degrees.
A - Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher-rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in the higher-rated
categories.
BB - An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet
its financial commitment on the obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D - An obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus(+) or minus(-) - The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
P - The letter P following a rating indicates the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the issuance of the bonds being rated and indicates that payment
of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to
such likelihood and risk.
L - The letter L indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
federally insured, and interest is adequately collateralized. In the case of
certificates of deposit, the letter L indicates that the deposit, combined
with other deposits being held in the same right and capacity, will be honored
for principal and pre-default interest up to federal insurance limits within
30 days after closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon maturity.
Conditional rating(s), indicated by "Con" are given to bonds for which
the continuance of the security rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows and/or the security rating is
conditional upon the issuance of insurance by the respective insurance
company.
NR - Not rated.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) by S&P to distinguish more clearly
the credit quality of notes as compared to bonds. Notes rated SP-1 have a
strong capacity to pay principal and interest. An issue determined to possess
a very strong capacity to pay debt service is given a plus(+) designation.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest,
with some vulnerability to adverse financial and economic changes over the
term of the notes. Notes rated SP-3 have speculative capacity to pay principal
and interest.
Commercial Paper Ratings
A-1 - This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3 - Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B - Issues rated B are regarded as having only speculative capacity for
timely payment.
C - This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D - Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless Standard & Poor's believes
such payments will be made during such grace period.
Moody's Ratings for Municipal Bonds
Aaa - Bonds which are Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge.'' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in
a high degree. These issues are often in default or have other marked short-
comings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Rating symbols may include numerical modifiers "1," "2", or "3". The
numerical modifier "1" indicates that the security ranks at the high end, "2"
in the mid-range, and "3" nearer the low end of the generic category. These
modifiers of rating symbols "Aa", "A" and "Baa" are to give investors a more
precise indication of relative debt quality in each of the historically
defined categories.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and for variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). This
distinction is in recognition of the differences between short-term credit
risk and long-term risk. Loans bearing the designation MIG 1 or VMIG 1 are of
the best quality, enjoying strong protection by established cash flows of
funds for their servicing, superior liquidity support or from established and
broad-based access to the market for refinancing or both. Loans bearing the
designation MIG 2 or VMIG 2 are of high quality, with ample margins of
protection although not as large as the preceding group. Loans bearing the
designation MIG 3 or VMIG 3 are of favorable quality, with all security
elements accounted for, but lacking the undeniable strength of the preceding
grades. Liquidity and cash flow may be narrow and market access for
refinancing is likely to be less well established.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: (a) evaluation of the management of the issuer; (b) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (c) evaluation
of the issuer's products in relation to competition and customer acceptance;
(d) liquidity; (e) amount and quality of long-term debt; (f) trend of earnings
over a period of ten years; (g) financial strength of a parent company and the
relationships which exist with the issuer; and (h) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
u:\legal\funds\camu\1998\secdocs\sai98.doc 38
u:\legal\funds\camu\1998\secdocs\sai98.doc A-5
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended February
28, 1998 and the Report of Independent Accountants dated April 15,
1998 are incorporated by reference to the Definitive 30b2-1 filed
on May 6, 1998 as Accession #0000091155-98-324.
Included in Part C:
Consent of Independent Auditors is filed herein.
(b) Exhibits
All references are to the Registrant's Registration Statement on
Form N-1A as filed with the Securities and Exchange Commission on
February 21, 1984. File Nos. 2-89548 and 811-3970 (the
"Registration Statement").
(1)(a) Registrant's Articles of Incorporation dated February 16,
1984 are incorporated by reference to the Registration Statement.
(b) Articles of Amendment dated August 26, 1987, December
14, 1988, November 4, 1992 and July 30, 1993, respectively, to
Articles of Incorporation are incorporated by reference to Post-
Effective Amendment No. 18 to the Registration Statement ("Post-
Effective Amendment No. 18").
(c) Articles of Amendment dated October 14, 1994 are
incorporated by reference to Post-Effective Amendment No. 21 to the
Registration Statement ("Post-Effective Amendment No. 21").
(d) Form of Articles of Amendment to the Articles of
Incorporation are incorporated by reference to Post-Effective No.
21.
(e) Articles Supplementary dated November 2, 1992, to
Articles of Incorporation are incorporated by reference to Post-
Effective Amendment No. 18.
(f) Form of Articles Supplementary to the Articles of
Incorporation are incorporated by reference to Post-Effective
Amendment No. 21.
(g) Amendment to Registrant's Articles of Incorporation
dated June 1, 1998 filed herein.
(2)(a) Registrant's By-Laws dated March 21, 1984 are
incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement ("Pre-Effective Amendment No. 1").
(b) Amendments to Registrant's By-Laws dated March 21, 1987
are incorporated by reference to Post-Effective Amendment No. 5 to
the Registration Statement ("Post-Effective Amendment No. 5").
(c) Amendment to Registrant's By-Laws dated July 20, 1994
is incorporated to Post-Effective Amendment No. 22 to the
Registration Statement ("Post-Effective Amendment No. 22").
(3) Not Applicable.
(4) Registrant's form of stock certificate is incorporated by
reference to Post-Effective Amendment No. 16 to the Registration
Statement filed on October 23, 1992 ("Post-Effective Amendment No.
16").
(5)(a) Investment Advisory Agreement between the Registrant and
Greenwich Street Advisors dated July 30, 1993 is incorporated by
reference to Post-Effective Amendment No. 18.
(b) Form of Transfer and Assumption of Investment Advisory
Agreement dated as of November 7, 1994 is incorporated by reference
to Post-Effective Amendment No. 21.
(c) Amendment to Investment Advisory Agreement dated
November 17, 1995 is incorporated by reference to Post-Effective
Amendment No. 23.
(6) Distribution Agreement between the Registrant and Smith
Barney Shearson Inc. dated July 30, 1993 is incorporated by
reference to Post-Effective Amendment No. 18.
(7) Not Applicable.
(8) Form of Custodian Agreement between the Registrant and PNC
Bank, National Association is incorporated by reference to Post-
Effective No. 22.
(9) (a) Transfer Agency Agreement between the Registrant and
The Shareholders Services Group, Inc. dated August 2, 1993 is
incorporated by reference to Post-Effective Amendment No. 18.
(b) Administration Agreement dated April 20, 1994 between
the Registrant and Smith, Barney Advisers, Inc. is incorporated by
reference to Post-Effective Amendment No. 21.
(10) Opinions of counsel as to the legality of securities are
incorporated by reference to Post-Effective Amendment No. 10 to the
Registration Statement filed on June 28, 1989 ("Post-Effective
Amendment No. 10") and Post-Effective Amendment No. 16.
(11)(a) Consent of Independent Accountants is filed herein.
(b) Consent of Morningstar Mutual Fund Values is
incorporated by reference to Post-Effective Amendment No. 16.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Amended Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant and Smith Barney Inc. is incorporated by
reference to Post-Effective Amendment No. 21.
(16) Performance data is incorporated by reference to Post-
Effective Amendment No. 10.
17. Financial Data Schedule is filed herein.
18. Form of Registrant's Rule 18f-3(d) Multiple Class Plan is
filed herein.
Item 25. Persons Controlled by or Under Common Control with
Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Title of Class Number of Record Holders
by Class as of June 5, 1998
Common Stock par Class A - 7,734
value $.001 per share Class B - 4,600
Class L* - 659
Class Y - 0
* Effective June 12, 1998 the former Class C shares were renamed
Class L shares.
Item 27. Indemnification
The response to this item is incorporated by reference to
Post-Effective Amendment No. 16.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Mutual Management Corp. (MMC)(formerly known
as Smith Barney Mutual Funds Management Inc.
MMC was incorporated in December 1968 under the laws of the State
of Delaware. MMC is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings") (formerly known as Smith Barney
Holdings Inc.) which in turn is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"). MMC is registered as an
investment adviser under the Investment Advisers Act of 1940 (the
"Advisers Act").
The list required by this Item 28 of officers and directors of MMC
together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated
by reference to Schedules A and D of FORM ADV filed by MMC pursuant
to the Advisers Act (SEC File No. 801-8314).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as a
distributor for Concert Investment Series; Consulting Group
Capital Markets Funds; Global Horizons Investment Series
(Cayman Islands); Greenwich Street California Municipal Fund
Inc.; Greenwich Street Municipal Fund Inc.; Greenwich
Street Series Fund; High Income Opportunity Fund Inc.;
The Italy Fund Inc.; Managed High Income Portfolio Inc.;
Managed Municipals Portfolio II Inc.; Managed Municipals
Portfolio Inc.; Municipal High Income Fund Inc.; Puerto
Rico Daily Liquidity Fund Inc.; Smith Barney Adjustable
Rate Government Income Fund; Smith Barney Aggressive
Growth Fund Inc.; Smith Barney Appreciation Fund Inc.;
Smith Barney Arizona Municipals Fund Inc.; Smith Barney
California Municipals Fund Inc.; Smith Barney Concert
Allocation Series Inc.; Smith Barney Equity Funds; Smith
Barney Fundamental Value Fund Inc.; Smith Barney Funds,
Inc.; Smith Barney Income Funds; Smith Barney Institutional
Cash Management Fund, Inc.; Smith Barney Intermediate
Municipal Fund, Inc.; Smith Barney Investment Funds Inc.;
Smith Barney Investment Trust; Smith Barney Managed
Governments Fund Inc.; Smith Barney Managed Municipals
Fund Inc.; Smith Barney Massachusetts Municipals Fund;
Smith Barney Money Funds, Inc.; Smith Barney Muni Funds;
Smith Barney Municipal Fund, Inc.; Smith Barney Municipal
Money Market Fund, Inc.; Smith Barney Natural Resources
Fund Inc.; Smith Barney New Jersey Municipals Fund Inc.;
Smith Barney Oregon Municipals Fund Inc.; Smith Barney Principal
Return Fund; Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust; Smith Barney
Variable Account Funds; Smith Barney World Funds,
Inc.; Smith Barney Worldwide Special Fund N.V.
(Netherlands Antilles); Travelers Series Fund Inc.; The
USA High Yield Fund N.V.; Worldwide Securities Limited
(Bermuda); Zenix Income Fund Inc. and various series of
unit investment trusts.
Smith Barney is a wholly owned subsidiary of Holdings. The
information required by this Item 29 with respect to each
director, officer and partner of Smith Barney is incorporated by
reference to Schedule A of FORM BD filed by Smith Barney pursuant
to the Securities Exchange Act of 1934 (SEC File No. 812-8510).
Item 30. Location of Accountants and Records
(1) Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(2) Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of
Registrant's latest report to shareholders, upon
request and without charge.
485(b) Certification
The Registrant hereby certifies that it meets all the
requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act or 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, as amended, the Registrant
has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York, on the
26th day of June, 1998.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
By:/s/Heath B. McLendon
Health B. McLendon
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Amendment to the Registration Statement has been
signed below by the following persons in the capacities and as of
the dates indicated.
Signature Title Date
/s/Heath B. McLendon Chairman of the Board, June 26, 1998
Heath B. McLendon President and Chief
Executive Officer
/s/Lewis E. Daidone Senior Vice President and June 26, 1998
Lewis E. Daidone Treasurer, Chief Financial
and Accounting Officer
/s/Herbert Barg* Director June 26, 1998
Herbert Barg
/s/Alfred J. Bianchetti* Director June 26, 1998
Alfred J. Bianchetti
/s/Martin Brody* Director June 26, 1998
Martin Brody
/s/Dwight B. Crane* Director June 26, 1998
Dwight B. Crane
/s/Burt N. Dorsett* Director June 26, 1998
Burt N. Dorsett
/s/Elliot S. Jaffe* Director June 26, 1998
Elliot S. Jaffe
/s/Stephen E. Kaufman* Director June 26, 1998
Stephen E. Kaufman
/s/Joseph J. McCann* Director June 26, 1998
Joseph J. McCann
/s/Cornelius C. Rose, Jr.* Director June 26, 1998
Cornelius C. Rose, Jr.
* Signed by Heath B. McLendon, their duly authorized attorney-in-
fact, pursuant to power of attorney dated June 26, 1997.
/s/Heath B. McLendon
Heath B. McLendon
EXHIBIT INDEX
Exhibit No. Exhibit
(1)(g) Amendment to Articles of Incorporation
(11)(a) Consent of KPMG Peat Markwick LLP
(17) Financial Data Schedule
(18) Rule 18f-3(d) Multiple Class Plan
cover page
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC
ARTICLES OF AMENDMENT
Smith Barney California Municipals Fund Inc., a Maryland
corporation, having its principal office in Baltimore City,
Maryland (the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended to
provide that the name of all of the issued and unissued Class C
Common Stock of the Corporation is hereby changed to Class L Common
Stock.
SECOND: The foregoing amendment to the Charter of the
Corporation has been approved by a majority of the entire Board of
Directors and is limited to a change expressly permitted by Section
2-605 of the Maryland General Corporation Law to be made without
action of the stockholders.
THIRD: The Corporation is registered as an open-end
investment company under the Investment Company Act of 1940.
FOURTH: The amendment to the Charter of the Corporation
effected hereby shall become effective at 9:00 a.m. on June 12,
1998.
IN WITNESS WHEREOF, Smith Barney California Municipals Fund
Inc. has caused these presents to be signed in its name and on its
behalf by its President and witnessed by its Assistant Secretary as
of June 1, 1998.
WITNESS: SMITH BARNEY CALIFORNIA MUNICIPALS
FUND INC.
/s/Michael Kocur By: /s/Heath B. McLendon
Michael Kocur Heath B. McLendon
Assistant Secretary President
THE UNDERSIGNED, President of Smith Barney California Municipals
Fund Inc., who executed on behalf of the Corporation Articles of
Amendment of which this Certificate is made a part, hereby
acknowledges in the name and on behalf of said Corporation the
foregoing Articles of Amendment to be the corporate act of said
Corporation and hereby certifies that the matters and facts set
forth herein with respect to the authorization and approval thereof
are true in all material respects under the penalties of perjury.
/s/ Heath B. McLendon
Heath B. McLendon, President
Rule 18f-3 (d) Multiple Class Plan for Smith Barney Mutual Funds
Introduction
This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d) of
the Investment Company Act of 1940, as amended (the "1940 Act").
The purpose of the Plan is to restate the existing arrangements
previously approved by the Boards of Directors and Trustees of
certain of the open-end investment companies set forth on Schedule
A (the "Funds" and each a "Fund") distributed by Smith Barney Inc.
("Smith Barney") under the Funds' existing order of exemption
(Investment Company Act Release Nos. 20042 (January 28,
1994) (notice) and 20090 (February 23, 1994)). Shares of the
Funds are distributed pursuant to a system (the "Multiple Class
System") in which each class of shares (a "Class") of a Fund
represents a pro rata interest in the same portfolio of
investments of the Fund and differs only to the extent outlined
below.
I. Distribution Arrangements and Service Fees
One or more Classes of shares of the Funds are offered for
purchase by investors with the following sales load structure. In
addition, pursuant to Rule 12b-1 under the 1940 Act (the "Rule"),
the Funds have each adopted a plan (the "Services and Distribution
Plan") under which shares of the Classes are subject to the
services and distribution fees described below.
1. Class A Shares
Class A shares are offered with a front-end sales load and under
the Services and Distribution Plan are subject to a service fee of
up to 0.25% of average daily net assets. In addition, the Funds
are permitted to assess a contingent deferred sales charge
("CDSC") on certain redemptions of Class A shares sold pursuant to
a complete waiver of front-end sales loads applicable to large
purchases, if the shares are redeemed within one year of the date
of purchase. This waiver applies to sales of Class A shares where
the amount of purchase is equal to or exceeds $500,000 although
this amount may be changed in the future.
2. Class B Shares
Class B shares are offered without a front-end sales load, but are
subject to a five-year declining CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual rate
of up to 0.25% of average daily net assets and a distribution fee
at an annual rate of up to 0.75% of average daily net assets.
3. Class D Shares
Class D shares are offered without a front-end sales load, CDSC,
service fee or distribution fee.
4. Class L Shares
Class L shares are offered with a front-end load, are subject to a
one-year CDSC and under the Services and Distribution Plan are
subject to a service fee at an annual rate of up to 0.25% of
average daily net assets and a distribution fee at an annual rate
of up to 0.75% of average daily net assets. Unlike Class B
shares, Class L shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.
5. Class I Shares
Class I shares are offered without a front-end sales load, but are
subject under the Services and Distribution Plan to a service fee
at an annual rate of up to 0.25% of average daily net assets.
6. Class O Shares
Class O shares are offered without a front-end load, but are
subject to a one-year CDSC and under the Services and Distribution
Plan are subject to a service fee at an annual rate of up to 0.25%
of average daily net assets and a distribution fee at an annual
rate of up to 0.50% of average daily net assets. Unlike Class B
shares, Class O shares do not have the conversion feature as
discussed below and accordingly, these shares are subject to a
distribution fee for an indefinite period of time. The Funds
reserve the right to impose these fees at such higher rates as may
be determined.
Effective June 28, 1999, Class O shares will be offered with a
front-end load and will continue to be subject to a one year CDSC,
a service fee at an annual rate of up to 0.25% of average daily
net assets and a distribution fee at an annual rate of up to 0.50%
of average daily net assets.
7. Class Y Shares
Class Y shares are offered without imposition of either a sales
charge or a service or distribution fee for investments where the
amount of purchase is equal to or exceeds a specific amount as
specified in each Fund's prospectus.
8. Class Z Shares
Class Z shares are offered without imposition of either a sales
charge or a service or distribution fee for purchase (i) by
employee benefit and retirement plans of Smith Barney and its
affiliates, (ii) by certain unit investment trusts sponsored by
Smith Barney and its affiliates, and (iii) although not currently
authorized by the governing boards of the Funds, when and if
authorized, (x) by employees of Smith Barney and its affiliates
and (y) by directors, general partners or trustees of any
investment company for which Smith Barney serves as a distributor
and, for each of (x) and (y), their spouses and minor children.
9. Additional Classes of Shares
The Boards of Directors and Trustees of the Funds have the
authority to create additional classes, or change existing
Classes, from time to time, in accordance with Rule 18f-3 of the
1940 Act.
II. Expense Allocations
Under the Multiple Class System, all expenses incurred by a Fund
are allocated among the various Classes of shares based on the net
assets of the Fund attributable to each Class, except that each
Class's net asset value and expenses reflect the expenses
associated with that Class under the Fund's Services and
Distribution Plan, including any costs associated with obtaining
shareholder approval of the Services and Distribution Plan (or an
amendment thereto) and any expenses specific to that Class. Such
expenses are limited to the following:
(i) transfer agency fees as identified by the transfer
agent as being attributable to a specific Class;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses
and proxies to current shareholders;
(iii) Blue Sky registration fees incurred by a Class of
shares;
(iv) Securities and Exchange Commission registration fees
incurred by a Class of shares;
(v) the expense of administrative personnel and services
as required to support the shareholders of a specific Class;
(vi) litigation or other legal expenses relating solely to
one Class of shares; and
(vii) fees of members of the governing boards of the funds
incurred as a result of issues relating to one Class of shares.
Pursuant to the Multiple Class System, expenses of a Fund
allocated to a particular Class of shares of that Fund are borne
on a pro rata basis by each outstanding share of that Class.
III. Conversion Rights of Class B Shares
All Class B shares of each Fund will automatically convert to
Class A shares after a certain holding period, expected to be, in
most cases, approximately eight years but may be shorter. Upon
the expiration of the holding period, Class B shares (except those
purchases through the reinvestment of dividends and other
distributions paid in respect of Class B shares) will
automatically convert to Class A shares of the Fund at the
relative net asset value of each of the Classes, and will, as a
result, thereafter be subject to the lower fee under the Services
and Distribution Plan. For purposes of calculating the holding
period required for conversion, newly created Class B shares
issued after the date of implementation of the Multiple Class
System are deemed to have been issued on (i) the date on which the
issuance of the Class B shares occurred or (ii) for Class B shares
obtained through an exchange, or a series of exchanges, the date
on which the issuance of the original Class B shares occurred.
Shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are also Class B
shares. However, for purposes of conversion to Class A, all Class
B shares in a shareholder's Fund account that were purchased
through the reinvestment of dividends and other distributions paid
in respect of Class B shares (and that have not converted to Class
A shares as provided in the following sentence) are considered to
be held in a separate sub-account. Each time any Class B shares
in the shareholder's Fund account (other than those in the sub-
account referred to in the preceding
sentence) convert to Class A, a pro rata portion of the Class B
shares then in the sub-account also converts to Class A. The
portion is determined by the ratio that the shareholder's Class B
shares converting to Class A bears to the shareholder's total
Class B shares not acquired through dividends and distributions.
The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling of the Internal Revenue
Service that payment of different dividends on Class A and Class B
shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and the continuing
availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event under the
Code. The conversion of Class B shares to Class A shares may be
suspended if this opinion is no longer available, In the event
that conversion of Class B shares does not occur, Class B shares
would continue to be subject to the distribution fee and any
incrementally higher transfer agency costs attending the Class B
shares for an indefinite period.
IV. Exchange Privileges
Shareholders of a Fund may exchange their shares at net asset
value for shares of the same Class in certain other of the Smith
Barney Mutual Funds as set forth in the prospectus for such Fund.
Funds only permit exchanges into shares of money market funds
having a plan under the Rule if, as permitted by paragraph (b) (5)
of Rule 11a-3 under the 1940 Act, either (i) the time period
during which the shares of the money market funds are held is
included in the calculations of the CDSC or (ii) the time period
is not included but the amount of the CDSC is reduced by the
amount of any payments made under a plan adopted pursuant to the
Rule by the money market funds with respects to those shares.
Currently, the Funds include the time period during which shares
of the money market fund are held in the CDSC period. The
exchange privileges applicable to all Classes of shares must
comply with Rule 11a-3 under the 1940 Act.
Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of June 30, 1998)
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund
Smith Barney Concert Allocation Series Inc.
Conservative Portfolio
Balanced Portfolio
Global Portfolio
Growth Portfolio
Income Portfolio
High Growth Portfolio
Smith Barney Equity Funds -
Concert Social Awareness Fund
Smith Barney Large Cap Blend Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -
Large Cap Value Fund
Short-Term High Grade Bond Fund
U.S. Government Securities Fund
Smith Barney Income Funds -
Smith Barney Balanced Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney High Income Fund
Smith Barney Municipal High Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Total Return Bond Fund
Smith Barney Investment Trust -
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney S&P 500 Index Fund
Smith Barney Mid Cap Blend Fund
Smith Barney Investment Funds Inc. -
Concert Peachtree Growth Fund
Smith Barney Contrarian Fund
Smith Barney Government Securities Fund
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Special Equities Fund
Smith Barney Institutional Cash Management Fund, Inc.
Cash Portfolio
Government Portfolio
Municipal Portfolio
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -
California Money Market Portfolio
Florida Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New York Portfolio
New York Money Market
Pennsylvania Portfolio
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust -
Smith Barney Telecommunications Income Fund
Smith Barney World Funds, Inc. -
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
Emerging Markets Portfolio
U:\legal\funds\camu\1998\secdocs\pea2518f
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney California Municipals Fund Inc.:
We consent to the use of our report dated April 15, 1998 for the Smith
Barney California Municipals Fund Inc., incorporated herein by reference
and to the references to our Firm under the headings "Financial
Highlights" in the Prospectus and "Counsel and Auditors" in the Statement
of Additional Information.
KPMG Peat Marwick LLP
New York, New York
June 24, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000740871
<NAME> SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 826,760,080
<INVESTMENTS-AT-VALUE> 899,081,883
<RECEIVABLES> 21,629,583
<ASSETS-OTHER> 408,616
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 921,120,082
<PAYABLE-FOR-SECURITIES> 5,945,487
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,422,344
<TOTAL-LIABILITIES> 8,367,831
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 835,691,873
<SHARES-COMMON-STOCK> 39,110,887
<SHARES-COMMON-PRIOR> 35,598,916
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,148,305
<ACCUMULATED-NET-GAINS> 5,786,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 72,422,115
<NET-ASSETS> 912,752,251
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,838,302
<OTHER-INCOME> 0
<EXPENSES-NET> 6,883,821
<NET-INVESTMENT-INCOME> 39,954,481
<REALIZED-GAINS-CURRENT> 16,037,222
<APPREC-INCREASE-CURRENT> 33,262,757
<NET-CHANGE-FROM-OPS> 89,254,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 31,027,594
<DISTRIBUTIONS-OF-GAINS> 8,637,079
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,214,750
<NUMBER-OF-SHARES-REDEEMED> 4,019,227
<SHARES-REINVESTED> 1,316,448
<NET-CHANGE-IN-ASSETS> 144,039,985
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,498,984
<OVERDISTRIB-NII-PRIOR> (157,059)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,066,128
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,883,821
<AVERAGE-NET-ASSETS> 612,141,483
<PER-SHARE-NAV-BEGIN> 16.26
<PER-SHARE-NII> 00.82
<PER-SHARE-GAIN-APPREC> 00.98
<PER-SHARE-DIVIDEND> 00.84
<PER-SHARE-DISTRIBUTIONS> 00.23
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.99
<EXPENSE-RATIO> 00.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000740871
<NAME> SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 826,760,080
<INVESTMENTS-AT-VALUE> 899,081,883
<RECEIVABLES> 21,629,583
<ASSETS-OTHER> 408,616
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 921,120,082
<PAYABLE-FOR-SECURITIES> 5,945,487
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,422,344
<TOTAL-LIABILITIES> 8,367,831
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 835,691,873
<SHARES-COMMON-STOCK> 12,732,201
<SHARES-COMMON-PRIOR> 10,666,497
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,148,305
<ACCUMULATED-NET-GAINS> 5,786,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 72,422,115
<NET-ASSETS> 912,752,251
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,838,302
<OTHER-INCOME> 0
<EXPENSES-NET> 6,883,821
<NET-INVESTMENT-INCOME> 39,954,481
<REALIZED-GAINS-CURRENT> 16,037,222
<APPREC-INCREASE-CURRENT> 33,262,757
<NET-CHANGE-FROM-OPS> 89,254,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,790,204
<DISTRIBUTIONS-OF-GAINS> 2,746,676
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,887,789
<NUMBER-OF-SHARES-REDEEMED> 1,236,051
<SHARES-REINVESTED> 413,966
<NET-CHANGE-IN-ASSETS> 144,039,985
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,498,984
<OVERDISTRIB-NII-PRIOR> (157,059)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,066,128
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,883,821
<AVERAGE-NET-ASSETS> 192,086,378
<PER-SHARE-NAV-BEGIN> 16.25
<PER-SHARE-NII> 00.74
<PER-SHARE-GAIN-APPREC> 00.98
<PER-SHARE-DIVIDEND> 00.76
<PER-SHARE-DISTRIBUTIONS> 00.23
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.98
<EXPENSE-RATIO> 01.21
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000740871
<NAME> SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC. CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 826,760,080
<INVESTMENTS-AT-VALUE> 899,081,883
<RECEIVABLES> 21,629,583
<ASSETS-OTHER> 408,616
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 921,120,082
<PAYABLE-FOR-SECURITIES> 5,945,487
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,422,344
<TOTAL-LIABILITIES> 8,367,831
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 835,691,873
<SHARES-COMMON-STOCK> 1,888,473
<SHARES-COMMON-PRIOR> 1,027,068
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 1,148,305
<ACCUMULATED-NET-GAINS> 5,786,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 72,422,115
<NET-ASSETS> 912,752,251
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 46,838,302
<OTHER-INCOME> 0
<EXPENSES-NET> 6,883,821
<NET-INVESTMENT-INCOME> 39,954,481
<REALIZED-GAINS-CURRENT> 16,037,222
<APPREC-INCREASE-CURRENT> 33,262,757
<NET-CHANGE-FROM-OPS> 89,254,460
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,090,960
<DISTRIBUTIONS-OF-GAINS> 365,883
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 973,664
<NUMBER-OF-SHARES-REDEEMED> 169,042
<SHARES-REINVESTED> 56,783
<NET-CHANGE-IN-ASSETS> 144,039,985
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,498,984
<OVERDISTRIB-NII-PRIOR> (157,059)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,066,128
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,883,821
<AVERAGE-NET-ASSETS> 23,865,377
<PER-SHARE-NAV-BEGIN> 16.24
<PER-SHARE-NII> 00.73
<PER-SHARE-GAIN-APPREC> 00.98
<PER-SHARE-DIVIDEND> 00.75
<PER-SHARE-DISTRIBUTIONS> 00.23
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.97
<EXPENSE-RATIO> 01.26
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
