As filed with the Securities and Exchange
Commission on April 28, 1999
Registration No. 2-89548
811-3970
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 26
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 27 [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
388 Greenwich Street, New York, New York 10013
(Name and address of agent for service)
Continuous(Approximate Date of Proposed Public Offering)It is proposed that
this filing becomes effective (check appropriate
box):
[ ] Immediately upon filing pursuant to paragraph b
[ ] on (date) pursuant to paragraph b
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on June 28, 1999 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
PART A-Prospectus
<PAGE>
[Logo]
Smith Barney Mutual Funds
Investing for your future.
Every day.
Prospectus Smith Barney
Mutual Funds
- --------------------------------------------------------------------------------
June 28, 1999 California Municipals Fund Inc.
Class A, B, L and Y Shares
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
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Contents
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Fund goal and main strategies ............. 4
Risks, performance and expenses ........... 5
More on the fund's investments ............ 8
Management ................................ 9
Choosing a class of shares to buy.......... 10
Comparing the fund's classes .............. 11
Sales charge .............................. 12
More about deferred sales charges.......... 15
Buying shares ............................. 16
Exchanging shares ......................... 17
Redeeming shares .......................... 18
Other things to know about
share transactions ...................... 20
Dividends, distributions and taxes......... 22
Share price ............................... 23
Financial highlights ...................... 24
You should know:
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
California Municipals Fund Inc. -1-
<PAGE>
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Fund goal and main strategies
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Investment objective
The fund seeks to provide California investors with as high a level of current
income exempt from federal income taxes and California state personal income
taxes as is consistent with prudent investment management and the preservation
of capital.
Key investments
The fund invests primarily in intermediate-term and long-term investment grade
California municipal securities. These include securities issued by the State of
California and certain other municipal issuers, political subdivisions, agencies
and public authorities that pay interest which is exempt from California
personal income taxes. Intermediate-term and long-term municipal securities have
remaining maturities at the time of purchase of from three to more than thirty
years. The fund can invest up to 20% of its assets in below investment grade
bonds or in unrated securities of equivalent quality (commonly known as "junk
bonds"). Investment grade bonds are those rated in any of the four highest
long-term rating categories, or if unrated, of comparable quality.
Selection process
The manager selects securities primarily by identifying undervalued sectors and
individual securities, while also selecting securities it believes will benefit
from changes in market conditions. In selecting individual securities, the
manager:
. Uses fundamental credit analysis to estimate the relative value and
attractiveness of various securities and sectors and to exploit
opportunities in the municipal bond market
. May trade between general obligation and revenue bonds and among various
revenue bond sectors, such as housing, hospital and industrial development,
based on their apparent relative values
. Considers the yield available for securities with different maturities and
a security's maturity in light of the outlook for the issuer and its sector
and interest rates
. Identifies individual securities with the most potential for added value,
such as those involving unusual situations, new issuers, the potential for
credit upgrades, unique structural characteristics or innovative features
- -2- California Municipals Fund Inc.
<PAGE>
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Risks, performance and expenses
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Principal risks of investing in the fund
Investors could lose money on their investment in the fund, or the fund may not
perform as well as other investments, if:
. Interest rates rise, causing the value of the fund's portfolio to decline
. The issuer of a security owned by the fund defaults on its obligation to pay
principal and/or interest or the security's credit rating is downgraded
. California municipal securities fall out of favor with investors. The fund
will suffer more than a national municipal fund from adverse events affecting
California municipal issuers
. Unfavorable legislation affects the tax-exempt status of municipal bonds
. The manager's judgment about the attractiveness, value or income potential of
a particular security proves to be incorrect
It is possible that some of the fund's income distributions may be, and
distributions of the fund's gains generally will be, subject to federal and
California state taxation. The fund may realize taxable gains on the sale of
its securities or on transactions in futures contracts. Some of the fund's
income may be subject to the federal alternative minimum tax. In addition,
distributions of the fund's income and gains will be taxable to investors in
states other than California.
The fund is classified as "non-diversified," which means it may invest a larger
percentage of its assets in one issuer than a diversified fund. To the extent
the fund concentrates its assets in fewer issuers, the fund will be more
susceptible to negative events affecting those issuer.
Who may want to invest
The fund may be an appropriate investment if you:
. Are a California taxpayer in a high federal tax bracket seeking income exempt
from California and federal taxation
. Currently have exposure to other asset classes and are seeking to broaden your
investment portfolio
. Are willing to accept the risks of municipal securities, including the risks
of concentrating in a single state
California Municipals Fund Inc. -3-
<PAGE>
Total return
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
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% Total Return: Class A Shares
[BAR CHART APPEARS HERE]
5 5 5 6.85 6.40 -1.48 16.52 3.97 9.67
89 90 91 92 93 94 95 96 97 98
The bar chart shows the performance of the fund's Class A shares for each of the
past 10 calendar years. Class B, L and Y shares would have different performance
because of their different expenses. The performance information in the chart
does not reflect sales charges, which would reduce your return.
Quarterly returns: Highest: xx% in ___ quarter 199X; Lowest: xx% in ___
quarter 199X
Year to date: xx% through 3/31/99
Comparative performance
This table indicates the risks of investing in the fund by comparing the average
annual total return of each class for the periods shown with that of the Lehman
Brothers Municipal Bond Index (the "Lehman Index"), a broad-based unmanaged
index of municipal bonds and the Lipper California Municipal Fund Average (the
"Lipper Average"), an average composed of the fund's peer group of mutual funds.
This table assumes imposition of the maximum sales charge applicable to the
class, redemption of shares at the end of the period, and reinvestment of
distributions and dividends.
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Average Annual Total Returns -- Calendar Years Ended December 31, 1998
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Class Inception date 1 year 5 years 10 years Since inception
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A [xx/xx/xx]
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B 11/6/92 n/a
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L 11/14/94 n/a n/a
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Y [xx/xx/xx] n/a
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Lehman Index n/a
- --------------------------------------------------------------------------------
Lipper n/a
Average
*Index comparison begins on
- -4- California Municipals Fund Inc.
<PAGE>
Fees and expenses
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
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Shareholder fees
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(fees paid directly from your investment) Class A Class B Class L Class Y
Maximum sales charge (load) imposed on purchases (as 4.00% None 1.00% None
a % of offering price)
Maximum deferred sales charge (load) (as a % of the None* 4.50% 1.00% None
lower of net asset value at purchase or redemption)
Annual fund operating expenses
(expenses deducted from fund assets)
Management fee 0.49% 0.49% 0.49% 0.49%
Distribution and service (12b-1) fee 0.15% 0.65% 0.70% None
Other expenses ----- ----- ----- -----
Total annual fund operating expenses ===== ===== ===== =====
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
without an initial charge) but if you redeem those shares within 12 months of
their purchase, you will pay a deferred sales charge of 1.00%.
Example
This example helps you compare the costs of investing in the fund with
the costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
. You invest $10,000 in the fund for the period shown
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without a sales charge
. The fund's operating expenses remain the same
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Number of years you own your shares
- --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
Class A (with or without redemption) $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class L (redemption at end of period) $ $ $ $
Class L (no redemption) $ $ $ $
Class Y (with or without redemption) $ $ $ $
California Municipals Fund Inc. -5-
<PAGE>
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More on the fund's investments
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California municipal securities. California municipal securities include debt
obligations issued by certain non-California governmental issuers such as Puerto
Rico, the Virgin Islands and Guam. The interest on California municipal
securities is exempt from federal income tax and California personal income tax.
As a result, the interest rate on these bonds normally is lower than it would be
if the bonds were subject to taxation. The California municipal securities in
which the fund invests include general obligation bonds, revenue bonds and
municipal leases. These securities may pay interest at fixed, variable or
floating rates. The fund may also hold zero coupon securities which pay no
interest during the life of the obligation but trade at prices below their
stated maturity value. The fund may also invest up to 20% of its net assets in
municipal securities of non-California issuers. These will generally be exempt
from federal, but not California, income taxes.
Below investment grade securities. Below investment grade securities are
considered speculative, involve a high risk of loss and are susceptible to
default or decline in market value because of adverse economic and business
developments. These securities are less liquid and have more volatile prices
than higher rated securities.
Derivative contracts. The fund may, but need not, use derivative contracts, such
as financial futures and options on financial futures, for any of the following
purposes:
. To hedge against the economic impact of adverse changes in the market value
of portfolio securities because of changes in interest rates
. As a substitute for buying or selling securities
A futures contract will obligate or entitle the fund to deliver or receive an
asset or cash payment based on the change in value of one or more securities.
Even a small investment in futures can have a big impact on a fund's interest
rate exposure. Therefore, using futures can disproportionately increase losses
and reduce opportunities for gains when interest rates are changing. The fund
may not fully benefit from or may lose money on futures if changes in their
value do not correspond accurately to changes in the value of the fund's
holdings. The other parties to certain futures present the same types of default
risk as issuers of fixed income securities. Futures can also make a fund less
liquid and harder to value, especially in declining markets.
Defensive investing. The fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short-term
debt securities. If the fund takes a temporary defensive position, it may be
unable to achieve its investment goal.
- -6- California Municipals Fund Inc.
<PAGE>
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Management
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Manager. The fund's investment adviser and administrator (the manager) is SSBC
Fund Management Inc., an affiliate of Salomon Smith Barney Inc. The manager's
address is 388 Greenwich Street, New York, New York 10013. The manager selects
the fund's investments and oversees its operations. The manager and Salomon
Smith Barney are subsidiaries of Citigroup Inc. Citigroup businesses produce a
broad range of financial services -- asset management, banking and consumer
finance, credit and charge cards, insurance, investments, investment banking and
trading -- and use diverse channels to make them available to consumer and
corporate customers around the world.
Joseph P. Deane, investment officer of SSBC Fund Management Inc. and senior vice
president and managing director of Salomon Smith Barney, has been responsible
for the day-to-day management of the fund's portfolio since November 1988.
[David T. Fare, investment officer of SSBC Fund Management Inc. and vice
president of Salomon Smith Barney, currently shares the responsibility for the
day-to-day management of the fund's portfolio, joining Mr. Deane in [1998].] Mr.
Deane and Mr. Fare have 29 and 12 years, respectively, of investment management
experience.
Management fees. During the fiscal year ended February 28, 1999, the manager
received an advisory fee and an administrative fee equal to ___% and ___%,
respectively, of the fund's average daily net assets.
Distributor. The fund has entered into an agreement with CFBDS, Inc. to
distribute the fund's shares. A selling group consisting of Salomon Smith Barney
and other broker-dealers sells fund shares to the public.
Distribution plans. The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and L shares. Under each plan, the fund pays distribution and service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
Year 2000 issue. Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if
substantial, could adversely affect companies and governments that issue
securities held by the fund. The manager and Salomon Smith Barney are addressing
the Year 2000 issue for their systems. The fund has been informed by other
service providers that they are taking similar measures. Although the fund does
not expect the Year 2000 issue to adversely affect it, the fund cannot guarantee
the efforts of the fund (limited to requesting and receiving reports from its
service providers) or its service providers to correct the problem will be
successful.
-7-
<PAGE>
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Choosing a class of shares to buy
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You can choose among four classes of shares: Classes A, B, L and Y. Each class
has different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
. If you plan to invest regularly or in large amounts, buying Class A shares
may help you reduce sales charges and ongoing expenses.
. For Class B shares, all of your purchase price and, for Class L shares,
more of your purchase amount (compared to Class A shares) will be
immediately invested. This may help offset the higher expenses of Class B
and Class L shares, but only if the fund performs well.
. Class L shares have a shorter deferred sales charge period than Class B
shares. However, because Class B shares convert to Class A shares, and
Class L shares do not, Class B shares may be more attractive to long-term
investors.
You may buy shares from:
. A Salomon Smith Barney Financial Consultant . An investment dealer in the
selling group or a broker that clears through Salomon Smith Barney -- a
dealer representative
. The fund, but only if you are investing through certain qualified plans or
certain dealer representatives
Investment minimums. Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
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Initial Additional
----------------------------- -----------
Classes A, B, L Class Y All Classes
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General $1,000 $15 million $50
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Monthly Systematic Investment Plans $ 25 n/a $25
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Quarterly Systematic Investment Plans $ 50 n/a $50
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Uniform Gift to Minor Accounts $ 250 $15 million $50
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- -8- California Municipals Fund Inc.
<PAGE>
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Comparing the fund's classes
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Your Salomon Smith Barney Financial Consultant or dealer representative can help
you decide which class meets your goals. They may receive different compensation
depending upon which class you choose.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class A Class B Class L Class Y
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Key .Initial sales . No initial . Initial sales . No initial or
features charge sales charge is lower deferred sales
.You may qualify charge than Class A charge
for reduction or . Deferred sales . Deferred sales . Must invest at
waiver of initial charge declines charge for only 1 least $15 million
sales charge over time year . Lower annual
. Lower annual . Converts to . Does not expenses than the
expenses than Class A after 8 convert to other classes
Class B and Class years Class A
L . Higher annual . Higher annual
expenses than expenses than
Class A Class A
- ------------------------------------------------------------------------------------------------------
Initial sales Up to 4.00%; None 1.00% None
charge reduced for large
purchases and
waived for certain
investors. No
charge for
purchases of
$500,000 or more
- ------------------------------------------------------------------------------------------------------
Deferred 1% on purchases Up to 4.50% 1% if you None
sales charge of $500,000 or charged when redeem within 1
more if you you redeem year of purchase
redeem within 1 shares. The
year of purchase charge is reduced
over time and
there is no
deferred sales
charge after 6
years
- ------------------------------------------------------------------------------------------------------
Annual 0.15% of average 0.65% of average 0.70% of average None
distribution daily net assets daily net assets daily net assets
and service
fees
- ------------------------------------------------------------------------------------------------------
Exchange Class A shares of Class B shares of Class L shares of Class Y shares of
Privilege* most Smith most Smith most Smith most Smith Barney
Barney funds Barney funds Barney funds funds
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
California Municipals Fund Inc. -9-
<PAGE>
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Sales charge
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Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge on
the fund's distributions or dividends you reinvest in additional Class A shares.
-------------------------------------------------------------------
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
-------------------------------------------------------------------
Less than $25,000 4.00 4.17
-------------------------------------------------------------------
$25,000 but less than $50,000 3.50 3.63
-------------------------------------------------------------------
$50,000 but less than $100,000 3.00 3.09
-------------------------------------------------------------------
$100,000 but less than $250,000 2.50 2.56
-------------------------------------------------------------------
$250,000 but less than $500,000 1.50 1.52
-------------------------------------------------------------------
$500,000 or more -0- -0-
-------------------------------------------------------------------
Investments of $500,000 or more. You do not pay an initial sales charge when you
buy $500,000 or more of Class A shares. However, if you redeem these Class A
shares within one year of purchase, you will pay a deferred sales charge of 1%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
. Accumulation privilege - lets you combine the current value of Class A shares
owned
. by you, or
. by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase of
Class A shares for purposes of calculating the initial sales charge. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
- -10- California Municipals Fund Inc.
<PAGE>
. Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales charge, if
any, as if all shares had been purchased at once. You may include purchases
on which you paid a sales charge within 90 days before you sign the letter.
Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:
. Employees of members of the NASD
. Clients of newly employed Salomon Smith Barney Financial Consultants, if
certain conditions are met
. Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the investor's Salomon Smith Barney Financial Consultant or dealer
representative is notified
If you want to learn more about the requirements for reductions or waivers of
Class A initial sales charges, contact your Salomon Smith Barney Financial
Consultant or dealer representative or consult the Statement of Additional
Information ("SAI").
California Municipals Fund Inc. -11-
<PAGE>
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Sales charge
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Class B shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of purchase,
you will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
- -----------------------------------------------------------------
6th
through
Year after purchase 1st 2nd 3rd 4th 5th 8th
- -----------------------------------------------------------------
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
- -----------------------------------------------------------------
Class B conversion. After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
- --------------------------------------------------------------------------------
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith Barney
distributions fund
- --------------------------------------------------------------------------------
Eight years after the In same proportion as the On the date the shares
date of purchase number of Class B shares originally acquired would
converting is to total have converted into Class A
Class B shares you own shares
- --------------------------------------------------------------------------------
Class L shares
You buy Class L shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class L shares within one year of purchase, you will pay a deferred
sales charge of 1%. If you held Class C shares of the fund on June 12, 1998, you
will not pay an initial sales charge on Class L shares you buy before June 22,
2001.
Class Y shares
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $15,000,000 initial
investment requirement. You can use a letter of intent to meet this requirement
by buying Class Y shares of the fund over a 6-month period. To qualify, you must
initially invest $5,000,000.
- -12- California Municipals Fund Inc.
<PAGE>
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More about deferred sales charges
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The deferred sales charge is based on the net asset value at the time of
purchase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
. Shares exchanged for shares of another Smith Barney fund
. Shares representing reinvested distributions and dividends
. Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation for
its expenses in selling shares, including the payment of compensation to your
Salomon Smith Barney Financial Consultant or dealer representative.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
. On payments made through certain systematic withdrawal plans
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the SAI.
California Municipals Fund Inc. -13-
<PAGE>
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Buying shares
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<TABLE>
<S> <C>
Through a You should contact your Salomon Smith Barney Financial
Salomon Consultant or dealer representative to open a brokerage account and
Smith make arrangements to buy shares.
Barney
Financial If you do not provide the following information, your order will be
represen- rejected:
tative
. Class of shares being bought
. Dollar amount or number of shares being bought
You should pay for your shares through your brokerage account no
later than the third business day after you place your order.
Salomon Smith Barney or your dealer representative may charge an
annual account maintenance fee.
- ---------------------------------------------------------------------------------------
Through Qualified retirement plans and certain other investors who are
the fund's clients of the selling group are eligible to buy shares directly from
transfer the fund.
agent
. Write the transfer agent at the following address:
Smith Barney California Municipals Fund, Inc.
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
. Enclose a check to pay for the shares. For initial purchases,
complete and send an account application.
. For more information, call the transfer agent at 1-800-451-2010.
- ---------------------------------------------------------------------------------------
Through a You may authorize Salomon Smith Barney, your dealer
systematic representative or the transfer agent to transfer funds automatically
investment from a regular bank account, cash held in a Salomon Smith Barney
plan brokerage account or Smith Barney money market fund to buy
shares on a regular basis.
. Amounts transferred should be at least: $25 monthly or $50
quarterly
. If you do not have sufficient funds in your account on a transfer
date, Salomon Smith Barney, your dealer representative or the
transfer agent may charge you a fee
For more information, contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent or consult the SAI.
</TABLE>
- -14- California Municipals Fund Inc.
<PAGE>
- --------------------------------------------------------------------------------
Exchanging shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Smith You should contact your Salomon Smith Barney Financial Consultant
Barney or dealer representative to exchange into other Smith Barney funds.
offers a Be sure to read the prospectus of the Smith Barney fund you are
distinctive exchanging into. An exchange is a taxable transaction.
family of
funds . You may exchange shares only for shares of the same class of
tailored to another Smith Barney fund. Not all Smith Barney funds offer all
help meet classes.
the
varying . Not all Smith Barney funds may be offered in your state of
needs of residence. Contact your Smith Barney Financial Consultant, dealer
both large representative or the transfer agent.
and small
investors. . You must meet the minimum investment amount for each fund.
. If you hold share certificates, the transfer agent must receive the
certificates endorsed for transfer or with signed stock powers
(documents transferring ownership of certificates) before the
exchange is effective.
. The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
- ---------------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at the time
additional of the exchange.
sales
charges Your deferred sales charge (if any) will continue to be measured
from the date of your original purchase. If the fund you exchange
into has a higher deferred sales charge, you will be subject to that
charge. If you exchange at any time into a fund with a lower
charge, the sales charge will not be reduced.
- ---------------------------------------------------------------------------------------
By If you do not have a brokerage account, you may be eligible to
telephone exchange shares through the transfer agent. You must complete an
authorization form to authorize telephone transfers. If eligible, you
may make telephone exchanges on any day the New York Stock
Exchange is open. Call the transfer agent at 1-800-451-2010 between
9:00 a.m. and 5:00 p.m. (Eastern time). Requests received after the
close of regular trading on the Exchange are priced at the net asset
value next determined.
You can make telephone exchanges only between accounts that have
identical registrations.
- ---------------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the transfer agent at
the address on the opposite page.
</TABLE>
California Municipals Fund Inc. -15-
<PAGE>
- --------------------------------------------------------------------------------
Redeeming shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must receive
the certificates endorsed for transfer or with signed stock
powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business
days after your request is received in good order. However,
if you recently purchased your shares by check, your
redemption proceeds will not be sent to you until your
original check clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will
be paid by check mailed to your address of record.
- ---------------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written requests
to the transfer agent at the following address:
Smith Barney California Municipals Fund, Inc.
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
Your written request must provide the following:
. Your account number
. The class of shares and the dollar amount or number of
shares to be redeemed
. Signatures of each owner exactly as the account is
registered
</TABLE>
- -16- California Municipals Fund Inc.
<PAGE>
<TABLE>
<S> <C>
By If you do not have a brokerage account, you may be eligible
telephone to redeem shares in amounts up to $10,000 per day through
the transfer agent. You must complete an authorization form
to authorize telephone redemptions. If eligible, you may
request redemptions by telephone on any day the New York
Stock Exchange is open. Call the transfer agent at 1-800-451-
2010 between 9:00 a.m. and 5:00 p.m. (Eastern time).
Requests received after the close of regular trading on the
Exchange are priced at the net asset value next determined.
Your redemption proceeds can be sent by check to your
address of record or by wire transfer to a bank account
designated on your authorization form. You may be charged
a fee for wire transfers. You must submit a new
authorization form to change the bank account designated to
receive wire transfers and you may be asked to provide
certain other documents.
- ---------------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash your shares on a monthly or quarterly basis. To qualify you
withdrawal must own shares of the fund with a value of at least $10,000
plans and each automatic redemption must be at least $50. If your
shares are subject to a deferred sales charge, the sales charge
will be waived if your automatic payments do not exceed 1%
per month of the value of your shares subject to a deferred
sales charge.
The following conditions apply:
. Your shares must not be represented by certificates
. All dividends and distributions must be reinvested
For more information, contact your Salomon Smith Barney
Financial Consultant or dealer representative or consult the SAI.
</TABLE>
California Municipals Fund Inc. -17-
<PAGE>
- --------------------------------------------------------------------------------
Other things to know about share transactions
- --------------------------------------------------------------------------------
When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:
. Name of the fund
. Account number
. Class of shares being bought, exchanged or redeemed
. Dollar amount or number of shares being bought, exchanged or redeemed
. Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
Signature guarantees. To be in good order, your redemption request must include
a signature guarantee if you:
. Are redeeming over $10,000 of shares
. Are sending signed share certificates or stock powers to the transfer
agent
. Instruct the transfer agent to mail the check to an address different from
the one on your account
. Changed your account registration
. Want the check paid to someone other than the account owner(s)
. Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
- -18- California Municipals Fund Inc.
<PAGE>
The fund has the right to:
. Suspend the offering of shares
. Waive or change minimum and additional investment amounts
. Reject any purchase or exchange order
. Change, revoke or suspend the exchange privilege
. Suspend telephone transactions
. Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securities
and Exchange Commission
. Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
Small account balances. If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
Excessive exchange transactions. The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other
shareholders. If so, the fund may limit additional purchases and/or exchanges by
the shareholder.
Share certificates. The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.
California Municipals Fund Inc. -19-
<PAGE>
- --------------------------------------------------------------------------------
Dividends, distributions and taxes
- --------------------------------------------------------------------------------
Dividends. The fund pays dividends each month from its net investment income.
The fund generally makes capital gain distributions, if any, once a year,
typically in December. The fund may pay additional distributions and dividends
at other times if necessary for the fund to avoid a federal tax. Capital gain
distributions and dividends are reinvested in additional fund shares of the same
class you hold. The fund expects distributions to be primarily from income. You
do not pay a sales charge on reinvested distributions or dividends.
Alternatively, you can instruct your Salomon Smith Barney Financial Consultant,
dealer representative or the transfer agent to have your distributions and/or
dividends paid in cash. You can change your choice at any time to be effective
as of the next distribution or dividend, except that any change given to the
transfer agent less than five days before the payment date will not be effective
until the next distribution or dividend is paid.
Taxes. In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Transaction Federal tax status California tax status
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Redemption or Usually capital gain or loss; long- Usually capital gain or loss
exchange of shares term only if shares owned more
than one year
- ---------------------------------------------------------------------------------------------------------------
Long-term capital gain Taxable gain Taxable gain
distributions
- ---------------------------------------------------------------------------------------------------------------
Short-term capital gain Ordinary income Ordinary income
distributions
- ---------------------------------------------------------------------------------------------------------------
Dividends Exempt if from interest on tax- Exempt if from interest on
exempt securities, otherwise California municipal securities,
ordinary income otherwise ordinary income
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Any taxable dividends and capital gain distributions are taxable whether
received in cash or reinvested in fund shares. Long-term capital gain
distributions are taxable to you as long-term capital gain regardless of how
long you have owned your shares. You may want to avoid buying shares when the
fund is about to declare a capital gain distribution or a taxable dividend,
because it will be taxable to you even though it may actually be a return of a
portion of your investment.
After the end of each year, the fund will provide you with information about the
distributions and dividends you received and any redemptions of shares during
the previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special tax
rules may apply, you should consult your tax adviser about your investment in
the fund.
- -20- California Municipals Fund Inc.
<PAGE>
- --------------------------------------------------------------------------------
Share price
- --------------------------------------------------------------------------------
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for each class of shares.
The fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This
calculation is done when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
Generally, the fund's investments are valued by an independent pricing service.
If market quotations or a valuation from the pricing service is not readily
available for a security or if a security's value has been materially affected
by events occurring after the close of the Exchange or market on which the
security is principally traded, that security may be valued by another method
that the fund's board believes accurately reflects fair value. A fund that uses
fair value to price securities may value those securities higher or lower than
another fund using market quotations to price the same securities. A security's
valuation may differ depending on the method used for determining value.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders to
buy, exchange or redeem shares to the fund's agent before the agent's close of
business.
California Municipals Fund Inc. -21-
<PAGE>
- --------------------------------------------------------------------------------
Financial highlights
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
performance of each class for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables for the fiscal years ended February 28, 1996
through 1999 was audited by KPMG LLP, independent accountants, whose report,
along with the fund's financial statements, is included in the annual report
(available upon request). The information for the prior period was audited by
other auditors.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
For a Class A share of capital stock outstanding throughout each year
ended February 28:
- --------------------------------------------------------------------------------
1999 1998 1997 1996/(1)/ 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.26 $16.31 $15.40 $16.15
- --------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment
income (loss) 0.82 0.85 0.85 0.89
Net realized and
unrealized gain (loss) 0.98 0.15 0.93 (0.56)
- --------------------------------------------------------------------------------
Total income (loss) 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)
- --------------------------------------------------------------------------------
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 (000)'s $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 (loss) 4.97 5.29 5.26 5.76
- --------------------------------------------------------------------------------
Portfolio turnover rate 43% 60% 44% 59%
- --------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects per share data for the period.
- -22- California Municipals Fund Inc.
<PAGE>
For a Class B share of capital stock outstanding throughout each year
ended February 28:
<TABLE>
<CAPTION>
1999 1998 1997 1996/(1)/ 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 16.25 $ 16.32 $ 15.40 $ 16.15
- ---------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) 0.74 0.76 0.75 0.81
Net realized and unrealized
gain (loss) 0.98 0.14 0.96 (0.57)
- ---------------------------------------------------------------------------------------
Total income (loss) from operations 1.72 0.90 1.71 0.24
- ---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.76) (0.77) (0.76) (0.80)
Net realized gains (0.23) (0.20) (0.03) (0.19)
- ---------------------------------------------------------------------------------------
Total distributions (0.99) (0.97) (0.79) (0.99)
- ---------------------------------------------------------------------------------------
Net asset value, end of year $ 16.98 $ 16.25 $ 16.32 $ 15.40
- ---------------------------------------------------------------------------------------
Total return 10.88% 5.73% 11.39% 1.89%
- ---------------------------------------------------------------------------------------
Net assets, end of year (000)'s $216,23 $173,347 $ 153,044 $127,888
- ---------------------------------------------------------------------------------------
Ratios to average
net assets:
Expenses 1.21% 1.23% 1.29% 1.32%
Net investment income (loss) 4.45 4.75 4.71 5.25
- ---------------------------------------------------------------------------------------
Portfolio turnover rate 43% 60% 44% 59%
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects per share data for the period.
California Municipals Fund Inc. -23-
<PAGE>
- --------------------------------------------------------------------------------
For a Class L share/(1)/ of capital stock outstanding throughout each year ended
February 28:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997 1996/(2)/ 1995/(3)/
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 16.24 $ 16.31 $ 15.40 $ 14.19
- -----------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) 0.73 0.75 0.78 0.24
Net realized and unrealized gain 0.98 0.15 0.92 1.39*
(loss)
- -----------------------------------------------------------------------------------------
Total income (loss) from operations 1.71 0.90 1.70 1.63
- -----------------------------------------------------------------------------------------
Less distributions from:
Net investment (0.75) (0.77) (0.76) (0.23)
income/(6)/
Net realized gains (0.23) (0.20) (0.03) (0.19)
- -----------------------------------------------------------------------------------------
Total distributions (0.98) (0.97) (0.97) (0.79)
- -----------------------------------------------------------------------------------------
Net assets 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 (000)'s $32,047 $16,678 $ 10,809 $ 762
- -----------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.26% 1.29% 1.39% 1.37%
Net investment income
(loss) 4.39 4.69 4.44 5.19
- -----------------------------------------------------------------------------------------
Portfolio turnover rate 43% 60% 44% 59%
- -----------------------------------------------------------------------------------------
</TABLE>
(1) On 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 per share data for the period.
(3) For the period from November 14, 1994 (inception date) to February 28,
1995.
(4) Not annualized.
(5) Annualized.
* 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
- -24- California Municipals Fund Inc.
<PAGE>
- --------------------------------------------------------------------------------
For a Class Y share of capital stock outstanding throughout each year ended
February 28:
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
Net asset value, beginning of
year
- --------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income
Net realized and unrealized
gain (loss)
- --------------------------------------------------------------------------------
Total income (loss) from
operations
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income
Net realized gains
- --------------------------------------------------------------------------------
Total distributions
- --------------------------------------------------------------------------------
Net asset value, end of year
- --------------------------------------------------------------------------------
Total return
- --------------------------------------------------------------------------------
Net assets, end of year (000)'s
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses
Net investment income (loss)
- --------------------------------------------------------------------------------
Portfolio turnover rate
- --------------------------------------------------------------------------------
(1) From the period of [date] (inception date) to February 28, 1999.
(2) Annualized.
California Municipals Fund Inc. -25-
<PAGE>
Salomon Smith Barney(SM)
a member of citigroup [Symbol]
California Municipals Fund Inc.
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
Visit our web site. Our web site is located at www.smithbarney.com
You can also review and copy the fund's shareholder reports, prospectus and
statement of additional information at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get copies of these materials
for a duplicating fee by writing to the Public Reference Section of the
Commission, Washington, D.C. 20549-6009. Information about the public
reference room may be obtained by calling 1-800-SEC-0330. You can get the same
information free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not
lawfully sell its shares.
(1) Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file no. 811-03970)
[FD00000 6/99]
PART B-Statement of Additional Information
June 28, 1999
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is not a prospectus and
is meant to be read in conjunction with the prospectus of the Smith Barney
California Municipals Fund Inc. (the "fund") dated June 28, 1999, as
amended or supplemented from time to time (the "prospectus"), and is
incorporated by reference in it entirety into the prospectus. Additional
information about the fund's investments is available in the fund's annual
and semi-annual reports to shareholders which are incorporated herein by
reference. The prospectus and copies of the reports may be obtained free
of charge by contacting a Salomon Smith Barney Financial Consultant, or by
writing or calling Salomon Smith Barney at the address or telephone number
above.
TABLE OF CONTENTS
Directors and Executive Officers of the Fund 2
Investment Objective and Management Policies 5
Risk Factors............................................................17
Special Considerations Relating to California Municipal Securities .....18
Investment Restrictions.................................................33
Portfolio Transactions.................................................35
Portfolio Turnover......................................................36
Purchase of Shares......................................................36
Determination of Net Asset Value........................................42
Redemption of Shares 43
Investment Management and Other Services 46
Valuation of Shares 49
Exchange Privilege 50
Performance Information 51
Dividends, Distributions and Taxes 55
Additional Information 60
Financial Statements....................................................61
Appendix A 62
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The names of the directors of the fund and executive officers of the fund,
together with information as to their principal business occupations, are
set forth below. The executive officers of the fund are employees of
organizations that provide services to the fund. Each director who is an
"interested person" of the fund, as defined in the 1940 Act, is indicated
by an asterisk. The address of the "non-interested" directors and
executive officers of the fund is 388 Greenwich Street, New York, New York
10013.
Herbert Barg (Age 75). Director
Private Investor. His address is 273 Montgomery Avenue, Bala Cynwyd,
Pennsylvania 19004.
Alfred J. Bianchetti (Age 76). Director
Retired; formerly Senior Consultant to Dean Witter Reynolds Inc. His
address is 19 Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody (Age 77). Director
Consultant, HMK Associates; Retired Vice Chairman of the Board of
Restaurant Associates Corp. His address is c/o HMK Associates, 30 Columbia
Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane (Age 61). Director
Professor, Harvard Business School. His address is c/o Harvard Business
School, Soldiers Field Road, Boston, Massachusetts 02163.
Burt N. Dorsett (Age 68). Director
Managing Partner of Dorsett McCabe Management. Inc., an investment
counseling firm; Director of Research Corporation Technologies, Inc., a
nonprofit patent clearing and licensing firm. His address is 201 East
62nd Street, New York, New York 10021.
Elliot S. Jaffe (Age 72). Director
Chairman of the Board and President of The Dress Barn, Inc. His address
is 30 Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 67). Director
Attorney. His address is 277 Park Avenue, New York, New York 10172.
Joseph J. McCann (Age 68). Director
Financial Consultant; Retired Financial Executive, Ryan Homes, Inc. His
address is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon (Age 65). Chairman of the Board and Investment Officer
Managing Director of Salomon Smith Barney Inc.; President of SSBC and
Travelers Investment Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the
Board of 59 investment companies managed by affiliates of Salomon Smith
Barney. His address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr. (Age 65). Director
President, Cornelius C. Rose Associates, Inc., financial consultants, and
Chairman and Director of Performance Learning Systems, an educational
consultant. His address is Meadowbrook Village, Building 4, Apt 6, West
Lebanon, New Hampshire 03784.
Lewis E. Daidone (Age 41). Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney; Chief Financial Officer of the
Smith Barney Mutual funds; Director and Senior Vice President of SSBC and
TIA.
Peter Coffey (Age 54). Vice President and Investment Officer
Investment Officer of SSBC; Managing Director of Salomon Smith Barney.
Paul Brook (Age 45). Controller
Director of Salomon Smith Barney; from 1997-1998 Managing Director of AMT
Capital Services Inc.; prior to 1997 Partner with Ernst & Young LLP.
Christina T. Sydor (Age 48). Secretary
Managing Director of Salomon Smith Barney; General Counsel and Secretary
of SSBC and TIA.
As of June , 1999, the directors and officers of the funds, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the
fund.
To the best knowledge of the directors, as of June , 1999, the
following shareholders or "groups" (as such term is defined in Section
13(d) of the Securities Exchange Act of 1934, as amended) owned
beneficially or of record more than 5% of the shares of the following
classes:
No officer, director or employee of Salomon Smith Barney or any of its
affiliates receives any compensation from the fund for serving as an
officer of the funds or director of the fund. The fund pays each director
who is not an officer, director or employee of Salomon 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 Salomon Smith Barney or its
affiliates receives a fee of $1000 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, 1999, the directors of the fund
were paid the following compensation:
Name of Person
Aggregate
Compensati
on
from Fund
Total
Pension or
Retirement
Benefits
Accrued
as part of
Fund
Expenses
Compensati
on
From Fund
And Fund
Complex
Paid to
Directors
Number of
Funds for
Which
Directors
Serves
Within
Fund Complex
Herbert Barg **
$
$0
$
18
Alfred
Bianchetti * **
0
13
Martin Brody **
0
21
Dwight B. Crane
**
0
24
Burt N. Dorsett
**
0
13
Elliot S. Jaffe
**
0
13
Stephen E.
Kaufman **
0
15
Joseph J. McCann
**
0
13
Heath B.
McLendon *
- -
59
Cornelius C.
Rose, Jr. **
0
13
* Designates an "interested" director.
** Designates member of Audit Committee.
Upon attainment of age 80, fund directors are required to change to
emeritus status. Directors emeritus are entitled to serve in
emeritus status for a maximum of 10 years. A director emeritus may
attend meetings but has no voting rights. During the fund's last
fiscal year, aggregate compensation paid by the fund to directors
achieving emeritus status totaled $.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses the fund's investment objective and the policies.
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." SSBC Fund Management, Inc. ("SSBC" or the
"manager") serves as investment manager and administrator to the fund.
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 manager 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.
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 manager 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 manager'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 manager 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 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
manager to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers thereof are rated Baa or better by
Moody's or BBB or better by S&P. The balance of the 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 manager 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.
Low and Comparable Unrated Securities. While the market values of low-
rated and comparable unrated securities tend to react less to fluctuations
in interest rate levels than the market values of higher rated securities,
the market 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 my
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.
Municipal Bonds. 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.
Municipal Leases. 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. 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 manager 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.
Private Activity Bonds. 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 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.
Zero Coupon Securities. Zero coupon securities involve special
considerations. The fund may also invest in zero coupon bonds. 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.
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.
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
manager, 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.
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 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 manager to be of
good standing and will not be made unless, in the judgment of the manager,
the consideration to be earned from such loans would justify the risk.
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, 1999, the fund did not invest in taxable Temporary
Investments.
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 changes in the value of 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
manager 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 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.
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 in 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 next 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 a deposit for the
contracts.
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.
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 manager'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 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 manager, which could prove to be
inaccurate. Even if the manager'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.
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
1997, 1998 and 1999 fiscal years.
Allocation of transactions, including their frequency, to various dealers
is determined by the manager 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 manager may receive orders for
portfolio transactions by the fund. Information so received enables the
manager to supplement its own research and analysis with the views and
information of other securities firms. Such information may be useful to
the manager 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 manager in carrying out its ligations 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 manager, 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 manager 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
manager 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.
Non-diversified status. The fund is classified as a non-diversified
investment company under the Investment Company Act of 1940 (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.
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 1997, 1998 and
1999 fiscal years, the fund's portfolio turnover rate was 60%, 43% and
____%, respectively.
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's
investment objective is fundamental and may not be changed without the
approval of the holders of a majority of the outstanding shares of the
fund.
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.
RISK FACTORS
The following summaries are included for the purpose of providing certain
information regarding the economic climate and financial condition of the
State of California and Puerto Rico, and are based primarily on
information from official statements made available in connection with the
issuance of certain securities and other documents and sources and does
not purport to be complete. The trust has not undertaken to verify
independently such information and the trust assumes no responsibility for
the accuracy of such information. These summaries do not provide
information regarding most securities in which the fund is permitted to
invest and in particular do not provide specific information on the
issuers or types of municipal securities in which the fund invests or the
private business entities whose obligations support the payments on AMT-
Subject bonds in which the fund will invest. Therefore, the general risk
factors as to the credit of the state or its political subdivisions
discussed herein may not be relevant to the fund. Although revenue
obligations of a state or its political subdivisions may be payable from
a specific project or source, there can be no assurance that future
economic difficulties and the resulting impact on state and local
government finances will not adversely affect the market value of the fund
or the ability of the respective obligors to make timely payments of
principal and interest on such obligations. In addition, a number of
factors may adversely affect the ability of the issuers of municipal
securities to repay their borrowings that are unrelated to the financial
or economic condition of a state, and that, in some cases, are beyond
their control. Furthermore, issuers of municipal securities are generally
not required to provide ongoing information about their finances and
operations to holders of their debt obligations, although a number of
cities, counties and other issuers prepare annual reports.
The following is based on information obtained from an Official Statement
dated December 9, 1998 relating to $600,000,000 State of California
General Obligation Bonds and the Governor's Budget Summary 1999-2000.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES
Special Considerations Relating To California Exempt Obligations
Some of the significant financial considerations relating to the fund's
investments in California Exempt Obligations are summarized below. This
summary information is derived principally from official statements and
prospectuses relating to securities offerings of the State of California
and various local agencies in California, available as of the date of this
SAI and does not purport to be a complete description of any of the
considerations mentioned herein. It is also based on the disclosure
statement filed in the County of Orange bankruptcy case. The accuracy and
completeness of the information contained in such official statements and
disclosure statement has not been independently verified.
Alternative Minimum Tax
Under current federal income tax law, (1) interest on tax-exempt municipal
securities issued after August 7, 1986 which are "specified private
activity bonds," and the proportionate share of any exempt-interest
dividend paid by a regulated investment company which receives interest
from such specified private activity bonds, will be treated as an item of
tax preference for purposes of the alternative minimum tax ("AMT") imposed
on individuals and corporations, though for regular Federal income tax
purposes such interest will remain fully tax-exempt, and (2) interest on
all tax-exempt obligations will be included in "adjusted current earnings"
of corporations for AMT purposes. Such private activity bonds ("AMT-
Subject bonds"), which include industrial development bonds and bonds
issued to finance such projects as airports, housing projects, solid waste
disposal facilities, student loan programs and water and sewage projects,
have provided, and may continue to provide, somewhat higher yields than
other comparable municipal securities.
Investors should consider that, in most instances, no state, municipality
or other governmental unit with taxing power will be obligated with
respect to AMT-Subject bonds. AMT-Subject bonds are in most cases revenue
bonds and do not generally have the pledge of the credit or the taxing
power, if any, of the issuer of such bonds. AMT-Subject bonds are
generally limited obligations of the issuer supported by payments from
private business entities and not by the full faith and credit of a state
or any governmental subdivision. Typically the obligation of the issuer
of AMT-Subject bonds is to make payments to bond holders only out of and
to the extent of, payments made by the private business entity for whose
benefit the AMT-Subject bonds were issued. Payment of the principal and
interest on such revenue bonds depends solely on the ability of the user
of the facilities financed by the bonds to meet its financial obligations
and the pledge, if any, of real and personal property so financed as
security for such payment. It is not possible to provide specific detail
on each of these obligations in which fund assets may be invested.
Risk of Concentration In a Single State
The primary purpose of investing in a portfolio of a single state's
municipal securities is the special tax treatment accorded the state's
resident individual investors. However, payment of interest and
preservation of principal is dependent upon the continuing ability of the
state's issuers and/or obligors on state, municipal and public authority
debt obligations to meet their obligations thereunder. Investors should be
aware of certain factors that might affect the financial condition of
issuers of municipal securities, consider the greater risk of the
concentration of a fund versus the safety that comes with a less
concentrated investment portfolio and compare yields available in
portfolios of the relevant state's issues with those of more diversified
portfolios, including out-of-state issues, before making an investment
decision.
Municipal securities in which a fund's assets are invested may include
debt obligations of the municipalities and other subdivisions of the
relevant state issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, schools, streets and water and sewer works.
Other purposes for which municipal securities may be issued include the
obtaining of funds to lend to public or private institutions for the
construction of facilities such as educational, hospital, housing, and
solid waste disposal facilities. The latter, including most AMT-Subject
bonds, are generally payable from private sources which, in varying
degrees, may depend on local economic conditions, but are not necessarily
affected by the ability of the state and its political subdivisions to pay
their debts. It is not possible to provide specific details on each of
these obligations in which fund assets may be invested. However, all such
securities, the payment of which is not a general obligation of an issuer
having general taxing power, must satisfy, at the time of an acquisition
by the fund, the minimum rating(s). See "Appendix A: Bond and Commercial
Paper Ratings" for a description of ratings and rating criteria. Some
municipal securities may be rated based on a "moral obligation" contract
which allows the municipality to terminate its obligation by deciding not
to make an appropriation. Generally, no legal remedy is available against
the municipality that is a party to the "moral obligation" contract in the
event of such non-appropriation.
Municipal Market Volatility. Municipal securities can be significantly
affected by political changes as well as uncertainties in the municipal
market related to taxation, legislative changes, or the rights of
municipal security holders. Because many municipal securities are issued
to finance similar projects, especially those relating to education,
health care, transportation and utilities, conditions in those sectors can
affect the overall municipal market. In addition, changes in the financial
condition of an individual municipal insurer can affect the overall
municipal market.
Interest Rate Changes. Debt securities have varying levels of sensitivity
to changes in interest rates. In general, the price of a debt security can
fall when interest rates rise and can rise when interest rates fall.
Securities with longer maturities can be more sensitive to interest rate
changes. In other words, the longer the maturity of a security, the
greater the impact a change in interest rates could have on the security's
price. In addition, short-term and long-term interest rates do not
necessarily move in the same amount or the same direction. Short-term
securities tend to react to changes in short-term interest rates, and
long-term securities tend to react to changes in long-term interest rates.
Issuer-Specific Changes. Changes in the financial condition of an issuer,
changes in specific economic or political conditions that affect a
particular type of security or issuer, and changes in general economic or
political conditions can affect the credit quality or value of an issuer's
securities. Lower-quality debt securities (those of less than investment-
grade quality) tend to be more sensitive to these changes than higher-
quality debt securities. Entities providing credit support or a maturity-
shortening structure also can be affected by these types of changes.
Municipal securities backed by current or anticipated revenues from a
specific project or specific assets can be negatively affected by the
discontinuance of the taxation supporting the project or assets or the
inability to collect revenues for the project or from the assets. If the
Internal Revenue Service determines an issuer of a municipal security has
not complied with applicable tax requirements, interest from the security
could become taxable and the security could decline significantly in
value. In addition, if the structure of a security fails to function as
intended, interest from the security could become taxable or the security
could decline in value.
Limits on Spending and Taxes
Under California (the "State") constitutional amendments, the State is
subject to an annual appropriations limit. The limit may be exceeded in
cases of emergency. The State's yearly appropriations limit is based on
the limit for the prior year adjusted annually for changes in California
per capita personal income and population and any transfers of financial
responsibility of providing services to or from another unit of
government.
On November 8, 1988, voters approved Proposition 98, a combined initiative
constitutional amendment and statute, which changed State funding of
public education below the university level and the operation of the State
appropriations limit, primarily by guaranteeing local schools and
community colleges ("K-14 schools") a minimum share of General Fund
revenues. Under Proposition 98, K-14 schools are guaranteed the greater
of a fixed percentage of General Fund revenues and the prior year's
appropriation adjusted for growth.
During the recession, General Fund revenues for several years were less
than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage
provided in the law. The Legislature responded to these developments by
designating the "extra" Proposition 98 payments in one year as a "loan"
from future years' entitlements. By implementing these actions, per-pupil
funding from Proposition 98 sources stayed almost constant at
approximately $4,200 from Fiscal Year 1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The
settlement in this case 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 an
appropriation above the current Proposition 98 base calculation. The
schools' share of the repayment will count as appropriations that count
toward satisfying the Proposition 98 guarantee, or from "below" the
current base. Repayments are spread over the eight-year period of 1994-95
through 2001-02 to mitigate any adverse fiscal impact. The 1998-99 Budget
Act appropriated $250 million as repayment of prior years' loans to
schools, as part of the settlement in this case.
Short-Term Borrowing of California
As part of its cash management program, the State has regularly issued
short-term obligations to meet cash flow needs. Between spring 1992 and
summer 1994, the State had depended upon external borrowing, including
borrowings extending into the subsequent fiscal year, to meet its cash
needs, including repayment of maturing Notes and Warrants. The State
issued $1.7 billion of revenue anticipation notes for the 1998-99 Fiscal
Year, which notes are to mature on June 30, 1999.
The State Treasurer is working closely with the State Controller and the
Department of Finance to manage the State's cash flow on a regular basis,
with the goal of reducing the State's external cash flow borrowing. The
three offices are also working to develop programs to use commercial paper
in whole or in part for the State's cash flow borrowing needs, and for
construction period financing for both general obligation bond-funded and
lease-revenue bond-funded projects. As of March 1, 1997 the Finance
Committees had authorized the issuance of approximately $3.356 billion of
commercial paper notes, but as of that date only $367.78 million aggregate
principal amount of general obligation commercial paper notes was actually
issued and outstanding.
The State has always paid the principal of and interest on its general
obligation bonds, general obligation commercial paper, lease-purchase debt
and short-term obligations, including revenue anticipation notes and
revenue anticipation warrants when due.
1998-99 Fiscal Year Budget
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal
Year of $55.4 billion, and proposed expenditures in the same amount.
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and the
Governor signed it on August 21, 1998. In signing the Budget Bill, the
Governor used his line-item veto power to reduce expenditures by $1.360
billion from the General Fund, and $160 million from Special Funds. Of
this total, the Governor indicated that about $250 million of vetoed funds
were "set aside" to fund programs for education. Vetoed items included
education funds, salary increases and many individual resources and
capital projects.
The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion.
After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion
from bond funds. The Budget Act projects a balance in the State's budget
reserve (the Special Fund for Economic Uncertainties or SFEU) at June 30,
1999 (but without including the "set aside" veto amount) of $1.255
billion, a little more than 2% of General Fund revenues. The Budget Act
assumes the State will carry out its normal intra-year cash flow borrowing
in the amount of $1.7 billion of revenue anticipation notes, which were
issued on October 1, 1998.
The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill that
provides for a phased-in reduction of the Vehicle License Fee (VLF).
Since the VLF is currently transferred to cities and counties, the bill
provides for the General Fund to replace the lost revenues. Starting on
January 1, 1999, the VLF will be reduced by 25% at a cost to the General
Fund of approximately $500 million in the 1998-99 Fiscal Year and about $1
billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters' tax credit ($133 million), and various targeted
business tax credits ($106 million).
Other significant elements of the 1998-99 Budget Act are as follows:
1. Proposition 98 funding for K-12 schools is increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, about $300
million higher than the minimum Proposition 98 guaranty. An additional
$600 million was appropriated to "settle up" prior years' Proposition 98
entitlements, and was primarily devoted to one-time uses such as block
grants, deferred maintenance, and computer and laboratory equipment. The
Budget also includes $250 million as repayment of prior years' loans to
schools, as part of the settlement of California Teachers' Association v.
Gould.
2. Funding for higher education increased substantially above
the level called for in the Governor's four-year compact. General Fund
support was increased by $340 million (15.6%) for the University of
California and $267 million (14.1%) for the California State University
system. In addition, Community Colleges received a $300 million (6.6%)
increase under Proposition 98.
3. The Budget includes increased funding for health, welfare
and social services programs. A 4.9% grant increase was included in the
basic welfare grants, the first increase in those grants in 9 years.
4. Funding for the judiciary and criminal justice programs
increased by about 11% over 1997-98, primarily to reflect increased State
support for local trial courts and a rising prison population.
5. The Budget also included new funding for resources projects,
dedication of $376 million of General Fund moneys for capital outlay
projects, funding of a 3% State employee salary increase, funding of 2,000
new Department of Transportation positions to accelerate transportation
construction projects, and funding of the Infrastructure and Economic
Development Bank ($50 million).
6. The State received approximately $167 million of federal
reimbursements to offset costs related to the incarceration of
undocumented alien felons for federal fiscal year 1997. The State
anticipates receiving approximately $195 million in federal reimbursements
for federal fiscal year 1998.
After the Budget Act was signed, and prior to the close of the Legislative
session on August 31, 1998, the Legislature passed a variety of fiscal
bills. The Governor had until September 30, 1998 to sign or veto these
bills. The bills with the most significant fiscal impact that the
Governor signed include $235 million for certain water system improvements
in southern California, $243 million for the State's share of the purchase
of environmentally sensitive forest lands, $178 million for state prisons,
$160 million for housing assistance ($40 million of which was included in
the 1998-99 Budget Act and an additional $120 million reflected in
Proposition 1A), and $125 million for juvenile facilities. The Governor
also signed bills totaling $223 million for educational programs that were
part of his $250 million veto "set aside," and $32 million for local
governments fiscal relief. In addition, he signed a bill reducing by $577
million the State's obligation to contribute to the State Teachers'
Retirement System in the 1998-99 Fiscal Year.
Based solely on the legislation enacted, on a net basis, the reserve for
June 30, 1999, was reduced by $256 million. On the other hand, 1997-98
revenues have been increased by $160 million. The revised June 30, 1999,
reserve is projected to be $1,159 million or $96 million below the level
projected in the Budget Act. In November 1998, the Legislative Analyst's
Office released a report predicting that General Fund revenues for 1998-
99 would be somewhat lower, and expenditures somewhat higher, than the
Budget Act forecasts, but the net variance would be within the projected
$1.2 billion year-end reserve amount.
1995-96 through 1997-98 Fiscal Years
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than
expected revenues, slowdown in growth of social welfare programs, and
continued spending restraint based on the actions taken in earlier years.
The State's cash position also improved, and no external deficit
borrowing has occurred over the end of these three fiscal years.
The economy grew strongly during these fiscal years and, as a result, the
General Fund received substantially greater tax revenues (around $2.2
billion in 1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98)
than initially forecast when the related budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, and to make up shortfalls from reduced federal health and
welfare aid in 1995-96 and 1996-97. The accumulated budget deficit from
the recession years was finally eliminated. The Department of Finance
estimates that the State's budget reserve (the SFEU) totaled $639.8
million as of June 30, 1997 and $1.782 billion at June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large
increase in funding for K-14 education under Proposition 98, reflecting
strong revenues that exceeded initial budgeted amounts. Part of the nearly
$1.75 billion of increased spending was allocated to prior fiscal years.
2. The Budget Act reflected payment of $1.228 billion to
satisfy a court judgment in a lawsuit regarding payments to the State
pension fund, and brought funding of the State's pension contribution back
to the quarterly basis that existed prior to the deferral actions that
were invalidated by the courts.
3. Funding from the General Fund for the University of
California and the California State University system was increased by
about 6 percent ($121 million and $107 million respectively), and there
was no increase in student fees.
4. Unlike prior years, this Budget Act did not depend on
uncertain federal budget actions. About $300 million in federal funds,
already included in the federal Fiscal Year 1997 and 1998 budgets, was
included in the Budget Act, to offset incarceration costs for illegal
aliens.
5. The Budget Act contained no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another year, saving
approximately $500 million.
Fiscal Years Prior to 1995-96
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic conditions (including a
recession which began in 1990) and growth of the largest General Fund
programs--K-14 education, health, welfare and corrections--at rates faster
than the revenue base. During this period, expenditures exceeded revenues
in four out of six years up to 1992-93, and the State accumulated and
sustained a budget deficit approaching $2.8 billion at its peak on June
30, 1993. Between the 1991-92 and 1994-95 Fiscal Years, each budget
required multibillion dollar actions to bring projected revenues and
expenditures into balance, including significant cuts in health and
welfare program expenditures; transfers of program responsibilities and
funding from the State to local governments; transfer of about $3.6
billion in annual local property tax revenues from other local governments
to local school districts, thereby reducing State funding for schools
under Proposition 98; and revenue increases (particularly in the 1991-92
Fiscal Year), most of which were for a short duration.
Despite these budget actions, the effects of the recession led to large,
unanticipated budget deficits. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to retire the deficit in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-
94, a second two-year plan was implemented in 1994-95, again using cross-
fiscal revenue anticipation warrants to partly finance the deficit into
the 1995-96 fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available
to pay its ongoing obligations. When the Legislature and the Governor
failed to adopt a budget for the 1992-93 Fiscal Year by July 1, 1992,
which would have allowed the State to carry out its normal annual cash
flow borrowing to replenish its cash reserves, the Controller issued
registered warrants to pay a variety of obligations representing prior
years' or continuing appropriations and mandates from court orders.
Available funds were used to make constitutionally-mandated payments, such
as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
Economic Overview
California's economy is the largest among the 50 states and one of the
largest in the world. Recent economic expansion has been marked by strong
growth in high technology business services (including computer software),
construction, computers and electronic components.
As 1998 unfolded, the impact of Asia's recession on California began to
emerge. Aerospace and electronics manufacturing employment peaked in
March, and by November had lost almost 15,000 jobs, or nearly 3 percent of
the industries' workforce. Total nonfarm employment started 1998 with
annual growth above 3.5 percent, but more recently the year-to-year pace
has slowed to approximately 2.7 percent.
Overall, however, California's economy continued to expand in 1998. Non-
farm employment growth averaged 3.2 percent and personal income was up
more than 6 percent. The jobless rate was below 6 percent most of the
year. Non-residential construction activity remained quite strong, with
building permit value up almost 18 percent. Homebuilding continued on a
moderate recovery path, with permits for new houses reaching 126,000
units, a 13.5 percent increase over 1997.
Litigation
The State is currently involved in certain legal proceedings that, if
decided against the State, may require the State to make significant
future expenditures or may impair future revenue sources. Following are
significant lawsuits involving the State as of December 9, 1998:
On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers Association et al.
v. Kathleen Connell filed a complaint challenging the authority of the
State Controller to make payments from the State Treasury in the absence
of a state budget. On July 21, 1998, the trial court issued a preliminary
injunction prohibiting the State Controller from paying moneys from the
State Treasury for fiscal year 1998-99, with certain limited exceptions,
in the absence of a state budget. The preliminary injunction, among other
things, prohibited the State Controller from making any payments pursuant
to any continuing appropriation.
On July 22, 1998, the State Controller asked the California Supreme Court
to immediately stay the trial court's preliminary injunction and to
overrule the order granting the preliminary injunction on the merits. On
July 29, 1998, the Supreme Court transferred the State Controller's
request to the Court of Appeal. The matters are now pending before the
Court of Appeal.
In Hayes v. Commission on State Mandates, certain local school districts
sought reimbursements for special education programs for handicapped
children. The State Board of Control, which was succeeded by the
Commission on State Mandates (COSM), decided in favor of the local school
districts. The decision was appealed by the Director of Finance in the
trial court and was remanded to the COSM for redetermination. The COSM
expanded the claim to include supplemental claims filed by seven
additional educational institutions. The potential liability to the State
has been estimated at more than $1 billion. A final consolidated decision
was expected to be issued in late 1998.
In State v. Stringfellow, the State is seeking recovery for cleanup costs
of a toxic waste site presently owned by the State. Present estimates of
the cleanup range from $300 million to $800 million.
The State is a defendant in a coordinated action involving 3,000
plaintiffs seeking recovery for damages caused by the Yuba River flood of
1986. The State's potential liability to all plaintiffs in this lawsuit
ranges from $800 million to $1.5 billion.
Year 2000
The State's reliance on information technology in every aspect of its
operations has made Year 2000 related information technology ("IT") issues
a high priority for the State. The Department of Information Technology
("DOIT"), an independent office reporting directly to the Governor, is
responsible for ensuring the State's information technology processes are
fully functional before the year 2000.
In the July Quarterly Report, the DOIT estimates total Year 2000 costs
identified by the departments under its supervision at about $239 million,
of which more than $100 million was projected to be expended in fiscal
years 1998-99 and 1999-2000. The October Quarterly Report indicated the
total costs were then estimated to be at least $290 million, and the
estimate would likely increase in the future. These costs are part of
much larger overall IT costs incurred annually by State departments and do
not include costs for remediation for embedded technology, desktop systems
and additional costs resulting from discoveries in the testing process.
For fiscal year 1998-99, the Legislature created a $20 million fund for
unanticipated Year 2000 costs, which can be increased if necessary.
Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Year 2000 compliance, the task is very
large and will likely encounter unexpected difficulties. The State cannot
predict whether all mission critical systems will be ready and tested by
late 1999 or what impact failure of any particular IT system(s) or of
outside interfaces with State IT systems might have. The State
Treasurer's Office and the State Controller's Office report that they are
both on schedule to complete their Year 2000 remediation projects by
December 31, 1998, allowing full testing during 1999.
SPECIAL CONSIDERATIONS REGARDING PUERTO RICO
The following highlights some of the more significant financial trends and
problems affecting the Commonwealth of Puerto Rico (the "Commonwealth" or
"Puerto Rico"), and is based on information drawn from official statements
and prospectuses relating to the securities offerings of Puerto Rico, its
agencies and instrumentalities, as available on the date of this SAI. SSBC
has not independently verified any of the information contained in such
official statements, prospectuses, and other publicly available documents,
but is not aware of any fact that would render such information materially
inaccurate.
The economy of Puerto Rico is fully integrated with that of the United
States. In fiscal 1997, trade with the United States accounted for
approximately 88% of Puerto Rico's exports and approximately 62% of its
imports. In this regard, in fiscal 1997 Puerto Rico experienced a $2.7
billion positive adjusted merchandise trade balance.
Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1997, aggregate
personal income was $32.1 billion ($30.0 billion in 1992 prices) and
personal per capita income was $8,509 ($7,957 in 1992 prices). Gross
product in fiscal 1993 was $25.1 billion ($24.5 billion in 1992 prices)
and gross product in fiscal 1997 was $32.1 billion ($27.7 billion in 1992
prices). This represents an increase in gross product of 27.7% from fiscal
1993 to 1997 (13.0% in 1992 prices).
Puerto Rico's economic expansion, which has lasted over ten years,
continued throughout the five-year period from fiscal 1993 through fiscal
1997. Almost every sector of the economy participated, and record levels
of employment were achieved. Factors behind the continued expansion
included Government-sponsored economic development programs, periodic
declines in the exchange value of the U.S. dollar, increases in the level
of federal transfers, and the relatively low cost of borrowing funds
during the period.
Average employment increased from 999,000 in fiscal 1993 to 1,128,300 in
fiscal 1997. Unemployment, although at relatively low historical levels,
remains above the U.S. average. Average unemployment decreased from 16.8%
in fiscal 1993 to 13.1% in fiscal 1997.
Manufacturing is the largest sector in the economy accounting for $19.8
billion or 41.2% of gross domestic product in fiscal 1997. The
manufacturing sector employed 153,273 workers as of March 1997.
Manufacturing in Puerto Rico is now more diversified than during earlier
phases of industrial development. In the last two decades industrial
development has tended to be more capital intensive and dependent on
skilled labor. This gradual shift is best exemplified by heavy investment
in pharmaceuticals, scientific instruments, computers, microprocessors,
and electrical products over the last decade. The service sector, which
includes wholesale and retail trade and finance, insurance, real estate,
hotels and related services, and other services, ranks second in its
contribution to gross domestic product and is the sector that employs the
greatest number of people.
In fiscal 1997, the service sector generated $18.4 billion in gross
domestic product or 38.2% of the total. Employment in this sector grew
from 467,000 in fiscal 1993 to 551,000 in fiscal 1997, a cumulative
increase of 17.8%. This increase was greater than the 12.9% cumulative
growth in employment over the same period providing 48% of total
employment. The Government sector of the Commonwealth plays an important
role in the economy of the island. In fiscal year 1997, the Government
accounted for $5.2 billion of Puerto Rico's gross domestic product and
provided 10.9% of the total employment. The construction industry has
experienced real growth since fiscal 1987. In fiscal 1997, investment in
construction rose to $4.7 billion, an increase of 14.7% as compared to
$4.1 billion for fiscal 1996. Tourism also contributes significantly to
the island economy, accounting for $2.0 billion of gross domestic product
in fiscal 1997.
The present administration has developed and is implementing a new
economic development program which is based on the premise that the
private sector should provide the primary impetus for economic development
and growth. This new program, which is referred to as the New Economic
Model, promotes changing the role of the Government from one of being a
provider of most basic services to that of a facilitator for private
sector initiatives and encourages private sector investment by reducing
Government-imposed regulatory restraints.
The New Economic Model contemplates the development of initiatives that
will foster private investment in, and private management of, sectors that
are served more efficiently and effectively by the private enterprise. One
of these initiatives has been the adoption of a new tax code intended to
expand the tax base, reduce top personal and corporate tax rates, and
simplify the tax system. Another initiative is the improvement and
expansion of Puerto Rico's infrastructure to facilitate private sector
development and growth, such as the construction of the water pipeline and
cogeneration facilities described below and the construction of a light
rail system for the San Juan metropolitan area.
The New Economic Model also seeks to identify and promote areas in which
Puerto Rico can compete more effectively in the global markets. Tourism
has been identified as one such area because of its potential for job
creation and contribution to the gross product. In 1993, a new Tourism
Incentives Act and a Tourism Development Fund were implemented in order to
provide special tax incentives and financing for the development of new
hotel projects and the tourism industry. As a result of these initiatives,
new hotels have been constructed or are under construction which have
increased the number of hotel rooms on the island from 8,415 in fiscal
1992 to 10,877 at the end of fiscal 1997 and to a projected 11,972 by the
end of fiscal 1998.
The New Economic Model also seeks to reduce the size of the Government's
direct contribution to gross domestic product. As part of this goal, the
Government has transferred certain Governmental operations and sold a
number of its assets to private parties. Among these are: (i) the
Government sold the assets of the Puerto Rico Maritime Authority; (ii) the
Government executed a five-year management agreement for the operation and
management of the Aqueducts and Sewer Authority by a private company;
(iii) the Aqueducts and Sewer Authority executed a construction and
operating agreement with a private consortium for the design,
construction, and operation of an approximately 75 million gallon per day
water pipeline to the San Juan metropolitan area from the Dos Bocas
reservoir in Utuado; (iv) the Electric Power Authority executed power
purchase contracts with private power producers under which two
cogeneration plants (with a total capacity of 800 megawatts) will be
constructed; (v) the Corrections Administration entered into operating
agreements with two private companies for the operation of three new
correctional facilities; (vi) the Government entered into a definitive
agreement to sell certain assets of a pineapple juice processing business
and sold certain mango growing operations; (vii) the Government is in the
process of transferring to local sugar cane growers certain sugar
processing facilities; (viii) the Government sold two hotel properties and
is currently negotiating the sale of a complex consisting of two hotels
and a convention center; and (ix) the Government has announced its
intention to sell the Puerto Rico Telephone Company and is currently
involved in the sale process.
One of the goals of the Rossello administration is to change Puerto Rico's
public health care system from one in which the Government provides free
health services to low income individuals through public health
facilities owned and administered by the Government to one in which all
medical services are provided by the private sector and the Government
provides comprehensive health insurance coverage for qualifying (generally
low income) Puerto Rico residents. Under this new system, the Government
selects, through a bidding system, one private health insurance company in
each of several designated regions of the island and pays such insurance
company the insurance premium for each eligible beneficiary within such
region. This new health insurance system is now covering 61 municipalities
out of a total of 78 on the island. It is expected that 11 municipalities
will be added by the end of fiscal 1998 and 5 more by the end of fiscal
1999. The total cost of this program will depend on the number of
municipalities included in the program, the number of participants
receiving coverage, and the date coverage commences. As of December 31,
1997, over 1.1 million persons were participating in the program at an
estimated annual cost to Puerto Rico for fiscal 1998 of approximately $672
million. In conjunction with this program, the operation of certain public
health facilities has been transferred to private entities. The
Government's current privatization plan for health facilities provides for
the transfer of ownership of all health
facilities to private entities. The Government sold six health facilities
to private companies and is currently in negotiations with other private
companies for the sale of thirteen health facilities to such companies.
One of the factors assisting the development of the manufacturing sector
in Puerto Rico has been the federal and Commonwealth tax incentives
available, particularly those under the Puerto Rico Industrial Incentives
Program and Sections 30A and 936 of the Internal Revenue Code 1986, as
amended (the "Code").
Since 1948, Puerto Rico has promulgated various industrial incentives laws
designed to stimulate industrial investment. Under these laws, companies
engaged in manufacturing and certain other designated activities were
eligible to receive full or partial exemption from income, property, and
other taxes. The most recent of these laws is Act No. 135 of December 2,
1997 (the "1998 Tax Incentives Law").
The benefits provided by the 1998 Tax Incentives Law are available to new
companies as well as companies currently conducting tax-exempt operations
in Puerto Rico that choose to renegotiate their existing tax exemption
grant. Activities eligible for tax exemption include manufacturing,
certain services performed for markets outside Puerto Rico, the production
of energy from local renewable sources for consumption in Puerto Rico, and
laboratories for scientific and industrial research. For companies
qualifying thereunder, the 1998 Tax Incentives Law imposes income tax
rates ranging from 2% to 7%. In addition, it grants 90% exemption from
property taxes, 100% exemption from municipal license taxes during the
first eighteen months of operation and between 80% and 60% thereafter, and
100% exemption from municipal excise taxes. The 1998 Tax Incentives Law
also provides various special deductions designated to stimulate
employment and productivity, research and development, and capital
investment in Puerto Rico.
Under the 1998 Tax Incentives Law, companies are able to repatriate or
distribute their profits free of tollgate taxes. In addition, passive
income derived from designated investments will continue to be fully
exempt from income and municipal license taxes. Individual shareholders of
an exempted business will be allowed a credit against their Puerto Rico
income taxes equal to 30% of their proportionate share in the exempted
business' income tax liability. Gain from the sale or exchange of shares
of an exempted business by its shareholders during the exemption period
will be subject to a 4% income tax rate.
For many years, U.S. companies operating in Puerto Rico enjoyed a special
tax credit that was available under Section 936 of the Code. Originally,
the credit provided an effective 100% federal tax exemption for operating
and qualifying investment income from Puerto Rico sources. Amendments to
Section 936 made in 1993 (the "1993 Amendments") instituted two
alternative methods for calculating the tax credit and limited the amount
of the credit that a qualifying company could claim. These limitations are
based on a percentage of qualifying income (the "percentage of income
limitation") and on qualifying expenditures on wages and other wage
related benefits (the "economic activity limitation", also known as the
"wage credit limitation"). As a result of amendments incorporated in the
Small Business Job Protection Act of 1996 enacted by the U.S. Congress and
signed into law by President Clinton on August 20, 1996 (the "1996
Amendments"), the tax credit, as described below, is now being phased out
over a ten-year period for existing claimants and is no longer available
for corporations that established operations in Puerto Rico after October
13, 1995 (including existing Section 936 Corporations (as defined below)
to the extent substantially new operations are established in Puerto
Rico). The 1996 Amendments also moved the credit based on the economic
activity limitation to Section 30A of the Code and phased it out over 10
years. In addition, the 1996 Amendments eliminated the credit previously
available for income derived from certain qualified investments in Puerto
Rico. The Section 30A credit and the remaining Section 936 credit are
discussed below.
Section 30A. The 1996 Amendments added a new Section 30A to the Code.
Section 30A permits a "qualifying domestic corporation" ("QDC") that meets
certain gross income tests (which are similar to the 80% and 75% gross
income tests of Section 936 of the Code discussed below) to claim a credit
(the "Section 30A credit") against the federal income tax imposed on
taxable income derived from sources outside the United States from the
active conduct of a trade or business in Puerto Rico or from the sale of
substantially all the assets used in such business ("possession income").
A QDC is a U.S. corporation which (i) was actively conducting a trade or
business in Puerto Rico on October 13, 1995, (ii) had a Section 936
election in effect for its taxable year that included October 13, 1995,
(iii) does not have in effect an election to use the percentage limitation
of Section 936(a)(4)(B) of the Code, and (iv) does not add a "substantial
new line of business."
The Section 30A credit is limited to the sum of (i) 60% of qualified
possession wages as defined in the Code, which includes wages up to 85% of
the maximum earnings subject to the OASDI portion of Social Security taxes
plus an allowance for fringe benefits of 15% of qualified possession
wages, (ii) a specified percentage of depreciation deductions ranging
between 15% and 65%, based on the class life of tangible property, and
(iii) a portion of Puerto Rico income taxes paid by the QDC, up to a 9%
effective tax rate (but only if the QDC does not elect the profit-split
method for allocating income from intangible property).
A QDC electing Section 30A of the Code may compute the amount of its
active business income, eligible for the Section 30A Credit, by using
either the cost sharing formula, the profit-split formula, or the cost-
plus formula, under the same rules and guidelines prescribed for such
formulas as provided under Section 936 (see discussion below). To be
eligible for the first two formulas, the QDC must have a significant
presence in Puerto Rico.
In the case of taxable years beginning after December 31, 2001, the amount
of possession income that would qualify for the Section 30A credit would
be subject to a cap based on the QDC's possession income for an average
adjusted base period ending before October 14, 1995.
Section 30A applies only to taxable years beginning after December 31,
1995 and before January 1, 2006.
Section 936. Under Section 936 of the Code, as amended by the 1996
Amendments, and as an alternative to the Section 30A credit, U.S.
corporations that meet certain requirements and elect its application
("Section 936 Corporations") are entitled to credit against their U.S.
corporate income tax, the portion of such tax attributable to income
derived from the active conduct of a trade or business within Puerto Rico
("active business income") and from the sale or exchange of substantially
all assets used in the active conduct of such trade or business. To
qualify under Section 936 in any given taxable year, a corporation must
derive for the three-year period immediately preceding the end of such
taxable year (i) 80% or more of its gross income from sources within
Puerto Rico and (ii) 75% or more of its gross income from the active
conduct of a trade or business in Puerto Rico.
Under Section 936, a Section 936 Corporation may elect to compute its
active business income, eligible for the Section 936 credit, under one of
three formulas: (A) a cost-sharing formula, whereby it is allowed to claim
all profits attributable to manufacturing intangibles, and other functions
carried out in Puerto Rico, provided it contributes to the research and
development expenses of its affiliated group or pays certain royalties;
(B) a profit-split formula, whereby it is allowed to claim 50% of the net
income of its affiliated group from the sale of products manufactured in
Puerto Rico; or (C) a cost-plus formula, whereby it is allowed to claim a
reasonable profit on the manufacturing costs incurred in Puerto Rico. To
be eligible for the first two formulas, the Section 936 Corporation must
have a significant business presence in Puerto Rico for purposes of the
Section 936 rules.
As a result of the 1993 Amendments and the 1996 Amendments, the Section
936 credit is only available to companies that elect the percentage of
income limitation and is limited in amount to 40% of the credit allowable
prior to the 1993 Amendments, subject to a five-year phase-in period from
1994 to 1998 during which period the percentage of the allowable credit is
reduced from 60% to 40%.
In the case of taxable years beginning on or after 1998, the possession
income subject to the Section 936 credit will be subject to a cap based on
the Section 936 Corporation's possession income for an average adjusted
base period ending on October 14, 1995. The Section 936 credit is
eliminated for taxable years beginning in 2006.
Proposal to Extend the Phaseout of Section 30A. During 1997, the
Government of Puerto Rico proposed to Congress the enactment of a new
permanent federal incentive program similar to that provided under Section
30A. Such a program would provide U.S. companies a tax credit based on
qualifying wages paid and other wage-related expenses, such as fringe
benefits, as well as depreciation expenses for certain tangible assets and
research and development expenses. Under the Governor's proposal, the
credit granted to qualifying companies would continue in effect until
Puerto Rico shows, among other things, substantial economic improvements
in terms of certain economic parameters. The fiscal 1998 budget submitted
by President Clinton to Congress in February 1997 included a proposal to
modify Section 30A to (i) extend the availability of the Section 30A
credit indefinitely; (ii) make it available to companies establishing
operations in Puerto Rico after October 13, 1995; and (iii) eliminate the
income cap. Although this proposal, was not included in the final fiscal
1998 federal budget, President Clinton's fiscal 1999 budget submitted to
Congress again included these modifications to Section 30A. While the
Government of Puerto Rico plans to continue lobbying for this proposal, it
is not possible at this time to predict whether the Section 30A credit
will be so modified.
Outlook. It is not possible at this time to determine the long-term
effect on the Puerto Rico economy of the enactment of the 1996 Amendments.
The Government of Puerto Rico does not believe there will be short-term or
medium-term material adverse effects on Puerto Rico's economy as a result
of the enactment of the 1996 Amendments. The Government of Puerto Rico
further believes that during the phase-out period sufficient time exists
to implement additional incentive programs to safeguard Puerto Rico's
competitive
Issuer-Specific Changes. Changes in the financial condition of an issuer,
changes in specific economic or political conditions that affect a
particular type of security or issuer, and changes in general economic or
political conditions can affect the credit quality or value of an issuer's
securities. Lower-quality debt securities (those of less than investment-
grade quality) tend to be more sensitive to these changes than higher-
quality debt securities. Entities providing credit support or a maturity-
shortening structure also can be affected by these types of changes.
Municipal securities backed by current or anticipated revenues from a
specific project or specific assets can be negatively affected by the
discontinuance of the taxation supporting the project or assets or the
inability to collect revenues for the project or from the assets. If the
Internal Revenue Service determines an issuer of a municipal security has
not complied with applicable tax requirements, interest from the security
could become taxable and the security could decline significantly in
value. In addition, if the structure of a security fails to function as
intended, interest from the security could become taxable or the security
could decline in value.
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 that 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.
For the 1996, 1997 and 1998 fiscal years, the fund has paid no brokerage
commissions.
Allocation of transactions, including their frequency, to various dealers
is determined by the manager 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 manager may receive orders for
portfolio transactions by the fund. Information so received is in
addition to, and not in lieu of, services required to be performed by the
manager, and the fees of the manager are not reduced as a consequence of
its of such supplemental information. Such information may be useful to
the manager 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 manager in carrying out its obligations to
the fund.
The fund will not purchase Exempt Obligations during the existence of any
underwriting or selling group relating thereto of which Salomon 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.
The fund also may execute portfolio transactions through Salomon Smith
Barney and its affiliates in accordance with rules promulgated by the SEC.
While investment decisions for the fund are made independently from those
of the other accounts managed by the manager, 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 manager 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
manager 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 1997, 1998 and 1999 fiscal years, the
fund's portfolio turnover rates were 60%, 43% and %, respectively.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for purchase. See the
prospectus for a discussion of factors to consider in selecting which
Class of shares to purchase.
Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge
as follows:
Amount of
Investment
Sales Charge as
a %
Of Transaction
Sales Charge as
a %
of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $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
deferred sales charge of 1.00% on redemptions made within 12 months of
purchase. The deferred sales charge on Class A shares is payable to
Salomon Smith Barney, which compensates Salomon Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000
or more. The deferred sales charge is waived in the same circumstances
in which the deferred sales charge applicable to Class B and Class L
shares is waived. See "Purchase of Shares-Deferred Sales Charge
Alternatives" and "Purchase of Shares-Waivers of Deferred Sales
Charge."
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. 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.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a deferred sales charge payable upon certain
redemptions. See "Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial sales charge of
1.00% (which is equal to 1.01% of the amount invested) and are subject to
a deferred sales charge payable upon certain redemptions. See "Deferred
Sales Charge Provisions" below. Until June 22, 2001 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% initial sales charge.
Class Y Shares. Class Y shares are sold without an initial sales charge
or deferred sales charge and are available only to investors investing a
minimum of $15,000,000 (except purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase
amount).
General
Investors may purchase shares from a Salomon Smith Barney Financial
Consultant or a Dealer Representative. In addition, certain investors,
including qualified retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the fund. When
purchasing shares of the fund, investors must specify whether the purchase
is for Class A, Class B, Class L or Class Y shares. Salomon Smith Barney
and Dealer Representatives 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 "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 for each
account, in the fund. 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 subsequent investment requirement for all Classes is $25. For
shareholders purchasing shares of the fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment
required 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 Citigroup and
its subsidiaries, including Salomon Smith Barney, unitholders who invest
distributions from a Unit Investment Trust ("UIT") sponsored by Salomon
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 First Data. Share certificates are
issued only upon a shareholder's written request to First Data.
Purchase orders received by the fund or a Salomon Smith Barney Financial
Consultant 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 (the ''trade date''). Orders received
by a Dealer Representative 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 the fund's agent prior to its close of
business. For shares purchased through Salomon Smith Barney or a Dealer
Representative purchasing through Salomon Smith Barney, payment for shares
of the fund is due on the third business day after the trade 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, Salomon
Smith Barney or First Data is authorized through preauthorized transfers
of at least $25 on a monthly basis or at least $50 on a quarterly basis to
charge the shareholder's account held with a bank or other financial
institution on a monthly or quarterly basis as indicated by the
shareholder, to provide for systematic additions to the shareholder's fund
account. A shareholder who has insufficient funds to complete the transfer
will be charged a fee of up to $25 by Salomon Smith Barney or First Data.
The Systematic Investment Plan also authorizes Salomon Smith Barney to
apply cash held in the shareholder's Salomon 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 Salomon Smith Barney Financial Consultant or a Dealer
Representative.
Sales Charge Waivers and Reductions
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 Citigroup and its subsidiaries
and any Citigroup affiliated funds including 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 Salomon Smith Barney Financial Consultant (for
a period up to 90 days from the commencement of the Financial Consultant's
employment with Salomon Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a
mutual fund which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial Consultant and
(iii) was subject to a sales charge; (d) purchases by shareholders who
have redeemed Class A shares in the fund (or Class A shares of another
Smith Barney Mutual Fund that is 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 Citigroup; (f) purchases by a separate account used to
fund certain unregistered variable annuity contracts; (g) investments of
distributions from a UIT sponsored by Salomon Smith Barney; and
(h) purchases by investors participating in a Salomon 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 other Smith Barney Mutual Funds that are offered with a sales
charge as currently 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.
Letter of Intent - Class A Shares. A Letter of Intent for an amount 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 previously 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 options
of the investor, up to 90 days before such date. Please contact a Salomon
Smith Barney Financial Consultant or First Data to obtain a Letter of
Intent application.
Letter of Intent - 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 (except purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount).
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 0.25%) and expenses applicable to the fund's Class A shares, which may
include a deferred sales charge of 1.00%. Please contact a Salomon Smith
Barney Financial Consultant or First Data for further information.
Deferred Sales Charge Provisions
''Deferred Sales Charge Shares'' are: (a) Class B shares; (b) Class L
shares; and (c) Class A shares that were purchased without an initial
sales charge but are subject to a deferred sales charge. A deferred sales
charge may be imposed on certain redemptions of these shares.
Any applicable deferred sales charge 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. Deferred Sales Charge Shares
that are redeemed will not be subject to a deferred sales charge to the
extent 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 Deferred Sales Charge Shares, shares redeemed more than 12
months after their purchase.
Class L shares and Class A shares that are Deferred Sales Charge Shares
are subject to a 1.00% deferred sales charge if redeemed within 12 months
of purchase. In circumstances in which the deferred sales charge 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 Salomon 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
Deferred sales charge
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 shareholders
as the total number of his or her Class B shares converting at the time
bears to the total number of outstanding Class B shares (other than Class
B Dividend Shares) owned by the shareholder.
The length of time that Deferred Sales Charge Shares acquired through an
exchange have been held will be calculated from the date 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 deferred sales charge will reduce the gain or increase the
loss, as the case may be, on the amount realized on redemption. The amount
of any deferred sales charge will be paid to Salomon Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares of
the fund at $10 per share for a cost of $1,000. Subsequently, the
investor acquired 5 additional shares of the fund 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 deferred sales charge 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 Deferred Sales Charge
The deferred sales charge 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'')
(however, 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 established prior to November 7, 1994); (c)
redemptions of shares within 12 months following the death or disability
of the shareholder; (d) redemptions of shares made in connection with
qualified distributions from retirement plans or IRAs upon the attainment
of age 591/2; (e) involuntary redemptions; and (f) 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 deferred sales charge imposed on
the prior redemption.
Deferred sales charge waivers will be granted subject to confirmation (by
Salomon Smith Barney in the case of shareholders who are also Salomon
Smith Barney clients or by First Data in the case of all other
shareholders) of the shareholder's status or holdings, as the case may be.
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 their own account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; and (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 on Class A shares should contact a Salomon Smith Barney
Financial Consultant.
DETERMINATION OF NET ASSET VALUE
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.
Generally, the fund's investments are valued at market value or, in the
absence of a market value with respect to any securities, at fair value as
determined by or under the direction of the Board of Directors. A security
that is primarily traded on a domestic or foreign exchange is valued at
the last sale price on that exchange or, if there were no sales during the
day, at the mean between the bid and asked price. Over-the-counter
securities are valued at the mean between the bid and asked price. If
market quotations for those securities are not readily available, they are
valued at fair value, as determined in good faith by the fund's Board of
Directors. An option is generally valued at the last sale price or, in
the absence of a last sale price, the last offer price.
U.S. government securities will be valued at the mean between the closing
bid and asked prices on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined in good
faith by the fund's Board of Directors.
Short-term investments maturing in 60 days or less are valued at amortized
cost whenever the Board of Directors determines that amortized cost
reflects fair value of those investments. Amortized cost valuation
involves valuing an instrument at its cost initially and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the effect of fluctuating interest rates on the market value
of the instrument.
All other securities and other assets of the fund will be valued at fair
value as determined in good faith by the fund's Board of Directors.
Determination of Public Offering Price
The fund offers its shares to the public on a continuous basis. The public
offering price per Class A and Class Y share of the fund is equal to the
net asset value per share at the time of purchase plus, for Class A
shares, an initial sales charge based on the aggregate amount of the
investment. The public offering price per Class B and Class L 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. The method of computing 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 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 deferred sales charge. 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 Salomon Smith Barney, or
if the shareholder's account is not with Salomon Smith Barney, from the
shareholder directly. The redemption proceeds will be remitted on or
before the third business day following 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 Salomon Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and
Salomon 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 Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial
Consultant. Shares other than those held by Salomon Smith Barney as
custodian may be redeemed through an investor's Financial Consultant,
Dealer Representative 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 appearing on a share
certificate, stock power or 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
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, directors or guardians. A redemption request will not be
deemed properly received until the transfer agent receives all required
documents in proper form.
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. Retirement plan accounts are eligible for automatic
cash withdrawal plans only where the shareholder is eligible to receive
qualified distributions and has an account value of at least $5,000. The
withdrawal plan will be carried over on exchanges between Classes of a
fund. Any applicable deferred sales charge 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 deferred sales charge at the time the
withdrawal plan commences. (With respect to withdrawal plans in effect
prior to November 7, 1994, any applicable deferred sales charge will be
waived on amounts withdrawn that do not exceed 2.00% per month of the
value of the shareholder's shares subject to the deferred sales charge.)
For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Salomon Smith Barney Financial Consultant.
Telephone Redemption and Exchange Program. Shareholders who do not have
a brokerage account may be eligible to redeem and exchange shares by
telephone. To determine if a shareholder is entitled to participate in
this program, he or she should contact the transfer agent at 1-800-451-
2010. Once eligibility is confirmed, the shareholder must complete and
return a Telephone/Wire Authorization Form, along with 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 the applicant's signature guarantee when making
his/her initial investment in a fund.)
Redemptions. Redemption requests of up to $10,000 of any class or
classes of shares of a fund may be made by eligible shareholders by
calling the transfer agent at 1-800-451-2010. Such requests may be made
between 9:00 a.m. and 5:00 p.m. (Eastern 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 shares 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 1-800-451-2010
between 9:00 a.m. and 5:00 p.m. (Eastern time) on any day on which the
NYSE is open.
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.
Redemptions in Kind. In conformity with applicable rules of the SEC,
redemptions may be paid in portfolio securities, in cash or any
combination of both, as the Board of Directors may deem advisable;
however, payments shall be made wholly in cash unless the Board of
Directors believes economic conditions exist that would make such a
practice detrimental to the best interests of the fund and its remaining
shareholders. If a redemption is paid in portfolio securities, such
securities will be valued in accordance with the procedures described
under "Determination of Net Asset Value" in the Prospectus and a
shareholder would incur brokerage expenses if these securities were then
converted to cash.
Distributions in Kind
If the fund's Board of Directors determines that it would be detrimental
to the best interests of the remaining shareholders of the fund 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 deferred sales charge 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 deferred sales charge will be waived on amounts withdrawn that
do not exceed 2.00% per month of the value of a shareholder's shares at
the time the Withdrawal Plan commences.) 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 will reduce the
shareholder's investment and may 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.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates
with the Transfer Agent as agent for Withdrawal Plan members. All
dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the
fund. For additional information, shareholders should contact a Salomon
Smith Barney Financial Consultant. Withdrawal Plans should be set up with
a Salomon Smith Barney Financial Consultant. A shareholder who purchases
shares directly through the Transfer Agent may continue to do so and
applications for participation in the Withdrawal Plan must be received by
the Transfer Agent no later than the eighth day of the month to be
eligible for participation beginning with that month's withdrawals. For
additional information, shareholders should contact a Salomon Smith Barney
Financial Consultant.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Adviser and Administrator - SSBC
SSBC (formerly known as Mutual Management Corp.) serves as investment
adviser to the fund pursuant to an investment advisory agreement (the
"Investment Advisory Agreement") with the fund which was approved by the
Board of Directors, including a majority of directors who are not
"interested persons" of the fund or the manager. The manager is a wholly
owned subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), which
in turn, is a wholly owned subsidiary of Citigroup Inc. ("Citigroup").
Subject to the supervision and direction of the fund's Board of Directors,
the manager 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. The manager pays the salary of any officer
and employee who is employed by both it and the fund. The manager bears
all expenses in connection with the performance of its services. SSBC
(through its predecessor entities) has been in the investment counseling
business since 1968 and renders investment advice to a wide variety of
individual, institutional and investment company clients that had
aggregate assets under management as of January 31, 1999 in excess of $115
billion.
As compensation for investment advisory services, the fund pays the
manager a fee computed daily and payable monthly at 0.30% of the value of
the fund's average daily net assets. For the fiscal years ended February
28, 1997, 1998 and 1999, the fund paid the manager net of fee waivers and
expense reimbursements, $2,240,458, $2,479,000 and $ , respectively, in
investment advisory fees. For the fiscal years ended February 28, 1997,
the manager voluntarily waived investment advisory fees of $ ,
respectively.
The manager also serves as administrator to the fund pursuant to a written
agreement (the "Administration Agreement"). The services provided by the
manager under the Administration Agreement are described in the prospectus
under "Management.'' The manager pays the salary of all officers and
employees who are employed by both it and the fund and bears all expenses
in connection with the performance of its services.
As administrator SSBC: (a) assists in supervising all aspects of the
fund's operations except those performed by the fund's investment manager
under its investment advisory agreement; b) supplies the fund with office
facilities (which may be in SSBC's own offices), statistical and research
data, data processing services, clerical, accounting and bookkeeping
services, including, but not limited to, the calculation of (i) the net
asset value of shares of the fund, (ii) applicable contingent deferred
sales charges and similar fees and charges and (iii) distribution fees,
internal auditing and legal services, internal executive and
administrative services, and stationary and office supplies; and (c)
prepares reports to shareholders of the fund, tax returns and reports to
and filings with the SEC and state blue sky authorities.
As compensation for administrative services rendered to the fund, the
manager receives a fee computed daily and payable monthly at the following
annual rates of average daily net assets: 0.20% up to $500 million; and
0.18% in excess of $500 million. For the fiscal year ended February 28,
1997, the fund paid $1,444,276 (net of fee waivers amounting to $ ) in
administration fees. For the fiscal year ended February 28, 1998, the
fund paid the manager $1,587,128 (net of fee waivers amounting to $ )
in administration fees. For the fiscal year ended February 28, 1999, the
fund paid the manager $ in administration fees.
The fund bears expenses incurred in its operations including: taxes,
interest, brokerage fees and commissions, if any; fees of directors of the
fund who are not officers, directors, shareholders or employees of Salomon
Smith Barney or the manager; Securities and Exchange Commission (the
"SEC") fees and state Blue Sky notice fees; charges of custodians;
transfer and dividend disbursing agent's 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 preparing 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.
Auditors
KPMG LLP, independent auditors, 345 Park Avenue, New York, New York 10154,
have been selected to serve as auditors of the fund and to render opinions
on the fund's financial statements for the fiscal year ended February 29,
2000.
Distributor. CFBDS, Inc., located at 20 Milk Street, Boston, Massachusetts
02109-5408 serves as the fund's distributor pursuant to a written
agreement dated October 8, 1998 (the "Distribution Agreement") which was
approved by the fund's Board of Directors, including a majority of the
Independent Directors on July 15, 1998. Prior to the merger of Travelers
Group, Inc. and Citicorp Inc. on October 8, 1998, Salomon Smith Barney
served as the fund's distributor. For the 1997 and 1998 fiscal years,
Salomon Smith Barney, received $677,000 and $1,357,000, respectively, in
sales charges from the sale of Class A shares, and did not reallow any
portion thereof to dealers. For the period March 1, 1998 through October
7, 1998 the aggregate dollar amount of sales charges on Class A shares was
$ all of which was paid to Salomon Smith Barney. For the period
October 8, 1998 through February 28, 1999 the aggregate dollar amount of
sales charges on Class A shares was $ , $ of which was paid to Salomon
Smith Barney.
For the period June 12, 1998 through October 7, 1998 the aggregate dollar
amount of sales charges on Class L shares was $ , all of which was paid
to Salomon Smith Barney. For the period October 8, 1998 through February
28, 1999 the aggregate dollar amount of sales charges on Class L shares
was $ , $ of which was paid to Salomon Smith Barney.
For the fiscal years ended February 28, 1997, 1998 and 1999, Salomon Smith
Barney or its predecessor received from shareholders $241,000, $263,000
and $ , respectively, in deferred sales charges on the redemption of
Class B shares. For the fiscal years ended February 28, 1997, 1998 and
1999, Salomon Smith Barney or its predecessor received from $5,000, $5,000
and $, respectively, in deferred sales charges on redemption of 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 Salomon Smith Barney may
benefit from the temporary use of the funds. The fund's Board of
Directors has been advised of the benefits to Salomon Smith Barney
resulting from these settlement procedures and will take such benefits
into consideration when reviewing the Investment Management Agreement for
continuance.
Distribution Arrangements. To compensate Salomon Smith Barney for the
service it provides and for the expense it bears, 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 Salomon 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
Salomon Smith Barney a distribution fee with respect to Class B and Class
L shares primarily intended to compensate Salomon Smith Barney for its
initial expense of paying Financial Consultants a commission upon sales of
those shares. The Class B and Class L distribution fee is calculated at
the annual rate of 0.50% and 0.55%, respectively, of the value of the
fund's average net assets attributable to the shares of each Class.
For the fiscal year ended February 28, 1999, Salomon Smith Barney incurred
distribution expenses totaling $ consisting of approximately $
for advertising, $ for printing and mailing of prospectuses, $
for support services, $ to Salomon Smith Barney Financial
Consultants, and $ in accruals for interest on the excess of Salomon
Smith Barney expenses incurred in distributing the fund's shares over the
sum of the distribution fees and deferred sales charge received by Salomon
Smith Barney from the fund.
The following service and distribution fees were incurred pursuant to a
Distribution Plan during the periods indicated:
Distribution Plan Fees
Fiscal Year
Ended 2/28/99
Fiscal Year
Ended 2/28/98
Fiscal Year
Ended 2/28/97
Class A
$
$ 915,346
$ 857,927
Class B
$
$1,244,383
$ 1,046,863
Class L*
$
$ 166,306
$ 93,053
* Class L shares were called Class C shares until June 12, 1998.
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Board of Directors,
including a majority of the Independent Directors. The Plan may not be
amended to increase the amount of the service and distribution fees
without shareholder approval, and all material 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 of
the fund at any time, without penalty, by vote of a majority of the
Independent Directors or by a vote of a majority of the outstanding voting
securities of the Class (as defined in the 1940 Act). Pursuant to the
Plan, Salomon Smith Barney will provide the fund's Board of Directors with
periodic reports of amounts expended under the Plan and the purpose for
which such expenditures were made.
VALUATION OF SHARES
The fund's net asset value per share is determined as of close of regular
trading on the NYSE, on each day that the NYSE is open, by dividing value
of the fund's net assets attributable to each Class by the total number of
shares of that Class outstanding.
When, in judgement 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 judgement of the
pricing service, there is no readily obtainable market quotation (which
may contribute a majority of the portfolio securities) are carried at fair
value of securities of similar type, yield maturity. Pricing services
generally determine value by reference to transactions in municipal
obligations, quotations from municipal bond dealers, market transaction 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 board of directors determines that amortized
cost is fair value. Amortized cost valuation involves valuing an
instrument at its cost initially and, thereafter, assuming a 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 available will be
valued in good faith at fair value by or under the direction of the fund's
Board of Directors.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class of the fund may be
exchanged for shares of the same Class of certain 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.
Class B Exchanges. If a Class B shareholder wishes to exchange all or a
portion of his or her shares in any of the funds imposing a higher
deferred sales charge than that imposed by the fund, the exchanged Class
B shares will be subject to the higher applicable deferred sales charge.
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 manager 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 fund may, at its discretion, decide
to limit additional purchases and/or exchanges by the 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 funds 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 Redemptions 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. An exchange
involves a taxable redemption of shares, subject to the tax treatment
described in "Dividends, Distributions and Taxes" below, followed by a
purchase of shares of a different fund. 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.
Additional Information Regarding Telephone Redemption and Exchange
Program
Neither the fund nor its agents will be liable for instructions
communicated by telephone that are reasonably believed to be genuine. The
fund or 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.
PERFORMANCE INFORMATION
From time to time, the fund may quote 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 include
data from the following industry and 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.
Yield and Equivalent Taxable Yield
A Class' 30-day yield figure described below is calculated according to a
formula prescribed by the SEC. The formula can be expressed as follows:
YIELD =2 [(a-b +1)6-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a'' in the
formula) on debt obligations that were purchased by the fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium. The amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
The fund's equivalent taxable 30-day yield for a Class of shares is
computed by dividing that portion of the Class' 30-day yield which is tax-
exempt by one minus a stated income tax rate and adding the product to
that portion, if any, of the Class' yield that is not tax-exempt.
The yields on municipal securities are dependent upon a variety of
factors, including general economic and monetary conditions, conditions of
the municipal securities market, size of a particular offering, maturity
of the obligation offered and rating of the issue. Investors should
recognize that in periods of declining interest rates the fund's yield for
each Class of shares will tend to be somewhat higher than prevailing
market rates, and in periods of rising interest rates the fund's yield for
each Class of shares will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money to the fund from the
continuous sale of its shares will likely be invested in portfolio
instruments producing lower yields than the balance of the fund's
portfolio, thereby reducing the current yield of the fund. In periods of
rising interest rates, the opposite can be expected to occur.
The fund's yield for Class A, Class B and Class L shares for the 30-day
period ended February 28, 1999 was %, % and %, respectively. The
equivalent taxable yield for Class A, Class B and Class L shares for that
same period was %, % and %, respectively, assuming the payment
of Federal income taxes at a rate of 39.6% and California taxes at a rate
of 12%.
Average Annual Total Return
"Average annual total return," as described below, is 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 a 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The fund's average annual total return for Class A shares assuming the
maximum applicable sales charge was as follows for the periods indicated
(reflecting the waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
% for the one-year period ended February 28, 1999.
% for the five-year period ended February 28, 1999.
% for the ten-year period ended February 28, 1999.
% per annum during the period from the fund's commencement of
operations on April 9, 1984 through February 28, 1999.
A Class' average annual total return assumes that the maximum applicable
sales charge or deferred sales charge assessed by the fund has been
deducted from the hypothetical investment. Had the maximum 4.00% sales
charge had not been deducted, Class A's average annual total return would
have been %, % and %, respectively, for those same periods.
The fund's average annual total return for Class B shares assuming the
maximum applicable deferred sales charge was as follows for the periods
indicated (reflecting the waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
% for the one-year period ended February 28, 1999.
% for the five-year period ended February 28, 1999.
% per annum during the period from the fund's commencement of
operations on November 6, 1992 through February 28, 1999.
Had the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class B's average annual total return would have
been %, % and %, respectively, for the same periods.
The fund's average annual total return for Class L shares assuming the
maximum applicable deferred sales charge was as follows for the periods
indicated (reflecting the waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
% for the one-year period ended February 28, 1999.
% per annum during the period from the fund's commencement of
operations on November 14, 1994 through February 28, 1999.
Had the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class L's average annual total return for the one-
year period ended February 28, 1999 would have been %.
Aggregate Total Return
"Aggregate total return" represents the cumulative change in the value of
an investment in the Class for the specified period and is 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 a 1-, 5-, or 10-year period (or
fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The fund's aggregate total return for Class A shares was as follows for
the periods indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
% for the one-year period ended February 28, 1999.
% for the five-year period ended February 28, 1999.
% for the ten-year period ended February 28, 1999.
% for the period from the fund's commencement of operations on
April 9, 1984 through February 28, 1999.
A Class' aggregate total return assumes that the maximum applicable sales
charge or maximum applicable deferred sales charge has been deducted from
the investment. If the maximum sales charge had not been deducted at the
time of purchase, Class A's aggregate total return for the same periods
would have been %, % and %, respectively.
The fund's aggregate total return for Class B shares was as follows for
the periods indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
% for the one-year period ended February 28, 1999.
% for the five-year period ended February 28, 1999.
% for the period from commencement of operations on November
6, 1992 through February 28, 1999.
If the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class B's aggregate total return for the same
periods would have been %, % and %, respectively.
The fund's aggregate total return for Class L shares was as follows for
the period indicated (reflecting the waiver of the fund's investment
advisory and administration fees and reimbursement of expenses):
% for the one-year period ended February 28, 1999.
% for the period from commencement of operations on November
14, 1994 through February 28, 1999.
If the maximum applicable deferred sales charge had not been deducted at
the time of redemption, Class L's aggregate total return for the one-year
period ended February 28, 1999 would have been %.
Performance will vary from time to time depending on 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 as representative of the
Class' performance for any specified period in the future. Because
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
fluctuations in interest rates and the expenses of the fund.
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 deferred sales charge.
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 United States federal
income tax considerations regarding the purchase, ownership and
disposition of shares of the fund. Each prospective shareholder is urged
to consult his own tax adviser with respect to the specific federal, state
and local consequences of investing in the fund. The summary is based on
the laws in effect on the date of this SAI, which are subject to change.
The fund and its investments
As described in the fund's prospectus, the fund is designed to provide
shareholders with current income which is excluded from gross income for
federal income tax purposes and which is exempt from California 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 intends to continue to qualify to be treated as a regulated
investment company each taxable year under the Code. To so qualify, the
fund must, among other things: (a) derive at least 90% of its gross income
in each taxable year from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or
currencies; and (b) diversify its holdings so that, at the end of each
quarter of the fund's taxable year, (i) at least 50% of the market value
of the fund's assets is represented by cash, securities of other regulated
investment companies, United States government securities and other
securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the fund's assets and not
greater than 10% of the outstanding voting securities of such issuer and
(ii) not more than 25% of the value of its assets is invested in the
securities (other than United States government securities or securities
of other regulated investment companies) of any one issuer or any two or
more issuers that the fund controls and are determined to be engaged in
the same or similar trades or businesses or related trades or businesses.
As a regulated investment company, the fund will not be subject to United
States federal income tax on its net investment income (i.e., income other
than its net realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, that it distributes
to its shareholders, provided that an amount equal to at least 90% of the
sum of its investment company taxable income (i.e., 90% of its taxable
income minus the excess, if any, of its net realized long-term capital
gains over its net realized short-term capital losses (including any
capital loss carryovers), plus or minus certain other adjustments as
specified in the Code) and its net tax-exempt income for the taxable year
is distributed in compliance with the Code's timing and other requirements
but will be subject to tax at regular corporate rates on any taxable
income or gains that it does not distribute. Furthermore, the fund will
be subject to a United States corporate income tax with respect to such
distributed amounts in any year that it fails to qualify as a regulated
investment company or fails to meet this distribution requirement.
The Code imposes a 4% nondeductible excise tax on the fund to the extent
it does not distribute by the end of any calendar year at least 98% of its
net investment income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-year period ending,
as a general rule, on October 31 of that year. For this purpose, however,
any income or gain retained by the fund that is subject to corporate
income tax will be considered to have been distributed by year-end. In
addition, the minimum amounts that must be distributed in any year to
avoid the excise tax will be increased or decreased to reflect any
underdistribution or overdistribution, as the case may be, from the
previous year. The fund anticipates that it will pay such dividends and
will make such distributions as are necessary in order to avoid the
application of this tax.
If, in any taxable year, the fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary
corporation and distributions to its shareholders would not be deductible
by the fund in computing its taxable income. In addition, in the event of
a failure to qualify, the fund's distributions, to the extent derived from
the fund's current or accumulated earnings and profits would constitute
dividends (eligible for the corporate dividends-received deduction) which
are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated in the
shareholders' hands as tax-exempt interest. If the fund fails to qualify
as a regulated investment company in any year, it must pay out its
earnings and profits accumulated in that year in order to qualify again as
a regulated investment company. In addition, if the fund failed to qualify
as a regulated investment company for a period greater than one taxable
year, the fund may be required to recognize any net built-in gains (the
excess of the aggregate gains, including items of income, over aggregate
losses that would have been realized if it had been liquidated) in order
to qualify as a regulated investment company in a subsequent year.
The fund's transactions in municipal bond index and interest rate futures
contracts and options on these futures contracts (collectively "section
1256 contracts") will be subject to special provisions of the Code
(including provisions relating to "hedging transactions" and "straddles")
that, among other things, may affect the character of gains and losses
realized by the fund (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the fund and
defer fund losses. These rules could therefore affect the character,
amount and timing of distributions to shareholders. These provisions also
(a) will require the fund to mark-to-market certain types of the positions
in its portfolio (i.e., treat them as if they were closed out) and (b) may
cause the fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. The fund
will monitor its transactions, will make the appropriate tax elections and
will make the appropriate entries in its books and records when it engages
in these transactions in order to mitigate the effect of these rules and
prevent disqualification of the fund as a regulated investment company.
All section 1256 contracts held by the fund at the end of its taxable year
are required to be marked to their market value, and any unrealized gain
or loss on those positions will be included in the fund's income as if
each position had been sold for its fair market value at the end of the
taxable year. The resulting gain or loss will be combined with any gain
or loss realized by the fund from positions in section 1256 contracts
closed during the taxable year. Provided such positions were held as
capital assets and were not part of a "hedging transaction" nor part of a
"straddle," 60% of the resulting net gain or loss will be treated as long-
term capital gain or loss, and 40% of such net gain or loss will be
treated as short-term capital gain or loss, regardless of the period of
time the positions were actually held by the fund.
Taxation of 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 income tax purposes and California personal
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 income tax purposes, any loss on the
sale or exchange of such share may, to the extent of exempt-interest
dividends, be disallowed. In addition, the Code may require a
shareholder, if he or she receives exempt-interest dividends, to treat as
Federal taxable income a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. Furthermore, that
portion of any exempt-interest dividend 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. Moreover, some or all of the fund's dividends may be a
specific preference item, or a component of an adjustment item, for
purposes of the Federal individual and corporate alternative minimum
taxes. In addition, the receipt of the fund's dividends and distributions
may affect a foreign corporate shareholder's Federal "branch profits" tax
liability and Federal "excess net passive income" tax liability of a
shareholder of a Subchapter S corporation. Shareholders should consult
their own tax advisors to determine whether they are (a) substantial users
with respect to a facility or related to such users within the meaning of
the Code or (b) subject to a federal alternative minimum tax, the Federal
branch profits tax or the Federal "excess net passive income" tax.
The fund does not expect to realize a significant amount of capital gains.
Net realized short-term capital gains are taxable to a United States
shareholder as ordinary income, whether paid in cash or in shares.
Distributions of net-long-term capital gains, if any, that the fund
designates as capital gains dividends are taxable as long-term capital
gains, whether paid in cash or in shares and regardless of how long a
shareholder has held shares of the fund.
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss equal to the difference between the amount realized
and his basis in his shares. Such gain or loss will be treated as capital
gain or loss, if the shares are capital assets in the shareholder's hands,
and will be long-term capital gain or loss if the shares are held for more
than one year and short-term capital gain or loss if the shares are held
for one year or less. Any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced, including
replacement through the reinvesting of dividends and capital gains
distributions in the fund, within a 61-day period beginning 30 days before
and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be increased to reflect the
disallowed loss. Any loss realized by a shareholder on the sale of a fund
share held by the shareholder for six months or less (to the extent not
disallowed pursuant to the six-month rule described above relating to
exempt-interest dividends) will be treated for United States federal
income tax purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains received
by the shareholder with respect to such share.
If a shareholder incurs a sales charge in 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 (e.g., an exchange privilege), the original
sales charge will not be taken into account in computing gain or loss on
the original shares to the extent the subsequent sales charge is reduced.
Instead, the disregarded portion of the original sales charge will be
added to the 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.
Backup Withholding. The fund may be required to withhold, for United
States federal income tax purposes, 31% of (a) taxable dividends and
distributions and (b) redemption proceeds payable to shareholders who fail
to provide the fund with their correct taxpayer identification number or
to make required certifications, or who have been notified by the IRS that
they are subject to backup withholding. Certain shareholders are exempt
from backup withholding. Backup withholding is not an additional tax and
any amount withheld may be credited against a shareholder's United States
federal income tax liabilities.
Notices. Shareholders will be notified annually by the fund as to the
United States federal income tax and California personal income tax status
of the dividends and distributions made by the fund to its shareholders.
These statements also will designate the amount of exempt-interest
dividends that is a preference item for purposes of the Federal individual
and corporate alternative minimum taxes. The dollar amount of dividends
excluded or exempt from Federal income taxation and California personal
income taxation and the dollar amount of dividends subject to Federal
income taxation and California personal income taxation, if any, will vary
for each shareholder depending upon the size and duration of each
shareholder's investment in the fund. To the extent the fund earns taxable
net investment income, it intends to designate as taxable dividends the
same percentage of each day's dividend as its taxable net investment
income bears to its total net investment income earned on that day.
The foregoing is only a summary of certain material tax consequences
affecting the fund and its shareholders. Shareholders are advised to
consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the fund.
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 on vote for each full share owned and 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.
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.
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 fund's custodian. Under the custody agreement, 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
securities transaction charges. The assets of the fund are held under
bank custodianship in compliance with the 1940 Act.
First Data, located at Federal Street, Boston, Massachusetts 02110, serves
as the fund's transfer agent. Under the transfer agency agreement, First
Data 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,
First Data 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 out-of-pocket expenses.
Description of Shares
The Master Trust Agreement of the fund permits the directors of the fund
to issue an unlimited number of full and fractional shares of a single
class and to divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate beneficial interests
in the fund. Each share in the fund represents an equal proportional
interest in the fund with each other share. Shareholders of the fund are
entitled upon its liquidation to share pro rata in its net assets
available for distribution. No shareholder of the fund has any preemptive
or conversion rights. Shares of the fund are fully paid and non-
assessable.
Pursuant to the Master Trust Agreement, the fund's directors may authorize
the creation of additional series of shares (the proceeds of which would
be invested in separate, independently managed portfolios) and additional
classes of shares within any series (which would be used to distinguish
among the rights of different categories of shareholders, as might be
required by future regulations or other unforeseen circumstances).
Voting Rights
The shareholders of the fund are entitled to a full vote for each full
share held (and a fractional vote for any fractional share held). The
directors of the fund have the power to alter the number and the terms of
office of the directors, and have terms of unlimited duration (subject to
certain removal procedures) and may appoint their own successors, provided
at least a majority of the directors at all times have been elected by the
shareholders of the fund. The voting rights of the shareholders of the
fund are not cumulative, so that the holders of more than 50% of the
shares can, if they choose, elect all of the directors of the fund; the
holders of the remaining shares of the fund would be unable to elect any
of the directors.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended February 28, 1999 will
be filed on or about May 1, 1999 and will be incorporated by reference in
its entirety Accession Number .
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.
AAA
Prime - These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds - In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible
to autonomous decline. Debt burden is moderate. A strong revenue
structure appears more than adequate to meet future expenditure
requirements. Quality of management appears superior.
Revenue Bonds - Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally
strong, due to the competitive position of the municipal enterprise or to
the nature of the revenues. Basic security provisions (including rate
covenant, earnings test for issuance of additional bonds, and debt service
reserve requirements) are rigorous. There is evidence of superior
management.
AA
High Grade - The investment characteristics of general obligation and
revenue bonds in this group are only slightly less marked than those of
the prime quality issues. Bonds rated "AA'' have the second strongest
capacity for payment of debt service.
A
Good Grade - Principal and interest payments on bonds in this category are
regarded as safe. This rating describes the third strongest capacity for
payment of debt service. It differs from the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the
issuer to meet debt obligations at some future date.
Revenue Bonds - Debt service coverage is good, but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management
performance appears adequate.
BBB
Medium Grade - Of the investment grade ratings, this is the lowest.
General Obligation Bonds - Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of
debt service. The difference between "A'' and "BBB" ratings is that the
latter shows more than one fundamental weakness, or one very substantial
fundamental weakness, whereas the former shows only one deficiency among
the factors considered.
Revenue Bonds - Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) by S&P to distinguish more
clearly the credit quality of notes as compared to bonds. Notes rated SP-
1 have a very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics are
given the designation of SP-1+. Notes rated SP-2 have a satisfactory
capacity to pay principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge.'' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A
Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa
Bonds that are rated Baa are considered as medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured; interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B
Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal
or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative in a
high degree. These issues are often in default or have other marked
short-comings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction is in recognition of the differences between short- and long-
term credit risk. Loans bearing the designation MIG 1 or VMIG 1 are of
the best quality, enjoying strong protection by established cash flows of
funds for their servicing, 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 margins of protection ample 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 S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the
direct credit support of an issuer or guarantor that possesses excellent
long-term operating and financial strengths combined with strong liquidity
characteristics (typically, such issuers or guarantors would display
credit quality characteristics which would warrant a senior bond rating of
"AA-'' or higher), or the direct credit support of an issuer or guarantor
that possesses above-average long-term fundamental operating and financing
capabilities combined with ongoing excellent liquidity characteristics.
Paper rated A-1 by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; long-term senior debt is
rated "A'' or better; the issuer has access to at least two additional
channels of borrowing; basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances; typically, the issuer's
industry is well established and the issuer has a strong position within
the industry; and the reliability and quality of management are
unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain
areas; (3) evaluation of the issuer's products in relation to competition
and customer acceptance; (4) liquidity; (5) amount and quality of long-
term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the
issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and
preparations to meet such obligations.
SMITH BARNEY MASSACHUSETTS MUNICIPALS FUND
Statement of
Additional
Information
March 30, 1999
Smith Barney Massachusetts Municipals Fund
388 Greenwich Street
New York, NY 10013
SALOMON SMITH BARNEY
A Member of Citigroup
[Symbol]
64
FUNDACCOUNTING\LEGAL\FUNDS\CAMU\CAMU SAI 1999
Part C-Other Information
Item 23.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").
(a)(1) Registrant's Articles of Incorporation dated February 16, 1984
are incorporated by reference to the Registration Statement.
(2)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").
(3)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").
(4)Form of Articles of Amendment to the Articles of Incorporation
are incorporated by reference to Post-Effective No. 21.
(5)Articles Supplementary dated November 2, 1992, to Articles of
Incorporation are incorporated by reference to Post-Effective Amendment
No. 18.
(6)Form of Articles Supplementary to the Articles of Incorporation
are incorporated by reference to Post-Effective Amendment No. 21.
(7)Amendment to Registrant's Articles of Incorporation dated June 1, 1998
is incorporated by reference to Post-Effective Amendment No. 25 to
the Registration Statement filed on June 26, 1998 ("Post-Effective
Amendment No. 25").
(b)(1) 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").
(2)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").
(3)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").
(c) 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").
(d)(1) Investment Advisory Agreement between the Registrant and
Greenwich Street Advisors dated July 30, 1993 is incorporated by
reference to Post-Effective Amendment No. 18.
(d)(2) 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.
(d)(3) Amendment to Investment Advisory Agreement dated November 17, 1995
is incorporated by reference to Post-Effective Amendment No. 23.
(e)(1)Distribution Agreement between the Registrant and Smith Barney
Shearson Inc. dated July 30, 1993 is incorporated by reference to
Post-Effective Amendment No. 18.
(2)Distribution Agreement between CFBDS, Inc. and the Registrant
dated October 8, 1998 is filed herein.
(3)Selling Group Agreement is filed herein.
(f)Not Applicable.
(g)Form of Custodian Agreement between the Registrant and PNC Bank,
National Association is incorporated by reference to Post-Effective No. 22.
(h)(1) 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.
(2)Administration Agreement dated April 20, 1994 between the Registrant
and Smith, Barney Advisers, Inc. is incorporated by reference to
Post-Effective Amendment No. 21.
(i)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.
(j)(1) Consent of Independent Accountants to be filed by amendment.
(2)Consent of Morningstar Mutual Fund Values is incorporated by reference
to Post-Effective Amendment No. 16.
(k)Not Applicable.
(l)Not Applicable.
(m)(1)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.
(2)Form of Amended Service and Distribution Plan pursuant to Rule 12b-1
between the Registrant and Salomon Smith Barney Inc. is filed herein.
(n)Financial Data Schedule to be filed by amendment.
(o)Form of Registrant's Rule 18f-3(d) Multiple Class Plan is incorporated
by reference to Post-Effective Amendment No. 25.
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
Item 25. Indemnification
The response to this item is incorporated by reference to Post-Effective
Return Fund, Smith Barney Small Cap Blend Fund, Inc., Smith Barney
Telecommunications Trust, Smith Barney Variable Account Funds,
Smith Barney World Funds, Inc., Travelers Series Fund Inc., and various
series of unit investment trusts.
series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The Travelers
Fund UL for Variable Annuities, The Travelers Fund VA for Variable
Annuities, The Travelers Fund BD for Variable Annuities, The Travelers
Fund BD II for Variable Annuities, The Travelers Fund BD III for
Variable Annuities, The Travelers Fund BD IV for Variable Annuities,
The Travelers Fund ABD for Variable Annuities, The Travelers Fund ABD II
for Variable Annuities, The Travelers Separate Account PF for Variable
Annuities, The Trave
CFBDS, Inc., ("CFBDS") the Registrant's Distributor, is also the
distributor for the following Smith Barney funds: Concert Investment Series,
Consulting Group Capital Markets Funds, Greenwich Street Series Fund,
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
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 Money Market 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., Travelers Series Fund Inc., and various series
of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The
Travelers Fund UL for Variable Annuities, The Travelers Fund VA for
Variable Annuities, The Travelers Fund BD for Variable Annuities, The
Travelers Fund BD II for Variable Annuities, The Travelers Fund BD III
for Variable Annuities, The Travelers Fund BD IV for Variable Annuities,
The Travelers Fund ABD for Variable Annuities, The Travelers Fund ABD II
For Variable Annuities, The Travelers Separate Account PF for Variable
Annuities, The Travelers Separate Account PF II for Variable Annuities,
The Travelers Separate Account QP for Variable Annuities, The Travelers
Separate Account TM for Variable Annuities, The Travelers Separate
Account TM II for Variable Annuities, The Travelers Separate Account
Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The Travelers Separate Account Seven for Variable
Annuities, The Travelers Separate Account Eight for Variable Annuities,
The Travelers Fund UL for Variable Annuities, The Travelers Fund UL II
for Variable Annuities, The Travelers Variable Life Insurance Separate
Account One, The Travelers Variable Life Insurance Separate Account Two,
The Travelers Variable Life Insurance Separate Account Three, The
Travelers Variable Life Insurance Separate Account Four, The Travelers
Separate Account MGA, The Travelers Separate Account MGA II, The
Travelers Growth and Income Stock Account for Variable Annuities, The
Travelers Quality Bond Account for Variable Annuities, The Travelers
Money Market Account for Variable Annuities, The Travelers Timed Growth
and Income Stock Account for Variable Annuities, The Travelers Timed
Short-Term Bond Account for Variable Annuities, The Travelers Timed
Aggressive Stock Account for Variable Annuities, The Travelers Timed
Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the
Distributor for CitiFunds Multi-State Tax Free Trust, CitiFunds Premium
Trust, CitiFunds Institutional Trust, CitiFunds Tax Free Reserves,
CitiFunds Trust I, CitiFunds Trust II, CitiFunds Trust III,
CitiFunds International Trust, CitiFunds Fixed Income Trust, CitiSelect
VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400,
CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP Portfolio.
CFBDS is also the placement agent for Large Cap Value Portfolio,
Small Cap Value Portfolio, International Portfolio, Foreign Bond
Portfolio, Intermediate Income Portfolio, Short-Term Portfolio,
Growth & Income Portfolio, U.S. Fixed Income Portfolio, Large Cap Growth
Portfolio,Small Cap Growth Portfolio, International Equity
Portfolio, Balanced Portfolio, Government Income Portfolio,
Tax Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following
Salomon Brothers funds: Salomon Brothers Opportunity Fund Inc.,
Salomon Brothers Investors Fund Inc., Salomon Brothers Capital Fund Inc.,
Salomon Brothers Series Funds Inc., Salomon Brothers Institutional Series
Funds Inc., Salomon Brothers Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds, Inc.
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form BD
filed by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No.
8-32417).
(c) Not applicable.
Item 28. Location of Accountants and Records
(1) Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
(2) SSBC Fund Management Inc.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(5) CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
None
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant, Smith Barney
California Municipals Fund Inc. has duly caused this 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 28th day of April, 1998.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
By: ______________________________
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
______________ Chairman of the Board, April 28, 1999
Heath B. McLendon President and Chief
Executive Officer
_____________ Senior Vice President and April 28, 1999
Lewis E. Daidone Treasurer, Chief Financial
and Accounting Officer
/s/Herbert Barg* Director April 28, 1999
Herbert Barg
/s/Alfred J. Bianchetti* Director April 28, 1999
Alfred J. Bianchetti
/s/Martin Brody* Director April 28, 1999
Martin Brody
/s/Dwight B. Crane* Director April 28, 1999
Dwight B. Crane
/s/Burt N. Dorsett* Director April 28, 1999
Burt N. Dorsett
/s/Elliot S. Jaffe* Director April 28, 1999
Elliot S. Jaffe
/s/Stephen E. Kaufman* Director April 28, 1999
Stephen E. Kaufman
/s/Joseph J. McCann* Director April 28, 1999
Joseph J. McCann
/s/Cornelius C. Rose, Jr.* Director April 28, 1999
Cornelius C. Rose, Jr.
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney dated June 26, 1997.
__________________________Heath B. McLendon
EXHIBIT INDEX
Exhibit No. Exhibit
(e)(2) CFBDS Distribution Agreement
(e)(3) Selling Group Agreement
(j) Consent of KPMG +
(m)(2) Form of Rule 12b-1 Plan
(n) Financial Data Schedule +
cover
+ To be filed by further amendment
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
FORM OF
DISTRIBUTION AGREEMENT
October 8, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the "Fund")
has agreed that you shall be, for the period of this Agreement, the non-
exclusive principal underwriter and distributor of shares of the Fund
and each Series of the Fund set forth on Exhibit A hereto, as such
Exhibit may be revised from time to time (each, including any shares of
the Fund not designated by series, a "Series"). For purposes of this
Agreement, the term "Shares" shall mean shares of the each Series, or
one or more Series, as the context may require.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of Shares
covered by, and in accordance with, the registration statement,
prospectus and statement of additional information then in effect under
the Securities Act of 1933, as amended (the "1933 Act"), and the
Investment Company Act of 1940, as amended (the "1940 Act"), and will
transmit or cause to be transmitted promptly any orders received by you
or those with whom you have sales or servicing agreements for purchase
or redemption of Shares to the Transfer and Dividend Disbursing Agent
for the Fund of which the Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit orders
for the sale of Shares. It is contemplated that you will enter into
sales or servicing agreements with registered securities brokers and
banks and into servicing agreements with financial institutions and
other industry professionals, such as investment advisers, accountants
and estate planning firms. In entering into such agreements, you will
act only on your own behalf as principal underwriter and distributor.
You will not be responsible for making any distribution plan or service
fee payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as the non-exclusive principal
underwriter and distributor of Shares in compliance with all applicable
laws, rules, and regulations, including, without limitation, all rules
and regulations made or adopted from time to time by the Securities and
Exchange Commission (the "SEC") pursuant to the 1933 Act or the 1940
Act or by any securities association registered under the Securities
Exchange Act of 1934, as amended.
1.4 Whenever in their judgment such action is warranted
for any reason, including, without limitation, market, economic or
political conditions, the Fund's officers may decline to accept any
orders for, or make any sales of, any Shares until such time as those
officers deem it advisable to accept such orders and to make such sales
and the Fund shall advise you promptly of such determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the 1933 Act, and all
expenses in connection with maintaining facilities for the issue and
transfer of Shares and for supplying information, prices and other data
to be furnished by the Fund hereunder, and all expenses in connection
with the preparation and printing of the Fund's prospectuses and
statements of additional information for regulatory purposes and for
distribution to shareholders; provided however, that nothing contained
herein shall be deemed to require the Fund to pay any costs of
advertising or marketing the sale of Shares.
2.2 The Fund agrees to execute any and all documents and
to furnish any and all information and otherwise to take any other
actions that may be reasonably necessary in the discretion of the Fund's
officers in connection with the qualification of Shares for sale in such
states and other U.S. jurisdictions as the Fund may approve and
designate to you from time to time, and the Fund agrees to pay all
expenses that may be incurred in connection with such qualification.
You shall pay all expenses connected with your own qualification as a
securities broker or dealer under state or Federal laws and, except as
otherwise specifically provided in this Agreement, all other expenses
incurred by you in connection with the sale of Shares as contemplated in
this Agreement.
2.3 The Fund shall furnish you from time to time, for use
in connection with the sale of Shares, such information reports with
respect to the Fund or any relevant Series and the Shares as you may
reasonably request, all of which shall be signed by one or more of the
Fund's duly authorized officers; and the Fund warrants that the
statements contained in any such reports, when so signed by the Fund's
officers, shall be true and correct. The Fund also shall furnish you
upon request with (a) the reports of the annual audits of the financial
statements of the Fund for each Series made by independent certified
public accountants retained by the Fund for such purpose; (b) semi-
annual unaudited financial statements pertaining to each Series; (c)
quarterly earnings statements prepared by the Fund for any Series; (d) a
monthly itemized list of the securities in each Series' portfolio; (e)
monthly balance sheets as soon as practicable after the end of each
month; (f) the current net asset value and offering price per share
for each Series on each day such net asset value is computed and (g)
from time to time such additional information regarding the financial
condition of each Series of the Fund as you may reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the Fund
with the SEC under the 1933 Act and the 1940 Act with respect to the
Shares have been prepared in conformity with the requirements of said
Acts and the rules and regulations of the SEC thereunder. As used in
this Agreement, the terms "registration statement", "prospectus" and
"statement of additional information" shall mean any registration
statement, prospectus and statement of additional information filed by
the Fund with the SEC and any amendments and supplements thereto filed
by the Fund with the SEC. The Fund represents and warrants to you that
any such registration statement, prospectus and statement of additional
information, when such registration statement becomes effective and as
such prospectus and statement of additional information are amended and
supplemented, includes at the time of such effectiveness, amendment or
supplement all statements required to be contained therein in
conformance with the 1933 Act, the 1940 Act and the rules and
regulations of the SEC; that all statements of material fact contained
in any registration statement, prospectus or statement of additional
information will be true and correct when such registration statement
becomes effective; and that neither any registration statement nor any
prospectus or statement of additional information when such registration
statement becomes effective will include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading to a
purchaser of the Fund's Shares. The Fund may, but shall not be
obligated to, propose from time to time such amendment or amendments to
any registration statement and such supplement or supplements to any
prospectus or statement of additional information as, in the light of
future developments, may, in the opinion of the Fund, be necessary or
advisable. If the Fund shall not propose such amendment or amendments
and/or supplement or supplements within fifteen days after receipt by
the Fund of a written request from you to do so, you may, at your
option, terminate this Agreement or decline to make offers of the Fund's
Shares until such amendments are made. The Fund shall not file any
amendment to any registration statement or supplement to any prospectus
or statement of additional information without giving you reasonable
notice thereof in advance; provided, however, that nothing contained in
this Agreement shall in any way limit the Fund's right to file at any
time such amendments to any registration statement and/or supplements to
any prospectus or statement of additional information, of whatever
character, as the Fund may deem advisable, such right being in all
respects absolute and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or
statement of additional information furnished by the Fund from time to
time, in connection with the sale of Shares. The Fund agrees to
indemnify, defend and hold you, your several officers and directors, and
any person who controls you within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any such counsel fees
incurred in connection therewith) which you, your officers and
directors, or any such controlling person, may incur under the 1933 Act
or under common law or otherwise, arising out of or based upon any
untrue statement, or alleged untrue statement, of a material fact
contained in any registration statement, any prospectus or any statement
of additional information or arising out of or based upon any omission,
or alleged omission, to state a material fact required to be stated in
any registration statement, any prospectus or any statement of
additional information or necessary to make the statements in any of
them not misleading; provided, however, that the Fund's agreement to
indemnify you, your officers or directors, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or
expenses arising out of any statements or representations made by you or
your representatives or agents other than such statements and
representations as are contained in any prospectus or statement of
additional information and in such financial and other statements as are
furnished to you pursuant to paragraph 2.3 of this Agreement; and
further provided that the Fund's agreement to indemnify you and the
Fund's representations and warranties herein before set forth in
paragraph 3 of this Agreement shall not be deemed to cover any liability
to the Fund or its shareholders to which you would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of your duties, or by reason of your reckless disregard of
your obligations and duties under this Agreement. The Fund's agreement
to indemnify you, your officers and directors, and any such controlling
person, as aforesaid, is expressly conditioned upon the Fund's being
notified of any action brought against you, your officers or directors,
or any such controlling person, such notification to be given by letter
or by telegram addressed to the Fund at its principal office in New
York, New York and sent to the Fund by the person against whom such
action is brought, within ten days after the summons or other first
legal process shall have been served. The failure so to notify the Fund
of any such action shall not relieve the Fund from any liability that
the Fund may have to the person against whom such action is brought by
reason of any such untrue, or alleged untrue, statement or omission, or
alleged omission, otherwise than on account of the Fund's indemnity
agreement contained in this paragraph 4.1. The Fund will be entitled to
assume the defense of any suit brought to enforce any such claim, demand
or liability, but, in such case, such defense shall be conducted by
counsel of good standing chosen by the Fund. In the event the Fund
elects to assume the defense of any such suit and retains counsel of
good standing, the defendant or defendants in such suit shall bear the
fees and expenses of any additional counsel retained by any of them; but
if the Fund does not elect to assume the defense of any such suit, the
Fund will reimburse you, your officers and directors, or the controlling
person or persons named as defendant or defendants in such suit, for the
reasonable fees and expenses of any counsel retained by you or them.
The Fund's indemnification agreement contained in this paragraph 4.1 and
the Fund's representations and warranties in this Agreement shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of you, your officers and directors, or any
controlling person, and shall survive the delivery of any of the Fund's
Shares. This agreement of indemnity will inure exclusively to your
benefit, to the benefit of your several officers and directors, and
their respective estates, and to the benefit of the controlling persons
and their successors. The Fund agrees to notify you promptly of the
commencement of any litigation or proceedings against the Fund or any of
its officers or Board members in connection with the issuance and sale
of any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund, its
several officers and Board members, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless from
and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith)
that the Fund, its officers or Board members or any such controlling
person may incur under the 1933 Act, or under common law or otherwise,
but only to the extent that such liability or expense incurred by the
Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be based
upon any untrue, or alleged untrue, statement of a material fact
contained in information furnished in writing by you to the Fund and
used in the answers to any of the items of the registration statement or
in the corresponding statements made in the prospectus or statement of
additional information, or shall arise out of or be based upon any
omission, or alleged omission, to state a material fact in connection
with such information furnished in writing by you to the Fund and
required to be stated in such answers or necessary to make such
information not misleading. Your agreement to indemnify the Fund, its
officers or Board members, and any such controlling person, as
aforesaid, is expressly conditioned upon your being notified of any
action brought against the Fund, its officers or Board members, or any
such controlling person, such notification to be given by letter or
telegram addressed to you at your principal office in Boston,
Massachusetts and sent to you by the person against whom such action is
brought, within ten days after the summons or other first legal process
shall have been served. You shall have the right to control the defense
of such action, with counsel of your own choosing, satisfactory to the
Fund, if such action is based solely upon such alleged misstatement or
omission on your part or with the Fund's consent, and in any event the
Fund, its officers or Board members or such controlling person shall
each have the right to participate in the defense or preparation of the
defense of any such action with counsel of its own choosing reasonably
acceptable to you but shall not have the right to settle any such action
without your consent, which will not be unreasonably withheld. The
failure to so notify you of any such action shall not relieve you from
any liability that you may have to the Fund, its officers or Board
members, or to such controlling person by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission, otherwise
than on account of your indemnity agreement contained in this paragraph
4.2. You agree to notify the Fund promptly of the commencement of any
litigation or proceedings against you or any of your officers or
directors in connection with the issuance and sale of any of the Fund's
Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under any of
the provisions of this Agreement and no orders for the purchase or sale
of such Shares under this Agreement shall be accepted by the Fund if and
so long as the effectiveness of the registration statement then in
effect or any necessary amendments thereto shall be suspended under any
of the provisions of the 1933 Act, or if and so long as a current
prospectus as required by Section 5(b) (2) of the 1933 Act is not on
file with the SEC; provided, however, that nothing contained in this
paragraph 5 shall in any way restrict or have any application to or
bearing upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's prospectus,
statement of additional information or charter documents, as amended
from time to time.
6. Offering Price
Shares of any class of any Series of the Fund offered for sale by
you shall be offered for sale at a price per share (the "offering
price") equal to (a) their net asset value (determined in the manner
set forth in the Fund's charter documents and the then-current
prospectus and statement of additional information) plus (b) a sales
charge, if applicable, which shall be the percentage of the offering
price of such Shares as set forth in the Fund's then-current prospectus
relating to such Series. In addition to or in lieu of any sales charge
applicable at the time of sale, Shares of any class of any Series of the
Fund offered for sale by you may be subject to a contingent deferred
sales charge as set forth in the Fund's then-current prospectus and
statement of additional information. You shall be entitled to receive
any sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a broker or
dealer through whom you sell Shares shall be governed by a separate
agreement between you and such broker or dealer and the Fund's then-
current prospectus and statement of additional information. Any
payments to any provider of services to you shall be governed by a
separate agreement between you and such service provider.
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC for
amendments to the registration statement,
prospectus or statement of additional
information then in effect or for additional
information;
(b) in the event of the issuance by
the SEC of any stop order suspending the
effectiveness of the registration statement,
prospectus or statement of additional
information then in effect or the initiation
of any proceeding for that purpose;
(c) of the happening of any event that
makes untrue any statement of a material fact
made in the registration statement,
prospectus or statement of additional
information then in effect or that requires
the making of a change in such registration
statement, prospectus or statement of
additional information in order to make the
statements therein not misleading; and
(d) of all actions of the SEC with
respect to any amendment to the registration
statement, or any supplement to the
prospectus or statement of additional
information which may from time to time be
filed with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof, shall
have an initial term of one year from the date hereof, and shall
continue for successive annual periods thereafter so long as such
continuance is specifically approved at least annually by (a) the Fund's
Board or (b) by a vote of a majority (as defined in the 1940 Act) of the
Fund's outstanding voting securities, provided that in either event the
continuance is also approved by a majority of the Board members of the
Fund who are not interested persons (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable
with or without cause, without penalty, on 60 days' notice by the Fund's
Board or by vote of holders of a majority of the relevant Series
outstanding voting securities, or on 90 days' notice by you. This
Agreement will also terminate automatically, as to the relevant Series,
in the event of its assignment (as defined in the 1940 Act and the rules
and regulations thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising under
this Agreement (collectively, a "Dispute") shall be settled by
arbitration administered under the rules of the American Arbitration
Association ("AAA") in New York, New York. Any arbitration and award
of the arbitrators, or a majority of them, shall be final and the
judgment upon the award rendered may be entered in any state or federal
court having jurisdiction. No punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and distributor of
Shares, you shall not perform any services for any entity other than
investment companies advised or administered by Citigroup Inc. or its
subsidiaries. The Fund recognizes that the persons employed by you to
assist in the performance of your duties under this Agreement may not
devote their full time to such service and nothing contained in this
Agreement shall be deemed to limit or restrict the persons employed by
you or any of your affiliates right to engage in and devote time and
attention to other businesses or to render services of whatever kind or
nature, provided, however, that in conducting such business or rendering
such services your employees and affiliates would take reasonable steps
to assure that the other parties involved are put on notice as to the
legal entity with which they are dealing. This Agreement and the terms
and conditions set forth herein shall be governed by, and construed in
accordance with, the laws of the State of New York without giving effect
to its conflict of interest principles.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning to
us the enclosed copy, whereupon this Agreement will become binding on
you.
Very truly yours,
SMITH BARNEY CALIFORNIA MUNICIPALS
FUND INC.
By: _____________________
Authorized Officer
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
Page: 3
4
FORM OF
AMENDED AND RESTATED
SHAREHOLDER SERVICES AND DISTRIBUTION PLAN
This Amended and Restated Shareholder Services and Distribution
Plan (the "Plan") is adopted in accordance with Rule 12b-1 (the
"Rule") under the Investment Company Act of 1940, as amended (the
"1940 Act"), by Smith Barney California Municipals Fund Inc., a
corporation organized under the laws of the State of Maryland (the
"Fund"), subject to the following terms and conditions:
Section 1. Annual Fee.
(a) Service Fee for Class A shares. The Fund will pay to Salomon
Smith Barney Inc., a corporation organized under the laws of
the State of New York ("Salomon Smith Barney"), a service
fee under the Plan at an annual rate of 0.25% of the average
daily net assets of the Fund attributable to the Class A
shares sold and not redeemed (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to Salomon
Smith Barney a service fee under the Plan at the annual rate
of 0.25% of the average daily net assets of the Fund
attributable to the Class B shares sold and not redeemed
(the "Class B Service Fee").
(c) Distribution Fee for Class B shares. In addition to the
Class B Service Fee, the Fund will pay Salomon Smith Barney
a distribution fee under the Plan at the annual rate of
0.75% of the average daily net assets of the Fund
attributable to the Class B shares sold and not redeemed
(the "Class B Distribution Fee").
(d) Service Fee for Class L shares. The Fund will pay to
Salomon Smith Barney a service fee under the plan at the
annual rate of 0.25% of the average daily net assets of the
Fund attributable to the Class L shares sold and not
redeemed (the "Class L Service Fee").
(e) Distribution Fee for Class L shares. In addition to the
Class L Service Fee, the Fund will pay Salomon Smith Barney
a distribution fee under the Plan at the annual rate of
0.75% of the average daily net assets of the Fund
attributable to the Class L shares sold and not redeemed
(the "Class L Distribution Fee").
(f) Payment of Fees. The Service Fees and Distribution Fees will
be calculated daily and paid monthly by the Fund with
respect to the foregoing classes of the Fund's shares (each
a "Class" and together, the "Classes") at the annual rates
indicated above.
Section 2. Expenses Covered by the Plan.
With respect to expenses incurred by each Class, its respective
Service Fee and/or Distribution Fee may be used by Salomon Smith
Barney for: (a) costs of printing and distributing the Fund's
prospectuses, statements of additional information and reports to
prospective investors in the Fund; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Fund;
(c) an allocation of overhead and other branch office distribution-
related expenses of Salomon Smith Barney; (d) payments made to, and
expenses of, Salomon Smith Barney's financial consultants and other
persons who provide support services to Fund shareholders in
connection with the distribution of the Fund's shares, including but
not limited to, office space and equipment, telephone facilities,
answering routine inquires regarding the Fund and its operation,
processing shareholder transactions, forwarding and collecting proxy
material, changing dividend payment elections and providing any other
shareholder services not otherwise provided by the Fund's transfer
agent; and (e) accruals for interest on the amount of the foregoing
expenses that exceed the Distribution Fee for that Class and, in the
case of Class B and Class L shares, any contingent deferred sales
charges received by Salomon Smith Barney; provided, however, that (i)
the Distribution Fee for a particular Class may be used by Salomon
Smith Barney only to cover expenses primarily intended to result in
the sale of shares of that Class, including, without limitation,
payments to the financial consultants of Salomon Smith Barney and
other persons as compensation for the sale of the shares, and (ii)
the Service Fees are intended to be used by Salomon Smith Barney
primarily to pay its financial consultants for servicing shareholder
accounts, including a continuing fee to each such financial
consultant, which fee shall begin to accrue immediately after the
sale of such shares.
Section 3. Approval by Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of
the Plan, with respect to a Class until the Plan has been approved by
a vote of at least a majority
of the outstanding voting securities of the Class. The Plan will be
deemed to have been approved
with respect to a Class so long as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a
majority of the outstanding voting securities of any other Class, or
(b) the Plan has not been
approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval by Directors.
Neither the Plan nor any related agreements will take effect until
approved by a majority vote of both (a) the Board of Directors and
(b) those Directors who are not interested persons of the Fund and
who have no direct or indirect financial interest in the operation of
the Plan or in any agreements related to it (the "Qualified
Directors"), cast in person at a meeting called for the purpose of
voting on the Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect with respect to each Class until
October 8, 1999 and thereafter for successive twelve-month periods
with respect to each Class; provided, however, that such continuance
is specifically approved at least annually by the Directors of the
Fund and by a majority of the Qualified Directors.
Section 6. Termination.
The Plan may be terminated at any time with respect to a Class (i)
by the Fund without the payment of any penalty, by the vote of a
majority of the outstanding voting securities of such Class or (ii)
by a majority vote of the Qualified Directors. The Plan may remain in
effect with respect to a particular Class even if the Plan has been
terminated in accordance with this Section 6 with respect to any
other Class.
Section 7. Amendments.
The Plan may not be amended with respect to any Class so as to
increase materially the amounts of the fees described in Section 1
above, unless the amendment is approved by a vote of holders of at
least a majority of the outstanding voting securities of that Class.
No material amendment to the Plan may be made unless approved by the
Fund's Board of Directors in the manner described in Section 4 above.
Section 8. Selection of Certain Directors.
While the Plan is in effect, the selection and nomination of the
Fund's Directors who are not interested persons of the Fund will be
committed to the discretion of the Directors then in office who are
not interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the
Fund pursuant to the Plan or any related agreement will prepare and
furnish to the Fund's Board of Directors and the Board will review,
at least quarterly, written reports complying with the requirements
of the Rule, which set out the amounts expended under the Plan and
the purposes for which those expenditures were made.
Section 10. Preservation of Materials.
The Fund will preserve copies of the Plan, any agreement relating
to the Plan and any report made pursuant to Section 9 above, for a
period of not less than six years (the first two years in an easily
accessible place) from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and "majority
of the outstanding voting securities" will be deemed to have the same
meaning that those terms have under the rules and regulations under
the 1940 Act, subject to any exemption that may be granted to the
Fund under the 1940 Act, by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the Fund has executed the Plan as of October
8, 1998.
SMITH BARNEY CALIFORNIA MUNICIPALS FUND INC.
By: ____________________________________
Heath B. McLendon
Chairman of the Board
g:\funds\value\agreemts\12b1Plan.doc
SMITH BARNEY MUTUAL FUNDS
BROKER DEALER CONTRACT
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We, CFBDS, Inc. ("CFBDS"), have agreements with certain
investment companies for which Mutual Management Corp. serves as
investment adviser and/or administrator (each a "Fund") pursuant to
which we act as nonexclusive principal underwriter and distributor
for the sale of shares of capital stock ("shares") of the various
series of such Funds, and as such have the right to distribute shares
for resale. Each Fund is an open-end investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act")
and the shares being offered to the public are registered under the
Securities Act of 1933, as amended (the "1933 Act"). Each series of
each Fund covered by a Distribution Agreement from time to time is
referred to in this agreement as a "Series" and collectively as the
"Series." The term "Prospectus", as used herein, refers to the
prospectus and related statement of additional information (the
"Statement of Additional Information") incorporated therein by
reference (as amended or supplemented) on file with the Securities
and Exchange Commission at the time in question. As a broker in the
capacity of principal underwriter and distributor for the Trust, we
offer to sell to you, as a broker or dealer, shares of each Fund upon
the following terms and conditions:
1. In all sales to the public you shall act as broker
for your customers or as dealer for your own account, and in no
transaction shall you have any authority to act as agent for the
Trust, for us or for any other dealer.
2. Orders received from you will be accepted through us
only at the public offering price per share (i.e. the net asset value
per share plus the applicable front-end sales charge, if any)
applicable to each order, and all orders for redemption of any shares
shall be executed at the net asset value per share less any
contingent deferred sales charge, if any, in each case as set forth
in the Prospectus. You will be entitled to receive and retain any
contingent deferred sales charge amounts in partial consideration of
your payment to financial consultants of commission amounts at the
time of sale and we will obligate any other brokers with whom we
enter into similar agreements to pay such amounts directly to you.
The procedure relating to the handling of orders shall be subject to
paragraph 4 hereof and instructions which we or the Fund shall
forward from time to time to you. All orders are subject to
acceptance or rejection by the applicable Fund or us in the sole
discretion of either. The minimum initial purchase and the minimum
subsequent purchase of any shares shall be as set forth in the
Prospectus pertaining to the relevant Series.
3. You shall not place orders for any shares unless you
have already received purchase orders for those shares at the
applicable public offering price and subject to the terms hereof.
You agree that you will not offer or sell any shares except under
circumstances that will result in compliance with the applicable
Federal and state securities laws, the applicable rules and
regulations thereunder and the rules and regulations of applicable
regulatory agencies or authorities and that in connection with sales
and offers to sell shares you will furnish to each person to whom any
such sale or offer is made, a copy of the Prospectus and, upon
request, the Statement of Additional Information, and will not
furnish to any person any information relating to shares which is
inconsistent in any respect with the information contained in the
Prospectus or Statement of Additional Information (as then amended or
supplemented). You shall not furnish or cause to be furnished to any
person or display or publish any information or materials relating to
the shares (including, without limitation, promotional materials and
sales literature, advertisements, press releases, announcements,
statements, posters, signs or other similar material), except such
information and materials as may be furnished to you by or on behalf
of us or the Funds, and such other information and materials as may
be approved in writing by or on behalf of us or the Funds.
4. As a broker dealer, you are hereby authorized (i) to
place orders directly with the applicable Fund or Series for shares
subject to the applicable terms and conditions governing the
placement of orders by us set forth in the Prospectus and (ii) to
tender shares directly to each Fund or its agent for redemption
subject to the applicable terms and conditions governing the
redemption of shares applicable to us set forth in the Prospectus.
5. You shall not withhold placing orders received from
your customers so as to profit yourself as a result of such
withholding, e.g., by a change in the "net asset value" from that
used in determining the offering price to your customers.
6. In determining the amount of any sales concession
payable to you hereunder, we reserve the right to exclude any sales
which we reasonably determine are not made in accordance with the
terms of the Prospectus and the provisions of this Agreement. Unless
at the time of transmitting an order we advise you or the transfer
agent to the contrary, the shares ordered will be deemed to be the
total holdings of the specified investor.
7. (a) You agree that payment for orders from you for
the purchase of shares will be made in accordance with the terms of
the Prospectus. On or before the business day following the
settlement date of each purchase order for shares, you shall transfer
same day funds to an account designated by us with the transfer agent
in an amount equal to the public offering price on the date of
purchase of the shares being purchased less your sales concession, if
any, with respect to such purchase order determined in accordance
with the Prospectus. If payment for any purchase order is not
received in accordance with the terms of the Prospectus, we reserve
the right, without notice, to cancel the sale and to hold you
responsible for any loss sustained as a result thereof.
(b) If any shares sold under the terms of this Agreement
are sold with a sales charge and are redeemed or are tendered for
redemption within seven (7) business days after confirmation of your
purchase order for such shares: (i) you shall forthwith refund to us
the full sales concession received by you on the sale; and (ii) we
shall forthwith pay to the applicable Series our portion of the sales
charge on the sale which has been retained by us, if any, and shall
also pay to the applicable Series the amount refunded by you.
(c) We will not be obligated to pay or cause to be paid
to you any ongoing trail commission or shareholder service fees with
respect to shares of the Series purchased through you and held by or
for your customers, which you shall collect directly from the Funds.
(d) Certificates evidencing shares shall be available
only upon request. Upon payment for shares in accordance with
paragraph 7(a) above, the transfer agent will issue and transmit to
you or your customer a confirmation statement evidencing the purchase
of such shares. Any transaction in uncertificated shares, including
purchases, transfers, redemptions and repurchases, shall be effected
and evidenced by book-entry on the records of the transfer agent.
8. No person is authorized to make any representations
concerning shares except those contained in the current Prospectus
and Statement of Additional Information and in printed information
subsequently issued by us or the Funds as information supplemental to
the Prospectus and the Statement of Additional Information. In
purchasing or offering shares pursuant to this Agreement you shall
rely solely on the representations contained in the Prospectus, the
Statement of Additional Information and the supplemental information
above mentioned.
9. You agree to deliver to each purchaser making a
purchase of shares from or through you a copy of the Prospectus at or
prior to the time of offering or sale, and, upon request, the
Statement of Additional Information. You may instruct the transfer
agent to register shares purchased in your name and account as
nominee for your customers. You agree thereafter to deliver to any
purchaser whose shares you or your nominee are holding as record
holder copies of the annual and interim reports and proxy
solicitation materials and any other information and materials
relating to the Trust and prepared by or on behalf of us, the Funds
or the investment adviser, custodian, transfer agent or dividend
disbursing agent for distribution to beneficial holders of shares.
The Funds shall be responsible for the costs associated with
forwarding such reports, materials and other information and shall
reimburse you in full for such costs. You further agree to make
reasonable efforts to endeavor to obtain proxies from such purchasers
whose shares you or your nominee are holding as record holder. You
further agree to obtain from each customer to whom you sell shares
any taxpayer identification number certification required under
Section 3406 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations promulgated thereunder, and to provide
us or our designee with timely written notice of any failure to
obtain such taxpayer identification number certification in order to
enable the implementation of any required backup withholding in
accordance with Section 3406 of the Code and the regulations
thereunder. Additional copies of the Prospectus, Statement of
Additional Information, annual or interim reports, proxy solicitation
materials and any such other information and materials relating to
the Trust will be supplied to you in reasonable quantities upon
request.
10. (a) In accordance with the terms of the Prospectus,
a reduced sales charge may be available to customers, depending on
the amount of the investment or proposed investment. In each case
where a reduced sales charge is applicable, you agree to furnish to
the transfer agent sufficient information to permit confirmation of
qualification for a reduced sales charge, and acceptance of the
purchase order is subject to such confirmation. Reduced sales
charges may be modified or terminated at any time in the sole
discretion of each Fund.
(b) You acknowledge that certain classes of investors
may be entitled to purchase shares at net asset value without a sales
charge as provided in the Prospectus and Statement of Additional
Information.
(c) You agree to advise us promptly as to the amount of
any and all sales by you qualifying for a reduced sales charge or no
sales charge.
(d) Exchanges (i.e., the investment of the proceeds from
the liquidation of shares of one Series in the shares of another
Series, each of which is managed by the same or an affiliated
investment adviser) shall, where available, be made in accordance
with the terms of each Prospectus.
11. We and each Fund reserve the right in our
discretion, without notice, to suspend sales or withdraw the offering
of any shares entirely. Each party hereto has the right to cancel
the portions of this Agreement to which it is party upon notice to
the other parties; provided, however, that no cancellation shall
affect any party's obligations hereunder with respect to any
transactions or activities occurring prior to the effective time of
cancellation. We reserve the right to amend this Agreement in any
respect effective on notice to you.
12. We shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the
continuous offering of shares. We shall be under no liability to you
except for lack of good faith and for obligations expressly assumed by
us herein. Nothing contained in this paragraph 12 is intended to
operate as, and the provisions of this paragraph 12 shall not in any way
whatsoever constitute a waiver by you of compliance with, any provisions
of the 1933 Act or of the rules and regulations of the Securities and
Exchange Commission issued thereunder.
13. You agree that: (a) you shall not effect any
transactions (including, without limitation, any purchases and
redemptions) in any shares registered in the name of, or beneficially
owned by, any customer unless such customer has granted you full
right, power and authority to effect such transactions on his behalf,
(b) we shall have full authority to act upon your express
instructions to sell, repurchase or exchange shares through us on
behalf of your customers under the terms and conditions provided in
the Prospectus and (c) we, the Funds, the investment adviser, the
administrator, the transfer agent and our and their respective
officers, directors or trustees, agents, employees and affiliates
shall not be liable for, and shall be fully indemnified and held
harmless by you from and against, any and all claims, demands,
liabilities and expenses (including, without limitation, reasonable
attorneys' fees) which may be incurred by us or any of the foregoing
persons entitled to indemnification from you hereunder arising out of
or in connection with (i) the execution of any transactions in shares
registered in the name of, or beneficially owned by, any customer in
reliance upon any oral or written instructions believed to be genuine
and to have been given by or on behalf of you, (ii) any statements or
representations that you or your employees or representatives make
concerning the Funds that are inconsistent with the applicable Fund's
Prospectus, (iii) any written materials used by you or your employees
or representatives in connection with making offers or sales of
shares that were not furnished by us, the Funds or the investment
adviser or an affiliate thereof and (iv) any sale of shares of a Fund
where the Fund or its shares were not properly registered or
qualified for sale in any state, any U.S. territory or the District
of Columbia, when we have indicated to you that the Fund or its
shares were not properly registered or qualified. The
indemnification agreement contained in this Paragraph 13 shall
survive the termination of this Agreement.
14. You represent that: (a) you are a member in good
standing of the National Association of Securities Dealers, Inc. (the
"NASD"), or, if a foreign dealer who is not eligible for membership
in the NASD, that (i) you will not make any sales of shares in, or to
nationals of, the United States of America, its territories or its
possessions, and (ii) in making any sales of shares you will comply
with the NASD's Conduct Rules and (b) you are a member in good
standing of the Securities Investor Protection Corporation ("SIPC").
You agree that you will provide us with timely written notice of any
change in your NASD or SIPC status.
15. We shall inform you as to the states or other
jurisdictions in which the Fund has advised us that shares have been
qualified for sale under, or are exempt from the requirements of, the
respective securities laws of such states, but we assume no
responsibility or obligation as to your qualification to sell shares
in any jurisdiction.
16. Any claim, controversy, dispute or deadlock arising
under this Agreement (collectively, a "Dispute") shall be settled by
arbitration administered under the rules of the American Arbitration
Association ("AAA") in New York, New York. Any arbitration and
award of the arbitrators, or a majority of them, shall be final and
the judgment upon the award rendered may be entered in any state or
federal court having jurisdiction. No punitive damages are to be
awarded.
17. All communications to us should be sent, postage
prepaid, to 21 Milk Street, Boston, Massachusetts 02109 Attention:
Philip Coolidge. Any notice to you shall be duly given if mailed,
telegraphed or telecopied to you at the address specified by you
below. Communications regarding placement of orders for shares
should be sent, postage prepaid, to First Data Investor Services
Group, Inc., P.O. Box 5128, Westborough, Massachusetts 01581-5128.
18. This Agreement shall be binding upon both parties
hereto when signed by us and accepted by you in the space provided
below.
19. This Agreement and the terms and conditions set
forth herein shall be governed by, and construed in accordance with,
the laws of the State of New York.
CFBDS, INC.
By:
(Authorized Signature)
Accepted:
Firm Name:
Address:
Accepted By (signature):
Name (print):
Title: Date:
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