<PAGE>
[GRAPHIC]
Smith Barney Mutual Funds
P R O S P E C T U S
California
Municipals Funds
Class A, B, L and Y Shares
- ----------------------------------------------
June 28, 1999
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>
California Municipals Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 6
Management.................................................................. 7
Choosing a class of shares to buy........................................... 8
Comparing the fund's classes................................................ 9
</TABLE>
<TABLE>
<S> <C>
Sales charges............................................................... 10
More about deferred sales charges........................................... 12
Buying shares............................................................... 13
Exchanging shares........................................................... 14
Redeeming shares............................................................ 16
Other things to know about share transactions............................... 18
Dividends, distributions and taxes.......................................... 20
Share price................................................................. 21
Financial highlights........................................................ 22
</TABLE>
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.
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and performance
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.
Principal investment strategies
Key investments The fund invests at least 80% of its net assets in California
municipal securities. California municipal securities include securities issued
by the State of California and certain other municipal issuers, political sub-
divisions, agencies and public authorities that pay interest which is exempt
from California personal income taxes. The fund focuses primarily on intermedi-
ate-term and long-term municipal securities which 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 catego-
ries, 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 indi-
vidual securities, the manager:
.Uses fundamental credit analysis to estimate the relative value and attrac-
tiveness 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 reve-
nue 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
California Municipals Fund
2
<PAGE>
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 distri-
butions of the fund's gains generally will be, subject to federal and Califor-
nia 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, distribu-
tions 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 invests its assets in fewer issuers, the fund will be more susceptible
to negative events affecting those issuers.
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
Smith Barney Mutual Funds
3
<PAGE>
Risk return bar chart
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 neces-
sarily indicate how the fund will perform in the future. 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.
Total Return: Class A Shares
[BAR GRAPH]
1989 5.00%
1990 5.00%
1991 5.00%
1992 6.82%
1993 6.40%
1994 (1.48)%
1995 16.52%
1996 3.97%
1997 9.67%
1998 5.02%
Calendar years ended December 31
Quarterly returns:
Highest: 10.31% in 1st quarter 1995; Lowest: (4.60)% in 1st quarter 1994
Year to date: 0.95% through 3/31/99
Risk return table
This table indicates the risks of investing in the fund by comparing the aver-
age 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 unman-
aged 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.
Average Annual Total Returns
Calendar Years Ended December 31, 1998
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since inception Inception date
<S> <C> <C> <C> <C> <C>
A 1.23% 6.35% 7.84% 8.71% 4/9/84
B 0.38% 6.50% n/a 7.92% 11/6/92
L 2.80% n/a n/a 10.37% 11/14/94
Y n/a n/a n/a 0.78% 9/22/98
Lehman Index 6.48% 6.22% 8.22% 9.51% *
Lipper Average 5.77% 5.67% 7.61% 8.76% *
</TABLE>
*Index comparison begins on April 30, 1984.
California Municipals Fund
4
<PAGE>
Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases
(as a % of offering price) 4.00% None 1.00% None
Maximum deferred sales charge (load) (as a %
of the lower of net asset value at purchase or
redemption) None* 4.50% 1.00% None
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Management fee 0.49% 0.49% 0.49% 0.49%
Distribution and service (12b-1) fees 0.15% 0.65% 0.70% None
Other expenses 0.04% 0.06% 0.05% 0.04%
----- ----- ----- -----
Total annual fund operating expenses 0.68% 1.20% 1.24% 0.53%
</TABLE>
*You may buy Class A shares in amounts of $500,000 or more at net asset value
(without an initial sales 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
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A (with or without redemption) $467 $609 $764 $1,213
Class B (redemption at end of period) $572 $681 $760 $1,310
Class B (no redemption) $122 $381 $660 $1,310
Class L (redemption at end of period) $325 $489 $774 $1,585
Class L (no redemption) $225 $489 $774 $1,585
Class Y (with or without redemption) $ 54 $170 $296 $ 665
</TABLE>
Smith Barney Mutual Funds
5
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More on the fund's investments
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 secu-
rities in which the fund invests include general obligation bonds, revenue
bonds and municipal leases. These securities may pay interest at fixed, vari-
able 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, also known
as "junk bonds", are considered speculative with respect to the issuer's abil-
ity to pay interest and principal, involve a high risk of loss and are suscep-
tible to default or decline in market value because of adverse economic and
business developments. The market value for these securities tends to be very
volatile, and these securities are less liquid than investment grade debt secu-
rities.
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 hold-
ings. 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.
California Municipals Fund
6
<PAGE>
Defensive investing The fund may depart from its principal investment strate-
gies 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.
Management
Manager The fund's investment adviser and administrator 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 respon-
sible for the day-to-day management of the fund's portfolio since November
1988. Mr. Deane has 29 years of securities business experience.
Management fees During the fiscal year ended February 28, 1999, the manager
received an advisory fee and an administrative fee equal to 0.30% and 0.19%,
respectively, of the fund's average daily net assets.
Distributor The fund has entered into an agreement with CFBDS, Inc. to distrib-
ute 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 serv-
ice 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 sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by the fund. The manager and Salomon Smith Barney are addressing the
Year 2000 issue for their systems. The fund
Smith Barney Mutual Funds
7
<PAGE>
has been informed by other service providers that they are taking similar mea-
sures. Although the fund does not expect the Year 2000 issue to adversely
affect it, the fund cannot guarantee the efforts of the fund, which are limited
to requesting and receiving reports from its service providers, or the efforts
of its service providers to correct the problem will be successful.
Choosing a class of shares to buy
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 amount 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 invest-
ors.
You may buy shares from:
.A Salomon Smith Barney Financial Consultant
.An investment dealer in the selling group or a broker that clears through Sal-
omon Smith Barney--a dealer representative
.The fund, but only if you are investing through 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.
<TABLE>
<CAPTION>
Initial Additional
Classes A, B, L Class Y All Classes
<S> <C> <C> <C>
General $1,000 $15 million $50
Monthly Systematic Investment Plans $25 n/a $25
Quarterly Systematic Investment Plans $50 n/a $50
Uniform Gift to Minor Accounts $250 $15 million $50
</TABLE>
California Municipals Fund
8
<PAGE>
Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class L Class Y
<S> <C> <C> <C> <C>
Key features .Initial .No initial .Initial .No initial
sales sales sales or
charge charge charge is deferred
.You may .Deferred lower than sales
qualify sales Class A charge
for reduc- charge .Deferred .Must
tion or declines sales invest at
waiver of over time charge for least $15
initial .Converts only 1 million
sales to Class A year .Lower
charge after 8 .Does not annual
.Lower years convert to expenses
annual .Higher Class A than the
expenses annual .Higher other
than Class expenses annual classes
B and than Class expenses
Class L A than Class
A
- ------------------------------------------------------------------------
Initial sales charge Up to None 1.00% None
4.00%;
reduced for
large pur-
chases and
waived for
certain
investors.
No charge
for pur-
chases of
$500,000 or
more
- ------------------------------------------------------------------------
Deferred sales charge 1% on pur- Up to 4.50% 1% if you None
chases of charged redeem
$500,000 or when you within 1
more if you redeem year of
redeem shares. The purchase
within 1 charge is
year of reduced
purchase over time
and there
is no
deferred
sales
charge
after 6
years
- ------------------------------------------------------------------------
Annual distribution and 0.15% of 0.65% of 0.70% of None
service fees average average average
daily net daily net daily net
assets assets assets
- ------------------------------------------------------------------------
Exchange Privilege* Class A Class B Class L Class Y
shares shares shares shares
of most of most of most of most
Smith Smith Smith Smith
Barney Barney Barney Barney
funds funds 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.
Smith Barney Mutual Funds
9
<PAGE>
Sales charges
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.
<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
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-
</TABLE>
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. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining their sales charge.
.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.
California Municipals Fund
10
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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 cer-
tain 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 about additional 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").
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 pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 4.5% 4% 3% 2% 1% 0%
</TABLE>
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:
<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith
distributions Barney
fund
<S> <C> <C>
Eight years after the date of purchase In same proportion On the date the
as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares
(excluding shares
issued as a divi-
dend)
</TABLE>
Smith Barney Mutual Funds
11
<PAGE>
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 and/or other Smith
Barney mutual funds 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 13-month period. To qualify, you
must initially invest $5,000,000.
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase 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.
California Municipals Fund
12
<PAGE>
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.
Buying shares
You should contact your Salomon Smith Barney Financial Con-
Through a sultant or dealer representative to open a brokerage account
Salomon Smith and make arrangements to buy shares.
Barney
Financial
Consultant or
dealer
representative
If you do not provide the following information, your order
will be rejected:
.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 the Qualified retirement plans and certain other investors who
fund's are clients of the selling group are eligible to buy shares
transfer directly from 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 pur-
chases, complete and send an account application.
.For more information, call the transfer agent at 1-800-451-
2010.
Smith Barney Mutual Funds
13
<PAGE>
Through a You may authorize Salomon Smith Barney, your dealer represen-
systematic tative or the transfer agent to transfer funds automatically
investment from a regular bank account, cash held in a Salomon Smith
plan Barney 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 represen-
tative 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.
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a taxable
funds transaction.
tailored to
help meet the
varying needs
of both large
and small
investors
.You may exchange shares only for shares of the same class of
another Smith Barney fund. Not all Smith Barney funds offer
all classes.
.Not all Smith Barney funds may be offered in your state of
residence. Contact your Salomon Smith Barney Financial Con-
sultant, dealer representative or the transfer agent.
.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.
California Municipals Fund
14
<PAGE>
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be mea-
sured 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 telephone If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete 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 deter-
mined.
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 following page.
Smith Barney Mutual Funds
15
<PAGE>
Redeeming shares
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 redemp-
tion 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 regis-
tered
California Municipals Fund
16
<PAGE>
By telephone If you do not have a brokerage account, you may be eligible
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 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 docu-
ments.
- --------------------------------------------------------------------------------
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.
Smith Barney Mutual Funds
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 regis-
tration
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.
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
California Municipals Fund
18
<PAGE>
.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 Securi-
ties 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 share-
holders. 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.
Smith Barney Mutual Funds
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, typi-
cally 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 dis-
tributions 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. Alterna-
tively, you can instruct your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent to have your distributions and/or divi-
dends 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 effec-
tive until the next distribution or dividend is paid.
Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
California tax
Transaction Federal tax status status
<S> <C> <C>
Redemption or Usually capital gain Usually capital gain
exchange of shares or loss; long-term or loss
only if shares owned
more than one year
Long-term capital Taxable gain Taxable gain
gain distributions
Short-term capital Ordinary income Ordinary income
gain distributions
Dividends Exempt if from Exempt if from
interest on tax- interest on
exempt securities, California municipal
otherwise ordinary securities,
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 distribu-
tions 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.
California Municipals Fund
20
<PAGE>
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 dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer 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.
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 liabili-
ties. 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 calcu-
lation 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 repre-
sentative 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.
Smith Barney Mutual Funds
21
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance 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.
For a Class A share of capital stock outstanding throughout each year ended
February 28:
<TABLE>
<CAPTION>
1999(/1/) 1998 1997 1996(/1/) 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.99 $16.26 $16.31 $15.40 $16.15
- ------------------------------------------------------------------------------
Income from operations:
Net investment income 0.77 0.82 0.85 0.85 0.89
Net realized and
unrealized gain (loss) 0.07 0.98 0.15 0.93 (0.56)
- ------------------------------------------------------------------------------
Total income from
operations 0.84 1.80 1.00 1.78 0.33
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.78) (0.84) (0.85) (0.84) (0.89)
In excess of net
investment income (0.02) -- -- -- --
Net realized gains (0.10) (0.23) (0.20) (0.03) (0.19)
- ------------------------------------------------------------------------------
Total distributions (0.90) (1.07) (1.05) (0.87) (1.08)
- ------------------------------------------------------------------------------
Net asset value, end of
year $16.93 $16.99 $16.26 $16.31 $15.40
- ------------------------------------------------------------------------------
Total return 5.02% 11.44% 6.37% 11.93% 2.46%
- ------------------------------------------------------------------------------
Net assets, end of year
(000)'s $769,306 $664,471 $578,687 $582,324 $401,743
- ------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 0.68% 0.70% 0.71% 0.76% 0.80%
Net investment income 4.53 4.97 5.29 5.26 5.76
- ------------------------------------------------------------------------------
Portfolio turnover rate 13% 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
22
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended
February 28:
<TABLE>
<CAPTION>
1999(/1/) 1998 1997 1996(/1/) 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.98 $16.25 $16.32 $15.40 $16.15
- ------------------------------------------------------------------------------
Income from operations:
Net investment income 0.68 0.74 0.76 0.75 0.81
Net realized and
unrealized gain (loss) 0.08 0.98 0.14 0.96 (0.57)
- ------------------------------------------------------------------------------
Total income from
operations 0.76 1.72 0.90 1.71 0.24
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.69) (0.76) (0.77) (0.76) (0.80)
In excess of net
investment income (0.02) -- -- -- --
Net realized gains (0.10) (0.23) (0.20) (0.03) (0.19)
- ------------------------------------------------------------------------------
Total distributions (0.81) (0.99) (0.97) (0.79) (0.99)
- ------------------------------------------------------------------------------
Net asset value, end of
year $16.93 $16.98 $16.25 $16.32 $15.40
- ------------------------------------------------------------------------------
Total return 4.56% 10.88% 5.73% 11.39% 1.89%
- ------------------------------------------------------------------------------
Net assets, end of year
(000)'s $247,252 $216,234 $173,347 $153,044 $127,888
- ------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.20% 1.21% 1.23% 1.29% 1.32%
Net investment income 4.02 4.45 4.75 4.71 5.25
- ------------------------------------------------------------------------------
Portfolio turnover rate 13% 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.
Smith Barney Mutual Funds
23
<PAGE>
For a Class L share(/1/) of capital stock outstanding throughout each
year ended February 28:
<TABLE>
<CAPTION>
1999(/2/) 1998 1997 1996(/2/) 1995(/3/)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.97 $16.24 $16.31 $15.40 $14.19
- ------------------------------------------------------------------------------
Income from operations:
Net investment income 0.67 0.73 0.75 0.78 0.24
Net realized and
unrealized gain 0.07 0.98 0.15 0.92 1.39*
- ------------------------------------------------------------------------------
Total income from
operations 0.74 1.71 0.90 1.70 1.63
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.68) (0.75) (0.77) (0.76) (0.23)
In excess of net
investment income (0.02) -- -- -- --
Net realized gains (0.10) (0.23) (0.20) (0.03) (0.19)
- ------------------------------------------------------------------------------
Total distributions (0.80) (0.98) (0.97) (0.79) (0.42)
- ------------------------------------------------------------------------------
Net asset value, end of
year $16.91 $16.97 $16.24 $16.31 $15.40
- ------------------------------------------------------------------------------
Total return 4.45% 10.83% 5.68% 11.30% 11.72%(/4/)
- ------------------------------------------------------------------------------
Net assets, end of year
(000)'s $48,169 $32,047 $16,678 $10,809 $762
- ------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.24% 1.26% 1.29% 1.39% 1.37%(/5/)
Net investment income 3.97 4.39 4.69 4.44 5.19(/5/)
- ------------------------------------------------------------------------------
Portfolio turnover rate 13% 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
California Municipals Fund
24
<PAGE>
For a Class Y share of capital stock outstanding throughout the period ended
February 28:
<TABLE>
<CAPTION>
1999(/1/)(/2/)
- ----------------------------------------------------
<S> <C>
Net asset value, beginning of year $17.19
- ----------------------------------------------------
Income from operations:
Net investment income 0.34
Net realized and unrealized loss (0.11)
- ----------------------------------------------------
Total income from operations 0.23
- ----------------------------------------------------
Less distributions from:
Net investment income (0.37)
In excess of net investment income (0.02)
Net realized gains (0.10)
- ----------------------------------------------------
Total distributions (0.49)
- ----------------------------------------------------
Net asset value, end of year $16.93
- ----------------------------------------------------
Total return(/3/) 1.34%
- ----------------------------------------------------
Net assets, end of year (000)'s $1,498
- ----------------------------------------------------
Ratio to average net assets(/4/):
Expenses 0.53%
Net investment income 4.56
- ----------------------------------------------------
Portfolio turnover rate 13%
- ----------------------------------------------------
</TABLE>
(/1/)Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(/2/)For the period from September 22, 1998 (inception date) to February 28,
1999.
(/3/)Not annualized.
(/4/)Annualized.
Smith Barney Mutual Funds
25
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
California
Municipals Fund
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket 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 refer-
ence 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 Commis-
sion, 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 law-
fully sell its shares.
(SM)Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act file
no. 811-03970)
[FD0209 6/99]
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 that 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 4
Investment
Restrictions..................................14
Risk Factors...................................16
Special Considerations Relating to California
Exempt Obligations .....................18
Special Considerations Regarding Puerto
Rico...................................................24
Portfolio
Transactions........................................29
Portfolio
Turnover...........................................30
Purchase of Shares...................................31
Determination of Net Asset
Value.................................................36
Redemption of Shares 37
Investment Management and Other Services 40
Valuation of Shares 44
Exchange Privilege 44
Performance Information 45
Dividends, Distributions and Taxes 50
Additional Information 54
Financial Statements.............................55
Other Information........................55
Appendix A 57
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 76). Director
Private Investor. Director or trustee of 18 investment
companies associated with Citigroup Inc. ("Citigroup")
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. Director or trustee of 13 investment
companies associated with Citigroup. 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. Director or trustee
of 22 investment companies associated with Citigroup.
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. Director or trustee
of 25 investment companies associated with Citigroup.
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. Director or trustee of 13
investment companies associated with Citigroup. His
address is 201 East 62nd Street, New York, New York
10021.
Elliot S. Jaffe (Age 73). Director
Chairman of the Board and President of The Dress Barn,
Inc. Director or trustee of 13 investment companies
associated with Citigroup. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 67). Director
Attorney. Director or trustee of 15 investment companies
associated with Citigroup. 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. Director or trustee of 13 investment
companies associated with Citigroup. His address is 200
Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon (Age 66). Chairman of the Board,
President and Chief Executive Officer
Managing Director of Salomon Smith Barney Inc.;
President of SSBC Fund Management, Inc. ("SSBC" or the
"manager") and Travelers Investment Adviser, Inc.
("TIA"); Chairman or Co-Chairman of the Board and
director or trustee of 64 investment companies
associated with Citigroup. 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. Director or
trustee of 13 investment companies associated with
Citigroup. 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.
Senior Vice President and Treasurer of 59 investment
companies associated with Citigroup.
Joseph P. Deane (Age 51). 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. Controller or
Assistant Treasurer of 43 investment companies
associated with Citigroup.
Christina T. Sydor (Age 48). Secretary
Managing Director of Salomon Smith Barney; General
Counsel and Secretary of SSBC and TIA. Secretary of 59
investment companies associated with Citigroup.
As of June 16, 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 16,
1999, no single shareholder or "group" (as such term is
defined in Section 13(d) of the Securities Exchange Act
of 1934, as amended) beneficially owned more than 5% of
the outstanding shares of the fund.
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. For the fiscal year ended February 28, 1999,
such out of pocket expenses totaled $13,593.
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 **
$4,600
$0
$105,425
18
Alfred
Bianchetti * **
4,600
0
51,200
13
Martin Brody **
3,600
0
132,500
21
Dwight B. Crane
**
4,100
0
139,975
24
Burt N. Dorsett
**
4,600
0
51,200
13
Elliot S. Jaffe
**
3,600
0
47,550
13
Stephen E.
Kaufman **
4,600
0
96,400
15
Joseph J. McCann
**
4,600
0
51,200
13
Heath B.
McLendon *
0
0
0
64
Cornelius C.
Rose, Jr. **
4,100
0
51,200
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 $2,000.
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 (not including the possible applicability of a
federal alternative minimum tax), 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
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, 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.
Non-diversified Classification
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 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.
Use of 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 because of 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 because of default by such
issuers is significantly greater because low-rated and
comparable unrated securities generally are unsecured
and frequently are subordinated to the prior payment of
senior indebtedness. The fund may incur additional
expenses to the extent it is required to seek recovery
upon a default in payment of principal or interest on
its portfolio holdings.
While the market for municipal securities is considered
to be generally adequate, the existence of limited
markets for particular low-rated and comparable unrated
securities may diminish the fund's ability to (a) obtain
accurate market quotations for purposes of valuing such
securities and calculating its net asset value and (b)
sell the securities at fair value either to meet
redemption requests or to respond to changes in the
economy or in the financial markets. The market for
certain low-rated and comparable unrated securities has
not fully weathered a major economic recession. Any such
recession, however, would likely disrupt severely the
market for such securities and adversely affect the
value of the securities and the ability of the issuers
of such securities to repay principal and pay interest
thereon.
Fixed-income securities, including low-rated securities
and comparable unrated securities, frequently have call
or buy-back features that permit their issuers to call
or repurchase the securities from their holders, such as
the fund. If an issuer exercises these rights during
periods of declining interest rates, the fund may have
to replace the security with a lower yielding security,
thus resulting in a decreased return to the fund.
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
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.
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.
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 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.
Zero Coupon Bonds. 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 or 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.
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 on the fund's books. 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 being advantageous.
Repurchase Agreements. The fund may agree to purchase
securities from a bank or recognized securities dealer
and simultaneously commit to resell the securities to
the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities
("repurchase agreements"). The fund would maintain
custody of the underlying securities prior to their
repurchase; thus, the obligation of the bank or dealer
to pay the repurchase price on the date agreed to would
be, in effect, secured by such securities. If the value
of such securities were less than the repurchase price,
plus interest, the other party to the agreement would be
required to provide additional collateral so that at all
times the collateral is at least 102% of the repurchase
price plus accrued interest. Default by or bankruptcy of
a seller would expose the fund to possible loss because
of adverse market action, expenses and/or delays in
connection with the disposition of the underlying
obligations. The financial institutions with which the
fund may enter into repurchase agreements will be banks
and non-bank dealers of U.S. Government securities that
are on the Federal Reserve Bank of New York's list of
reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by the fund's manager. The
manager will continue to monitor creditworthiness of the
seller under a repurchase agreement, and will require
the seller to maintain during the term of the agreement
the value of the securities subject to the agreement to
equal at least 102% of the repurchase price (including
accrued interest). In addition, the manager will
require that the value of this collateral, after
transaction costs (including loss of interest)
reasonably expected to be incurred on a default, be
equal to 102% or greater than the repurchase price
(including accrued premium) provided in the repurchase
agreement or the daily amortization of the difference
between the purchase price and the repurchase price
specified in the repurchase agreement. The manager will
mark-to-market daily the value of the securities.
Lending of Portfolio Securities. Consistent with
applicable regulatory requirements, the fund may lend
portfolio securities to brokers, dealers and other
financial organizations that meet capital and other
credit requirements or other criteria established by the
Board. Loans of portfolio securities will be
collateralized by cash, letters of credit or U.S.
Government Securities, which are maintained at all times
in an amount equal to at least 102% of the current
market value of the loaned securities. Any gain or loss
in the market price of the securities loaned that might
occur during the term of the loan would be for the
account of the fund. From time to time, the fund may
return a part of the interest earned from the investment
of collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with
the fund and that is acting as a "finder."
By lending its securities, the fund can increase its
income by continuing to receive interest and any
dividends on the loaned securities as well as by either
investing the collateral received for securities loaned
in short-term instruments or obtaining yield in the form
of interest paid by the borrower when U.S. Government
Securities are used as collateral. Although the
generation of income is not the primary investment goal
of the fund, income received could be used to pay the
fund's expenses and would increase an investor's total
return. The fund will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the
fund must receive at least 102% cash collateral or
equivalent securities of the type discussed in the
preceding paragraph from the borrower; (ii) the borrower
must increase such collateral whenever the market value
of the securities rises above the level of such
collateral; (iii) the fund must be able to terminate the
loan at any time; (iv) the fund must receive reasonable
interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities and any
increase in market value; (v) the fund may pay only
reasonable custodian fees in connection with the loan;
and (vi) voting rights on the loaned securities may pass
to the borrower, provided, however, that if a material
event adversely affecting the investment occurs, the
Board must terminate the loan and regain the right to
vote the securities. Loan agreements involve certain
risks in the event of default or insolvency of the other
party including possible delays or restrictions upon a
fund's ability to recover the loaned securities or
dispose of the collateral for the loan.
Temporary Investments. Under normal market conditions,
the fund may hold up to 20% of its total assets in cash
or money market instruments, including taxable money
market instruments. 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 any 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 traded on a
domestic exchange or board of trade. Such investments,
if any, by the fund will be made 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 on the futures contract. The potential loss
related to the purchase of an option on financial
futures contracts is limited to the premium paid for the
option (plus transaction costs). The value of the
option may change daily and that change would be
reflected in the net asset value of the fund.
Regulations of the Commodity Futures Trading Commission
applicable to the fund require that its transactions in
financial futures contracts and options on financial
futures contracts be engaged in for bona fide hedging
purposes, or if the fund enters into futures contracts
for speculative purposes, that the aggregate initial
margin deposits and premiums paid by the fund will not
exceed 5% of the market value of its assets. In
addition, the fund will, with respect to its purchases
of financial futures contracts, establish a segregated
account consisting of cash or cash equivalents in an
amount equal to the total market value of the futures
contracts, less the amount of initial margin on 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.
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.
Other Investments. The fund 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.
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) 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
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.
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. The summary is based
on a sampling of offering statements for the debt of the
state's issuers, data from independent rating agencies,
and/or data reported in other public sources. The fund
has not independently verified the accuracy and
completeness of this information, and will not update it
during the year. The fund assumes no responsibility for
the accuracy of such information.
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.
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.
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 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 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
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 use 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 Municipal 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 13%, 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 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. It is not
recommended that the Fund be used as a vehicle for
Keogh, IRA or other qualified retirement plans.
Purchase orders received by the fund or 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) investments of
distributions from a UIT sponsored by Salomon Smith
Barney; and (g) 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 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
option 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 0.15%) 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 shareholder as the total number of his or
her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than
Class B Dividend Shares) owned by the shareholder.
The length of time 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) involuntary redemptions; and (e)
redemptions of shares to effect a combination of the
fund with any investment company by merger, acquisition
of assets or otherwise. In addition, a shareholder who
has redeemed shares from other Smith Barney Mutual Funds
may, under certain circumstances, reinvest all or part
of the redemption proceeds within 60 days and receive
pro rata credit for any 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.
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.
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.
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 (Manager)
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.
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 May 31, 1999 of approximately
$167 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,
$2,240,458, $2,479,000 and $2,989,089, respectively, in
investment advisory fees.
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; 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 in
administration fees. For the fiscal year ended February
28, 1998, the fund paid the manager $1,587,128 in
administration fees. For the fiscal year ended February
28, 1999, the fund paid the manager $1,893,181 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; 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.
Transfer Agent and Custodian
PNC Bank, National Association, 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 Investor Services Group, Inc., 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.
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 $ 1,039,000 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
$779,000, $ 701,100 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 $ 29,000, 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 $ 70,000, $ 63,000 of
which was paid to Salomon Smith Barney.
For the fiscal years ended February 28, 1998 and 1999,
Salomon Smith Barney received from shareholders $38,000
and $45,000 respectively, in deferred sales charges on
the redemption of Class A shares. For the fiscal years
ended February 28, 1997, 1998 and 1999, Salomon Smith
Barney received from shareholders $241,000, $263,000 and
$212,000, 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 $8,000, 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
$4,663,908 consisting of $247,305 for advertising,
$17,305 for printing and mailing of prospectuses,
$1,428,855 for support services, $2,862,463 to Salomon
Smith Barney Financial Consultants, and $107,980 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
$ 1,077,263
$ 915,346
$ 857,927
Class B
$ 1,519,558
$1,244,383
$ 1,046,863
Class L*
$ 274,706
$ 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 the judgment of the pricing service, quoted bid
prices for investments are readily available and are
representative of the bid side of the market, these
investments are valued at the mean between the quoted
bid and asked prices. Investments for which, in the
judgment of the pricing service, there is no readily
obtainable market quotation (which may contribute a
majority of the portfolio securities) are carried at
fair value of securities of similar type, yield and
maturity. Pricing services generally determine value by
reference to transactions in municipal obligations,
quotations from municipal bond dealers, market
transactions in comparable securities and various
relationships between securities. Short-term
investments that mature in 60 days or less are valued at
amortized cost whenever the 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 priced by a pricing service
and for which market quotations are not available will
be valued in good faith at fair value by or under the
direction of the fund's board of directors.
EXCHANGE PRIVILEGE
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, Class L and Class
Y shares for the 30-day period ended February 28, 1999
was 4.05%, 3.70%, 3.62% and 3.67%, respectively. The
equivalent taxable yield for Class A, Class B, Class L
and Class Y shares for that same period was 7.93%,
7.24%, 7.08% and 7.18%, respectively, assuming the
payment of Federal income taxes at a rate of 39.6% and
California taxes at a rate of 9.30%.
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):
0.81% for the one-year period ended
February 28, 1999.
6.58% for the five-year period ended
February 28, 1999.
7.84% for the ten-year period ended
February 28, 1999.
8.65% per annum during the period from the
fund's commencement of operations on April
9, 1984 through February 28, 1999.
Class A's 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 5.02%, 7.45% 8.28% and
8.95%, 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):
0.07% for the one-year period ended
February 28, 1999.
6.74% for the five-year period ended
February 28, 1999.
7.81% 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 4.56%, 6.90%
and 7.81%, 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):
2.42% for the one-year period ended
February 28, 1999.
10.10% 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 would have been 4.45% and
10.35%, respectively, for the same periods.
The fund's average annual total return for Class Y
shares assuming the maximum applicable deferred sales
charge was as follows for the period indicated
(reflecting the waiver of the fund's investment advisory
and administration fees and reimbursement of expenses):
1.34% per annum during the period from the
fund's commencement of operations on
September 22, 1998 through February 28,
1999.
Class Y's shares do not incur sales charges nor deferred
sales charges.
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):
0.81% for the one-year period ended
February 28, 1999.
37.53% for the five-year period ended
February 28, 1999.
112.76% for the ten-year period ended
February 28, 1999.
244.31% for the period from the fund's
commencement of operations on April 9, 1984
through February 28, 1999.
Class A's 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 5.02%,
43.24%, 121.64% and 258.56%, 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):
0.07% for the one-year period ended
February 28, 1999.
38.59% for the five-year period ended
February 28, 1999.
60.75% 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 4.56%, 39.59% and 60.75%, 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):
2.42% for the one-year period ended
February 28, 1999.
51.15% 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 same periods would have
been 4.45% and 52.64%.
The fund's aggregate total return for Class Y shares was
as follows for the period indicated (reflecting the
waiver of the fund's investment advisory and
administration fees and reimbursement of expenses):
1.37% for the period from commencement of
operations on September 22, 1998 through
February 28, 1999.
Class Y's shares do not incur sales charges nor deferred
sales charges.
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 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 90% of 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.
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.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended
February 28, 1999 was filed on May 5, 1999 and is
incorporated in its entirety by reference, Accession
Number 0000091155-99-000315.
OTHER INFORMATION
In an industry where the average portfolio manager has
seven years of experience (source: ICI, 1998), the
portfolio managers of Smith Barney Mutual Funds average
21 years in the industry and 15 years with the firm.
Smith Barney Mutual Funds offers more than 60 mutual
funds. We understand that many investors prefer an
active role in allocating the mix of funds in their
portfolio, while others want the asset allocation
decisions to be made by experienced managers.
That's why we offer four "styles" of fund management
that can be tailored to suit each investor's unique
financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested
within their asset class and investment style,
enabling investors to make asset allocation
decisions in conjunction with their Salomon Smith
Barney Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range
of equity and fixed income strategies that seek
to capture opportunities across asset classes and
investment styles using disciplined investment
approaches.
The Concert Allocation Series
As a fund of funds, investors can select a
Concert Portfolio that may help their investment
needs. As needs change, investors can easily
choose another long-term, diversified investment
from our Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed
for investors who are looking beyond more
traditional market categories: from natural
resources to a roster of state-specific municipal
funds.
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 CALIFORNIA MUNICIPALS FUND INC.
Statement of
Additional
Information
June 28, 1999
Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
SALOMON
SMITH BARNEY
A Member
of Citigroup [Symbol]
33
FUNDACCOUNTING\LEGAL\FUNDS\CAMU\CAMU SAI 1999
