[SB]Smith Barney
[MF]Mutual Funds
P R O S P E C T U S
California
Municipals Fund
Class A, B, L and Y Shares
-------------------------------------------------------------------------
June 28, 2000
[GRAPHIC]
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 rev-
enue 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 have different performance because of dif-
ferent expenses. The performance information in the chart does not reflect
sales charges, which would reduce your return.
Total Return: Class A Shares
[BAR CHART]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.84% 9.81% 8.00% 12.61% (6.67)% 22.63% 5.65% 11.10% 5.46% (5.85)%
Calendar years ended December 31
Quarterly returns:
Highest: 10.31% in 1st quarter 1995; Lowest: (4.60)% in 1st quarter 1994
Year to date: 4.69% through 3/31/00
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 Debt
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, 1999
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since inception Inception date
<S> <C> <C> <C> <C> <C>
A (9.63)% 6.54% 6.21% 7.72% 4/9/84
B (10.34)% 6.70% n/a 5.81% 11/6/92
L (8.17)% 6.58% n/a 6.89% 11/14/94
Y (5.89)% n/a n/a (4.09)% 9/22/98
Lehman Index (2.06)% 6.91% 6.89% 8.73% *
Lipper Average (5.16)% 6.08% 6.08% 7.85% *
</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 0.06% 0.08% 0.09% 0.04%
----- ----- ----- -----
Total annual fund operating expenses 0.70% 1.22% 1.28% 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) $469 $615 $774 $1,236
Class B (redemption at end of period) $574 $687 $770 $1,337
Class B (no redemption) $124 $387 $670 $1,337
Class L (redemption at end of period) $329 $502 $795 $1,630
Class L (no redemption) $229 $502 $795 $1,630
Class Y (with or without redemption) $ 54 $170 $296 $ 665
</TABLE>
Smith Barney Mutual Funds
5
<PAGE>
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 SSB Citi Fund Man-
agement LLC (successor to 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 opera-
tions. The manager and Salomon Smith Barney are subsidiaries of Citigroup Inc.
Citigroup businesses produce a broad range of financial services--asset manage-
ment, banking and consumer finance, credit and charge cards, insurance, invest-
ments, 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 the manager and senior vice president
and managing director of Salomon Smith Barney, has been responsible for the
day-to-day management of the fund's portfolio since November 1988. Mr. Deane
has 30 years of securities business experience.
Management fees During the fiscal year ended February 29, 2000, 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 Salomon Smith Barney
Inc. and PFS Distributors, Inc, to distribute the fund's shares.
Distribution plan The fund has adopted a Rule 12b-1 distribution plan for its
Class A, B and L shares. Under the plan, the fund pays distribution and/or
service fees. These fees are an ongoing expense and, over time, may cost you
more than other types of sales charges.
Transfer agent and shareholder servicing agent Citi Fiduciary Trust Company
serves as the fund's transfer agent and shareholder servicing agent (the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement
with the transfer agent, PFPC Global Fund Services serves as the fund's sub-
transfer agent (the "sub-transfer agent") to perform certain shareholder record
keeping functions and render accounting services.
Smith Barney Mutual Funds
7
<PAGE>
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
Salomon 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.
Class A Class B Class L Class Y
Key . Initial . No ini- . Initial . No ini-
features sales tial sales tial or
charge sales charge deferred
. You may charge is lower sales
qualify . Deferred than charge
for sales Class A . Must
reduction charge . Deferred invest
or declines sales at least
waiver over charge $15
of ini- time for only million
tial . Converts 1 year . Lower
sales to Class . Does not annual
charge A after convert expenses
. Lower 8 years to Class than the
annual . Higher A other
expenses annual . Higher classes
than expenses annual
Class B than expenses
and Class A than
Class L Class A
--------------------------------------------------------------------------------
Initial Up to None 1.00% None
sales 4.00%;
charge reduced
for large
purchases
and waived
for cer-
tain
investors.
No charge
for pur-
chases of
$500,000
or more
--------------------------------------------------------------------------------
Deferred 1.00% on Up to 4.50% 1.00% if None
sales purchases charged you redeem
charge of when you within 1
$500,000 redeem year of
or more if shares. purchase
you redeem The charge
within 1 is reduced
year of over time
purchase and there
is no
deferred
sales
charge
after 6
years
--------------------------------------------------------------------------------
Annual 0.15% of 0.65% of 0.70% of None
distribution average average average
and service daily net daily net daily net
fees assets assets assets
--------------------------------------------------------------------------------
Exchange Class A Class B Class L Class Y
Privilege* shares shares shares shares
of most of most of most of most
Smith Smith Smith Smith
Barney Barney Barney Barney
funds funds funds funds
--------------------------------------------------------------------------------
*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. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
Letter of intent - lets you purchase Class A shares of the fund and certain
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
<PAGE>
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
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
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
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
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 Certain investors who are clients of the selling group
fund's sub- are eligible to buy shares directly from the fund.
transfer
agent
. Write the sub-transfer agent at the following address:
Smith Barney California Municipals Fund Inc.
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
. Enclose a check made payable to the fund to pay for the
shares. For initial purchases, complete and send an account
application.
. For more information, call the transfer agent at 1-800-451-
2010.
Smith Barney Mutual Funds
13
<PAGE>
Through a
systematic You may authorize Salomon Smith Barney, your dealer represen-
investment tative or the sub-transfer agent to transfer funds automati-
plan cally from a regular bank account, cash held in a Salomon
Smith 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 sub-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
(except for systematic changes).
. If you hold share certificates, the sub-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 4:00 p.m. (Eastern
time).
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 sub-trans-
fer 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 sub-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 sub-transfer agent at the following address:
Smith Barney California Municipals Fund Inc.
(Specify class of shares)
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
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 4:00 p.m. (Eastern time).
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
cash You can arrange for the automatic redemption of a portion of
withdrawal your shares on a monthly or quarterly basis. To qualify you
plans must own shares of the fund with a value of at least $10,000
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 sub-transfer
agent
. Instruct the sub-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 reg-
istration
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 sub-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 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 was audited by KPMG LLP, independent audi-
tors, whose report, along with the fund's financial statements, is included in
the annual report (available upon request).
For a Class A share of capital stock outstanding throughout each year ended
February 28:
<TABLE>
<CAPTION>
2000(/1/)(/2/) 1999(/1/) 1998 1997 1996(/1/)(/3/)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.93 $16.99 $16.26 $16.31 $15.40
----------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.78 0.77 0.82 0.85 0.85
Net realized and
unrealized gain (loss) (1.67) 0.07 0.98 0.15 0.93
----------------------------------------------------------------------------------
Total income (loss) from
operations (0.89) 0.84 1.80 1.00 1.78
----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.76) (0.78) (0.84) (0.85) (0.84)
In excess of net
investment income -- (0.02) -- -- --
Net realized gains -- (0.10) (0.23) (0.20) (0.03)
----------------------------------------------------------------------------------
Total distributions (0.76) (0.90) (1.07) (1.05) (0.87)
----------------------------------------------------------------------------------
Net asset value, end of
year $15.28 $16.93 $16.99 $16.26 $16.31
----------------------------------------------------------------------------------
Total return (5.36)% 5.02% 11.44% 6.37% 11.93%
----------------------------------------------------------------------------------
Net assets, end of year
(millions) $628 $ 769 $664 $579 $582
----------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 0.70% 0.68% 0.70% 0.71% 0.76%
Net investment income 4.99 4.53 4.97 5.29 5.26
----------------------------------------------------------------------------------
Portfolio turnover rate 29% 13% 43% 60% 44%
----------------------------------------------------------------------------------
</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.
(/2/) For the year ended February 29, 2000.
(/3/) For the year ended February 29, 1996.
California Municipals Fund
22
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended
February 28:
<TABLE>
<CAPTION>
2000(/1/)(/2/) 1999(/1/)(/2/) 1998 1997 1996(/1/)(/3/)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.93 $16.98 $16.25 $16.32 $15.40
---------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.70 0.68 0.74 0.76 0.75
Net realized and
unrealized gain (loss) (1.68) 0.08 0.98 0.14 0.96
---------------------------------------------------------------------------------------
Total income (loss) from
operations (0.98) 0.76 1.72 0.90 1.71
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.67) (0.69) (0.76) (0.77) (0.76)
In excess of net
investment income -- (0.02) -- -- --
Net realized gains -- (0.10) (0.23) (0.20) (0.03)
---------------------------------------------------------------------------------------
Total distributions (0.67) (0.81) (0.99) (0.97) (0.79)
---------------------------------------------------------------------------------------
Net asset value, end of
year $15.28 $16.93 $16.98 $16.25 $16.32
---------------------------------------------------------------------------------------
Total return (5.87)% 4.56% 10.88% 5.73% 11.39%
---------------------------------------------------------------------------------------
Net assets, end of year
(millions) $196 $247 $216 $173 $153
---------------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.22% 1.20% 1.21% 1.23% 1.29%
Net investment income 4.47 4.02 4.45 4.75 4.71
---------------------------------------------------------------------------------------
Portfolio turnover rate 29% 13% 43% 60% 44%
---------------------------------------------------------------------------------------
</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.
(/2/) For the year ended February 29, 2000.
(/3/) For the year ended February 29, 1996.
Smith Barney Mutual Funds
23
<PAGE>
For a Class L share of capital stock outstanding throughout each year ended
February 28:
<TABLE>
<CAPTION>
2000(/1/)(/2/) 1999(/1/)(/3/) 1998 1997 1996(/1/)(/4/)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.91 $16.97 $16.24 $16.31 $15.40
---------------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.69 0.67 0.73 0.75 0.78
Net realized and
unrealized gain (loss) (1.68) 0.07 0.98 0.15 0.92
---------------------------------------------------------------------------------------
Total income (loss) from
operations (0.99) 0.74 1.71 0.90 1.70
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.66) (0.68) (0.75) (0.77) (0.76)
In excess of net
investment income -- (0.02) -- -- --
Net realized gains -- (0.10) (0.23) (0.20) (0.03)
---------------------------------------------------------------------------------------
Total distributions (0.66) (0.80) (0.98) (0.97) (0.79)
---------------------------------------------------------------------------------------
Net asset value, end of
year $15.26 $16.91 $16.97 $16.24 $16.31
---------------------------------------------------------------------------------------
Total return (5.92)% 4.45% 10.83% 5.68% 11.30%
---------------------------------------------------------------------------------------
Net assets, end of year
(millions) $38 $48 $32 $17 $11
---------------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.28% 1.24% 1.26% 1.29% 1.39%
Net investment income 4.41 3.97 4.39 4.69 4.44
---------------------------------------------------------------------------------------
Portfolio turnover rate 29% 13% 43% 60% 44%
---------------------------------------------------------------------------------------
</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.
(/2/) For the year ended February 29, 2000.
(/3/) On June 12, 1998, the former Class C shares were renamed Class L shares.
(/4/) For the year ended February 29, 1996.
California Municipals Fund
24
<PAGE>
For a Class Y share of capital stock outstanding throughout the period ended
February 28:
<TABLE>
<CAPTION>
2000(/1/)(/2/) 1999(/1/)(/3/)
-------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of year $16.93 $17.19
-------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.82 0.34
Net realized and unrealized loss (1.68) (0.11)
-------------------------------------------------------------------
Total income (loss) from operations (0.86) 0.23
-------------------------------------------------------------------
Less distributions from:
Net investment income (0.78) (0.37)
In excess of net investment income -- (0.02)
Net realized gains -- (0.10)
-------------------------------------------------------------------
Total distributions (0.78) (0.49)
-------------------------------------------------------------------
Net asset value, end of year $15.29 $16.93
-------------------------------------------------------------------
Total return(/3/) (5.14)% 1.34%++
-------------------------------------------------------------------
Net assets, end of year (000)'s $1,142 $1,498
-------------------------------------------------------------------
Ratio to average net assets(/4/):
Expenses 0.46% 0.53%+
Net investment income 5.22 4.56+
-------------------------------------------------------------------
Portfolio turnover rate 29% 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 year ended February 29, 2000.
(/3/) For the period from September 22, 1998 (inception date) to February 28,
1999.
(++)Not annualized.
(+) Annualized.
Smith Barney Mutual Funds
25
<PAGE>
(This page is intentionally left blank.)
<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
Information about the fund (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's (the "Commission") Public Reference
Room in Washington, D.C. In addition, information on the operation of the Pub-
lic Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the fund are available on the EDGAR Data-
base on the Commission's Internet site at http://www.sec.gov. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
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 6/00
<PAGE>
[SB]Smith Barney
[MF]Mutual Funds
[GRAPHIC]
P R O S P E C T U S
California
Municipals Fund
Class A and B Shares
----------------------------------------
June 28, 2000
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............................................................ 15
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
revenue bond sectors, such as housing, hospital and industrial development,
based on their apparent relative values
. Considers the yield available for securities with different maturities and a
security's maturity in light of the outlook for the issuer and its sector
and interest rates
. Identifies individual securities with the most potential for added value,
such as those involving unusual situations, new issuers, the potential for
credit upgrades, unique structural characteristics or innovative features
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 affect-
ing 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 shares have different performance because of different expenses.
The performance information in the chart does not reflect sales charges, which
would reduce your return.
Total Return: Class A Shares
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.84% 9.81% 8.00% 12.61% (6.67)% 22.63% 5.65% 11.10% 5.46% (5.85)%
Calendar years ended December 31
Quarterly returns:
Highest: 10.31% in 1st quarter 1995; Lowest: (4.60)% in 1st quarter 1994
Year to date: 4.69% through 3/31/00
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 Debt 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 appli-
cable to the class, redemption of shares at the end of the period, and rein-
vestment of distributions and dividends.
Average Annual Total Returns
Calendar Years Ended December 31, 1999
<TABLE>
<CAPTION>
Class 1 year 5 years 10 years Since inception Inception date
<S> <C> <C> <C> <C> <C>
A (9.63)% 6.54% 6.21% 7.72% 4/9/84
B (10.34)% 6.70% n/a 5.81% 11/6/92
Lehman Index (2.06)% 6.91% 6.89% 8.73% *
Lipper Average (5.16)% 6.08% 6.08% 7.85% *
</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
<S> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a % of offering price) 4.00% None
Maximum deferred sales charge (load) (as a % of the lower of
net asset value at purchase or redemption) None* 4.50%
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B
<S> <C> <C>
Management fee 0.49% 0.49%
Distribution and service (12b-1) fees 0.15% 0.65%
Other expenses 0.06% 0.08%
----- -----
Total annual fund operating expenses 0.70% 1.22%
</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) $469 $615 $774 $1,236
Class B (redemption at end of period) $574 $687 $770 $1,337
Class B (no redemption) $124 $387 $670 $1,337
</TABLE>
Smith Barney Mutual Funds
5
<PAGE>
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 SSB Citi Fund Man-
agement LLC (successor to 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 opera-
tions. The manager and Salomon Smith Barney are subsidiaries of Citigroup Inc.
Citigroup businesses produce a broad range of financial services--asset manage-
ment, banking and consumer finance, credit and charge cards, insurance, invest-
ments, 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 the manager and senior vice president
and managing director of Salomon Smith Barney, has been responsible for the
day-to-day management of the fund's portfolio since November 1988. Mr. Deane
has 30 years of securities business experience.
Management fees During the fiscal year ended February 29, 2000, 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 Salomon Smith Barney to
distribute the fund's shares.
Distribution plan The fund has adopted a Rule 12b-1 distribution plan for its
Class A and B shares. Under the plan, the fund pays distribution and/or service
fees. These fees are an ongoing expense and, over time, may cost you more than
other types of sales charges.
Smith Barney Mutual Funds
7
<PAGE>
Choosing a class of shares to buy
You can choose among two classes of shares: Classes A and B. 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 will be immediately invest-
ed. This may help offset the higher expenses of Class B shares, but only if
the fund performs well.
Initial purchases of shares of the fund must be made through a PFS Investments
Registered Representative.
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 All Classes
<S> <C> <C>
General $1,000 $50
Systematic Investment Plans $25 $25
Uniform Gift to Minor Accounts $250 $50
</TABLE>
California Municipals Fund
8
<PAGE>
Comparing the fund's classes
Your PFS Investments Registered Representative can help you decide which class
meets your goals. They may receive different compensation depending upon which
class you choose.
Class A Class B
Key features . Initial sales . No initial sales
charge charge
. You may qualify . Deferred sales
for reduction or charge declines
waiver of ini- over time
tial sales . Converts to
charge Class A after 8
. Lower annual years
expenses than . Higher annual
Class B expenses than
Class A
---------------------------------------------------------------------------
Initial sales charge Up to 4.00%; None
reduced for large
purchases and
waived for certain
investors. No
charge for pur-
chases of $500,000
or more
---------------------------------------------------------------------------
Deferred sales charge 1.00% on purchases Up to 4.50%
of $500,000 or charged when you
more if you redeem redeem shares. The
within 1 year of charge is reduced
purchase over time and
there is no
deferred sales
charge after 6
years
---------------------------------------------------------------------------
Annual distribu- 0.15% of average 0.65% of average
tion and service daily net assets daily net assets
fees
---------------------------------------------------------------------------
Exchange Privilege* Class A shares Class B shares
of most Smith of most Smith
Barney funds Barney funds
---------------------------------------------------------------------------
*Ask your PFS Investments Registered Representative 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. Certain
trustees and fiduciaries may be entitled to combine accounts in determining
their sales charge.
Letter of intent - lets you purchase Class A shares of the fund and certain
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
<PAGE>
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
. Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if the PFS Investments Registered Representative is notified
. Investors who purchase through a PFS Investments Registered Representative
with proceeds from a prior mutual fund redemption if certain conditions are
met.
If you want to learn about additional waivers of Class A initial sales charges,
contact your PFS Investments Registered 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>
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
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
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 PFS Investments Registered Representative.
PFS Distributors Inc., an affiliate of PFS Investments Inc., receives deferred
sales charges as partial compensation for its expenses in connection with the
sale of shares, including the payment of compensation to your PFS Investments
Registered Representative.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
. On payments made through certain systematic withdrawal plans
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your PFS Investments Registered Representative or consult the SAI.
California Municipals Fund
12
<PAGE>
Buying shares
Buying shares . Initial purchases of shares of each fund must be made
by mail through a PFS Investments Registered Representative by
completing the appropriate appli-cation. The completed
application should be forwarded to the Fund's sub-transfer
agent, PFS Shareholder Services.
. Subsequent investments may be sent by mail directly to PFS
Shareholder Services.
. The address and telephone number of PFS Shareholder Serv-
ices is: 3100 Breckinridge Blvd., Bldg. 200, Duluth, Geor-
gia 30099-0062; (800) 544-5445.
. You may also reach PFS Shareholder Services by calling
(800) 544-7278 for Spanish speaking representatives or
(800) 824-1721 for the TDD Line for the hearing impaired.
. Checks drawn on foreign banks must be payable in U.S. dol-
lars and have the routing number of the U.S. bank encoded
on the check.
--------------------------------------------------------------------------------
Buying shares
by wire Initial purchases of shares for $10,000 may be made by wire
order from your bank account. Contact PFS Shareholder Serv-
ices for details. In addition, once an account is open, you
may make additional wire orders through your PFS Investments
Registered Representative.
--------------------------------------------------------------------------------
Through a You may authorize PFS Shareholder Services to transfer funds
systematic automatically from a regular bank account, or other financial
investment institutions to buy shares of a fund.
plan
. Amounts transferred should be at least $25 monthly
. If you do not have sufficient funds in your account on a
transfer date, PFS Shareholder Services may charge you a
fee
For more information, contact your PFS Investments Registered
Representative or consult the SAI.
Smith Barney Mutual Funds
13
<PAGE>
Exchanging shares
Smith Barney You should contact your PFS Investments Registered Represen-
offers a tative to exchange into other eligible Smith Barney funds. Be
distinctive sure to read the prospectus of the Smith Barney fund you are
family of exchanging into. An exchange is a taxable transaction.
funds
tailored to . You may exchange shares only for shares of the same class
help meet the of certain Smith Barney funds. Not all Smith Barney funds
varying needs offer all classes.
of both large
and small . Not all Smith Barney funds may be offered in your state of
investors residence. Contact your PFS Investments Registered Repre-
sentative
. You must meet the minimum investment amount for each fund
(except for systematic exchanges)
. If you hold share certificates, PFS Shareholder Services
must receive the certificates endorsed for transfer or
with signed stock powers (documents transferring ownership
of certificates) before the exchange is effective.
. The fund may suspend or terminate your exchange privilege
if you engage in an excessive pattern of exchanges.
--------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at
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 You may exchange shares by telephone up to a maximum of
$500,000 if you elect telephone transactions on your account
application.
To learn more about the exchange privileges and Smith Barney
mutual funds you may be eligible to exchange into, contact
your PFS Investments Registered Representative or consult the
SAI.
California Municipals Fund
14
<PAGE>
Redeeming shares
Redemptions Generally, a properly completed Redemption Form with any
by mail required signature guarantee is all that is required for a
redemption. In some cases, however, other documents may be
necessary.
You may redeem some or all of your shares by sending a Redemp-
tion Form or other written request in proper form to PFS
Shareholder Services, 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30099-0062. You may also reach PFS Shareholder
Services by calling (800) 544-5445 or (800) 544-7278 for Span-
ish speaking representatives or (800) 824-1721 for the TDD
Line for the hearing impaired. The written request for redemp-
tion must be in good order. This means that you have provided
the following information. Your request will not be processed
without this information.
. Name of the fund
. Account number
. Dollar amount or number of shares to be redeemed
. Signature of each owner exactly as account is registered
. Other documentation required by PFS Shareholder Services
To be in good order, your request must include a signature
guarantee if:
. The proceeds of the redemption exceed $50,000
. The proceeds are not paid to the record owner(s) at the
record address
. The shareholder(s) has had an address change in the past 45
days
. The shareholder(s) is a corporation, sole proprietor, part-
nership, trust or fiduciary
You can obtain a signature guarantee from most banks, dealers,
brokers, credit unions and federal savings and loan institu-
tions, but not from a notary public.
In all cases, your redemption price is the net asset value
next determined after your request is received in good order.
Redemption proceeds normally will be
Smith Barney Mutual Funds
15
<PAGE>
sent within three days. However, if you recently purchased
your shares by check, your redemption proceeds will not be
sent to you until your original check clears, which may take
up to 15 days. Any request that your redemption proceeds be
sent to a destination other than your bank account or address
of record must be in writing and must include signature
guarantees.
--------------------------------------------------------------------------------
Redemptions You may redeem shares by telephone unless you elect not to
by telephone accept the telephone transactions option on your account
application. This is available only for redemptions of $50,000
or less, and the proceeds must be mailed to your address of
record. In addition, you must be able to provide proper iden-
tification information. You may not redeem by telephone if
your address has changed within the past 45 days or if your
shares are in certificate form. Telephone redemption requests
may be made by calling PFS Shareholder Services at (800) 544-
5445 between 8:00 a.m. and 8:00 p.m. Eastern time on any day
the New York Stock Exchange is open. Requests received after
the close of regular trading on the Exchange are priced at the
net asset value next computed. Orders received after the close
of the New York Stock Exchange are priced the following day.
If telephone redemptions are not available for any reason, you
may use the Fund's regular redemption procedure described
above.
--------------------------------------------------------------------------------
Payment of You may elect to have your redemption proceeds sent by check
redemption to your address of record or deposited into your bank account
proceeds by the Automated Clearinghouse (ACH). Wire transfers are not
available on phone redemptions. You will be charged a service
fee for transfers made directly to your bank by ACH.
--------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash with- your shares on a monthly or quarterly basis. To qualify you
drawal plans must own shares of the fund with a value of at least $10,000
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 are equal to
or less than 1% per month of the value of your shares subject
to a deferred sales charge.
California Municipals Fund
16
<PAGE>
The following conditions apply:
. Shares may not be represented by certificates
. All dividends and distributions must be reinvested
For more information contact your PFS Investments Registered
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
Signature guarantees To be in good order, your redemption request must include
a signature guarantee:
. if proceeds of the redemption exceed $50,000
. if proceeds are not paid to the record owner at the record address
. if shareholder has had an address change in the past 45 days
. if shareholder is a corporation, sole proprietor, partnership, trust or
fiduciary.
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
. 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
California Municipals Fund
18
<PAGE>
and other shareholders. If so, the fund may limit additional purchases and/or
exchanges by the shareholder.
Share certificates The fund does not issue share certificates unless a written
request signed by all registered owners is made to PFS Shareholder Services. 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 PFS Investments Registered Representative to have
your distributions and/or dividends paid in cash. You can change your choice at
any time to be effective as of the next distribution or dividend, except that
any change given to PFS Shareholder Services less than five days before the
payment date will not be effective until the next distribution or dividend is
paid.
Taxes In general, redeeming shares, exchanging shares and receiving 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 PFS Shareholder Services before the New York Stock Exchange
closes. If the Exchange closes early, you must place your order prior to the
actual closing time. Otherwise, you will receive the next business day's price.
PFS Shareholder Services 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 was audited by KPMG LLP, independent audi-
tors, whose report, along with the fund's financial statements, is included in
the annual report (available upon request).
For a Class A share of capital stock outstanding throughout each year ended
February 28:
<TABLE>
<CAPTION>
2000(/1/)(/2/) 1999(/1/) 1998 1997 1996(/1/)(/3/)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.93 $16.99 $16.26 $16.31 $15.40
----------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.78 0.77 0.82 0.85 0.85
Net realized and
unrealized gain (loss) (1.67) 0.07 0.98 0.15 0.93
----------------------------------------------------------------------------------
Total income (loss) from
operations (0.89) 0.84 1.80 1.00 1.78
----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.76) (0.78) (0.84) (0.85) (0.84)
In excess of net
investment income -- (0.02) -- -- --
Net realized gains -- (0.10) (0.23) (0.20) (0.03)
----------------------------------------------------------------------------------
Total distributions (0.76) (0.90) (1.07) (1.05) (0.87)
----------------------------------------------------------------------------------
Net asset value, end of
year $15.28 $16.93 $16.99 $16.26 $16.31
----------------------------------------------------------------------------------
Total return (5.36)% 5.02% 11.44% 6.37% 11.93%
----------------------------------------------------------------------------------
Net assets, end of year
(millions) $628 $ 769 $664 $579 $582
----------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 0.70% 0.68% 0.70% 0.71% 0.76%
Net investment income 4.99 4.53 4.97 5.29 5.26
----------------------------------------------------------------------------------
Portfolio turnover rate 29% 13% 43% 60% 44%
----------------------------------------------------------------------------------
</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.
(/2/) For the year ended February 29, 2000.
(/3/) For the year ended February 29, 1996.
California Municipals Fund
22
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended
February 28:
<TABLE>
<CAPTION>
2000(/1/)(/2/) 1999(/1/) 1998 1997 1996(/1/)(/3/)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $16.93 $16.98 $16.25 $16.32 $15.40
----------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income 0.70 0.68 0.74 0.76 0.75
Net realized and
unrealized gain (loss) (1.68) 0.08 0.98 0.14 0.96
----------------------------------------------------------------------------------
Total income (loss) from
operations (0.98) 0.76 1.72 0.90 1.71
----------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.67) (0.69) (0.76) (0.77) (0.76)
In excess of net
investment income -- (0.02) -- -- --
Net realized gains -- (0.10) (0.23) (0.20) (0.03)
----------------------------------------------------------------------------------
Total distributions (0.67) (0.81) (0.99) (0.97) (0.79)
----------------------------------------------------------------------------------
Net asset value, end of
year $15.28 $16.93 $16.98 $16.25 $16.32
----------------------------------------------------------------------------------
Total return (5.87)% 4.56% 10.88% 5.73% 11.39%
----------------------------------------------------------------------------------
Net assets, end of year
(millions) $196 $247 $216 $173 $153
----------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses 1.22% 1.20% 1.21% 1.23% 1.29%
Net investment income 4.47 4.02 4.45 4.75 4.71
----------------------------------------------------------------------------------
Portfolio turnover rate 29% 13% 43% 60% 44%
----------------------------------------------------------------------------------
</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.
(/2/) For the year ended February 29, 2000.
(/3/) For the year ended February 29, 1996.
Smith Barney Mutual Funds
23
<PAGE>
Securities offered through
PFS Investments Inc.
-----------------------
MEMBER NASD 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.
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 a 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 PFS
Investments Registered Representative, by calling PFS Shareholder Services at
1-800-544-5445, or by writing to the fund at 3100 Breckinridge Blvd, Bldg. 200,
Duluth, Georgia, 30099-0062.
Information about the Fund (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's (the "Commission") Public Reference
Room in
Washington, D.C. In addition, information on the operation of the Public Refer-
ence Room may be obtained by calling the Commission at 1-202-942-8090. Reports
and other information about the fund are available on the EDGAR Database on the
Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained for a duplicating fee by electronic request at the following E-
mail address: [email protected], or by writing the Commission's Public Refer-
ence Section, Washington, D.C. 20549-0102.
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.
(Investment Company Act file
no. 811-03970)
FD0209 6/00
Statement of Additional Information
June 28, 2000
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, 2000, as amended or supplemented from time to time (the
"prospectus"), and is incorporated by reference in its 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 a
registered representative of PFS Distributors, Inc. ("PFS"), 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
Special Considerations Relating to California Exempt Obligations 16
Special Considerations Regarding Puerto Rico 25
Portfolio Transactions 27
Portfolio Turnover 27
Purchase of Shares 28
PFS Accounts 34
Determination of Net Asset Value 35
Redemption of Shares 36
Investment Management and Other Services 39
Valuation of Shares 45
Exchange Privilege 46
Performance Data 47
Dividends, Distributions and Taxes 52
Additional Information 57
Financial Statements 58
Other Information 58
Appendix A 59
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 Investment Company Act of 1940 (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, unless otherwise indicated.
Herbert Barg (Age 77). Director
Private Investor. Director or trustee of 16 investment companies
associated with Citigroup Inc. ("Citigroup") His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti (Age 77). Director
Retired; formerly Senior Consultant to Dean Witter Reynolds Inc.
Director or trustee of 11 investment companies associated with
Citigroup. His address is 19 Circle End Drive, Ramsey, New Jersey
07466.
Martin Brody (Age 78). Director
Consultant, HMK Associates; Retired Vice Chairman of the Board of
Restaurant Associates Corp. Director or trustee of 20 investment
companies associated with Citigroup. His address is c/o HMK
Associates, 30 Columbia Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane (Age 62). Director
Professor, Harvard Business School. Director or trustee of 23
investment companies associated with Citigroup. His address is c/o
Harvard Business School, Soldiers Field Road, Boston, Massachusetts
02163.
Burt N. Dorsett (Age 69). 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 11 investment companies associated with Citigroup. His
address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe (Age 74). Director
Chairman of the Board and President of The Dress Barn, Inc. Director
or trustee of 11 investment companies associated with Citigroup.
His address is 30 Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 68). Director
Attorney. Director or trustee of 13 investment companies associated
with Citigroup. His address is 277 Park Avenue, New York, New York
10172.
Joseph J. McCann (Age 69). Director
Financial Consultant; Retired Financial Executive, Ryan Homes, Inc.
Director or trustee of 11 investment companies associated with
Citigroup. His address is 200 Oak Park Place, Pittsburgh,
Pennsylvania 15243.
*Heath B. McLendon (Age 67). Chairman of the Board, President and
Chief Executive Officer
Managing Director of Salomon Smith Barney Inc.("Salomon Smith
Barney"); President of SSB Citi Fund Management LLC ("SSB Citi" or
the "manager"), successor to SSBC Fund Management, Inc. and
Travelers Investment Adviser, Inc. ("TIA"); Chairman or Co-Chairman
of the Board and director or trustee of 78 investment companies
associated with Citigroup. His address is 7 World Trade Center, New
York, New York 10048.
Cornelius C. Rose, Jr. (Age 66). Director
President, Cornelius C. Rose Associates, Inc., financial
consultants, and Chairman and Director of Performance Learning
Systems, an educational consultant. Director or trustee of 11
investment companies associated with Citigroup. His address is
Meadowbrook Village, Building 4, Apt 6, West Lebanon, New Hampshire
03784.
Lewis E. Daidone (Age 42). 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 SSB Citi and TIA. Senior Vice President and Treasurer of 61
investment companies associated with Citigroup.
Joseph P. Deane (Age 52). Vice President and Investment Officer
Investment Officer of SSB Citi; Managing Director of Salomon Smith
Barney.
David F. Fare (Age 38) Investmetn Officer
Vice President of Salomon Smith Barney or its predecessor firms
since 1989.
Paul Brook (Age 46). 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 49). Secretary
Managing Director of Salomon Smith Barney; General Counsel and
Secretary of SSB Citi and TIA. Secretary of 61 investment companies
associated with Citigroup.
As of June 16, 2000, the directors and officers of the fund, 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, 2000, 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 fund 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 $2000 per
annum plus $250 per in-person meeting and $50 per telephonic
meeting. For the fiscal year ended February 29, 2000, such out of
pocket expenses totaled $14,437.
For the fiscal year ended February 29, 2000, 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 **
$4,200
$0
$114,288
16
Alfred
Bianchetti * **
3,700
0
53,900
11
Martin Brody **
3,500
0
138,600
20
Dwight B. Crane
**
4,000
0
155,363
23
Burt N. Dorsett
**
4,200
0
57,950
11
Elliot S. Jaffe
**
3,600
0
45,100
11
Stephen E.
Kaufman **
4,200
0
110,650
13
Joseph J. McCann
**
4,200
0
58,050
11
Heath B.
McLendon *
0
0
0
78
Cornelius C.
Rose, Jr. **
2,000
0
53,500
11
* 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
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." SSB Citi 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 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, as well as 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 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 yearly. In addition to the "non-appropriation" risk,
these securities represent a 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 an advantageous price.
Repurchase Agreements. The fund may agree to purchase securities
from a bank or 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 agreed date 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
fund's Board of Directors ("Board of Directors" or "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 the 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 29,
2000, the fund did 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 which 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 a financial futures contract 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 fund's
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.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA EXEMPT OBLIGATIONS
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations, and voter initiatives,
as discussed below, could adversely affect the market values and
marketability of, or result in default of, existing obligations,
including obligations that may be held by a fund. Obligations of the
state or local governments may also be affected by budgetary
pressures affecting the State of California (the State) and economic
conditions in the State. Interest income to a fund could also be
adversely affected. The following discussion highlights only some of
the more significant financial trends and problems, and is based on
information drawn from official statements and prospectuses relating
to securities offerings of the State, its agencies, or
instrumentalities, as available as of the date of this SAI. The
Manager has not independently verified any of the information
contained in such official statements and other publicly available
documents, but is not aware of any fact, which would render such
information inaccurate.
Alternative Minimum Tax
As long as a fund continues to qualify as a regulated investment
company under the federal Internal Revenue Code, it will incur no
California income or franchise tax liability on income and capital
gains distributed to shareholders. California personal income tax
law provides that exempt-interest dividends paid by a regulated
investment company, or series thereof, from interest on obligations
that are exempt from California personal income tax are excludable
from gross income. For a fund to qualify to pay exempt-interest
dividends under California law, at least 50% of the value of its
assets must consist of such obligations at the close of each quarter
of its fiscal year. For purposes of California personal income
taxation, distributions to individual shareholders derived from
interest on other types of obligations and short-term capital gains
will be taxed as dividends, and long-term capital gain distributions
will be taxed as long-term capital gains. California has an
alternative minimum tax similar to the federal AMT described above.
However, the California AMT does not include interest from private
activity municipal obligations as an item of tax preference.
Interest on indebtedness incurred or continued by a shareholder in
connection with the purchase of shares of a fund will not be
deductible for California personal income tax purposes. Corporate
taxpayers should note that dividends will not be exempt from
California corporate income or franchise tax.
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 the fund versus
the safety that comes with a less concentrated investment portfolio
and compare yields available in portfolios of California's issues
with those of more diversified portfolios, including out-of-state
issues, before making an investment decision.
Municipal securities in which the fund's assets are invested may
include debt obligations of the municipalities and other
subdivisions of California 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" 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 affected
significantly 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 affected negatively by the discontinuance of
the taxation supporting the project or assets or the inability to
collect revenues from 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, or the
structure of a security fails to function as intended, interest from
the security could become taxable or the security could decline
significantly in value.
General. During the early 1990's, California experienced significant
financial difficulties, which reduced its credit standing, but the
State's finances have improved significantly since 1994, with
ratings increases since 1996. The ratings of certain related debt of
other issuers for which California has an outstanding lease
purchase, guarantee or other contractual obligation (such as for
state-insured hospital bonds) are generally linked directly to
California's rating. Should the financial condition of California
deteriorate again, its credit ratings could be reduced, and the
market value and marketability of all outstanding notes and bonds
issued by California, its public authorities or local governments
could be adversely affected.
Economic Factors. California's economy is the largest among the 50
states and one of the largest in the world. The State's population
of over 34 million represents about 12-1/2% of the total United
States population and grew by 26% in the 1980s, more than double the
national rate. Population growth slowed to less than 1% annually in
1994 and 1995, but rose to almost 2% in the final years of the
1990's. During the early 1990's, net population growth in the State
was due to births and foreign immigration, but in recent years, in-
migration from the other states has increased and once more
represents net positive growth.
Total personal income in the State, at an estimated $964 billion in
1999, accounts for almost 13% of all personal income in the nation.
Total employment is over 15 million, the majority of which is in the
service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930s.
Construction, manufacturing (especially aerospace), and financial
services, among others, were all severely affected, particularly in
Southern California. Recovery did not begin in California until
1994, later than the rest of the nation, but since that time
California's economy has outpaced the national average. By the end
of 1999, unemployment in the State was at its lowest level in three
decades.
Economic indicators show a steady and strong recovery underway in
California since the start of 1994 particularly in high technology
manufacturing and services, including computer software, electronic
manufacturing and motion picture/television production, and other
services, entertainment and tourism, and both residential and
commercial construction. International economic problems starting in
1997 had some moderating impact on California's economy, but
negative impacts, such as a sharp drop in exports to Asia which hurt
the manufacturing and agricultural sectors, were offset by increased
exports to Latin American and other nations, and a greater strength
in services, computer software and construction. With economic
conditions in many Asian countries recovering in 1999, that year had
the strongest economic growth in the State for the entire decade.
Current forecasts predict continued strong growth of the State's
economy in 2000, with slower growth predicted in 2001 and beyond.
Any delay or reversal of the recovery may create new shortfalls in
State revenues.
Constitutional Limitations On Taxes, Other Charges and
Appropriations Certain California municipal obligations may be
obligations of issuers which rely in whole or in part, directly or
indirectly, on AD VALOREM property taxes as a source of revenue. The
taxing powers of California local governments and districts are
limited by Article XIIIA of the California Constitution, enacted by
the voters in 1978 and commonly known as "Proposition 13." Briefly,
Article XIIIA limits to 1% of full cash value of the rate of AD
VALOREM property taxes on real property and generally restricts the
reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise AD VALOREM taxes
above the 1% limit to pay debt service on voter-approved bonded
indebtedness. Under Article XIIIA, the basic 1% AD VALOREM tax
levy is applied against the assessed value of property as of the
owner's date of acquisition (or as of March 1, 1975, if acquired
earlier), subject to certain adjustments. This system has resulted
in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but the U.S. Supreme Court
upheld it in 1992. Article XIIIA prohibits local governments from
raising revenues through AD VALOREM taxes above the 1% limit; it
also requires voters of any governmental unit to give two-thirds
approval to levy any "special tax." Court decisions, however,
allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
On November 5, 1996, the voters of the State approved Proposition
218, called the "Right to Vote on Taxes Act." Proposition 218 added
Articles XIIIC and XIIID to the State Constitution, which contain a
number of provisions affecting the ability of local agencies to levy
and collect both existing and future taxes, assessments, fees and
charges. Article XIIIC requires that all new or increased local
taxes be submitted to the electorate before they become effective.
Taxes for general governmental purposes require a majority vote and
taxes for specific purposes require a two-thirds vote. Further, any
general purpose tax which was imposed, extended or increased without
voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally
more difficult for local agencies to levy and maintain "assessments"
for municipal services and programs. Article XIIID also contains
several new provisions affecting "fees" and "charges," defined for
purposes of Article XIIID to mean "any levy other than an ad valorem
tax, a special tax, or an assessment, imposed by a [local
government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property
related service." All new and existing property related fees and
charges must conform to requirements prohibiting, among other
things, fees and charges which generate revenues exceeding the funds
required to provide the property related service or are used for
unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and
charges, and, except for fees or charges for sewer, water and refuse
collection services (or fees for electrical and gas service, which
are not treated as "property related" for purposes of Article
XIIID), no property related fee or charge may be imposed or
increased without majority approval by the property owners subject
to the fee or charge or, at the option of the local agency, two-
thirds voter approval by the electorate residing in the affected
area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes,
assessments, fees and charges. Consequently, local voters could, by
future initiative, repeal, reduce or prohibit the future imposition
or increase of any local tax, assessment, fee or charge. It is
unclear how this right of local initiative may be used in cases
where taxes or charges have been or will be specifically pledged to
secure debt issues.
The interpretation and application of Proposition 218 will
ultimately be determined by the courts with respect to a number of
matters, and it is not possible at this time to predict with
certainly the outcome of such determinations. Proposition 218 is
generally viewed as restricting the fiscal flexibility of local
governments, and for this reason, some ratings of California cities
and counties have been, and others may be, reduced.
The State and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly
amended by Propositions 98 and 111 in 1988 and 1990, respectively.
Article XIIIB prohibits the State or any covered local government
from spending "appropriations subject to limitation" in excess of
the appropriations limit imposed. "Appropriations subject to
limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds
from regulatory licenses, user charges or other fees, to the extent
that such proceeds exceed the cost of providing the product or
service, but "proceeds of taxes" exclude most State subventions to
local governments. No limit is imposed on appropriations of funds,
which are not "proceeds of taxes," such as reasonable user charges
or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued
or authorized prior to January 1, 1979, or subsequently authorized
by the voters, (2) appropriations arising from certain emergencies
declared by the Governor, (3) appropriations for certain capital
outlay projects, (4) appropriations by the State of post-1989
increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency. The
appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of
service responsibilities between government units. The definitions
for such adjustments were liberalized in 1990 to follow more closely
growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local
governments must return any excess to taxpayers by rate reductions.
The State must refund 50% of any excess, with the other 50% paid to
schools and community colleges. With more liberal annual adjustment
factors since 1988, and depressed revenues since 1990 because of the
recession, few governments are currently operating near their
spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for
up to four years. For at least the last ten years, appropriations
subject to limitation have been under the State's limit. State
appropriations are estimated to be $3.8 billion under the limit for
fiscal year 1999-2000.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and possible
inconsistencies in their terms, and the impossibility of predicting
future appropriations or changes in population and cost of living,
and the probability of continuing legal challenges, it is not
currently possible to determine fully the impact of these Articles
on California municipal obligations or on the ability of the State
or local governments to pay debt service on such California
municipal obligations. It is not possible, at the present time, to
predict the outcome of any pending litigation with respect to the
ultimate scope, impact or constitutionality of these Articles or the
impact of any such determinations upon State agencies or local
governments, or upon their ability to pay debt service on their
obligations. Further initiatives or legislative changes in laws or
the California Constitution may also affect the ability of the State
or local issuers to repay their obligations.
Obligations of the State of California Under the California
Constitution, debt service on outstanding general obligation bonds
is the second charge to the General Fund after support of the public
school system and public institutions of higher education. As of
January 1, 2000, the State had outstanding approximately $20.5
billion of long-term general obligation bonds, plus $681 million of
general obligation commercial paper which will be refunded by long-
term bonds in the future, and $6.7 billion of lease-purchase debt
supported by the State General Fund. The State also had about $13.7
billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1998-99, debt service on
general obligation bonds and lease purchase debt was approximately
4.4% of General Fund revenues.
Recent Financial Results The principal sources of General Fund
revenues in 1998-1999 were the California personal income tax (53
percent of total revenues), the sales tax (32 percent), bank and
corporation taxes (10 percent), and the gross premium tax on
insurance (2 percent). An estimated 20% of personal income tax
receipts (10% of total General Fund) is derived from capital gains
realizations and stock option income. While these sources have been
extraordinarily strong in the past few years, they are particularly
volatile; any sustained drop in stock market levels could have a
significant impact on these revenues. The State maintains a Special
Fund for Economic Uncertainties (the "SFEU"), derived from General
Fund revenues, as a reserve to meet cash needs of the General Fund,
but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included
for financial reporting purposes in the General Fund balance.
Because of the recession and an accumulated budget deficit, no
reserve was budgeted in the SFEU from 1992-93 to 1995-96.
A a result of the severe economic recession from 1990-94 and other
factors, during this period the State experienced substantial
revenue shortfalls, and greater than anticipated social service
costs. The State accumulated and sustained a budget deficit in the
budget reserve, the SFEU, approaching $2.8 billion at its peak at
June 30, 1993. The Legislature and Governor responded to these
deficits by enacting a series of fiscal steps between FY1991-92 and
FY1994-95, including significant cuts in health and welfare and
other program expenditures, tax increases, transfers of program
responsibilities and some funding sources from the State to local
governments, and transfer of about $3.6 billion in annual local
property tax revenues primarily from cities and counties to local
school districts, thereby reducing State funding for schools. The
budget deficits also led to cash flow shortfalls which led the State
to use external cash flow borrowing over the end of the fiscal year
for several years to fund the deficit.
The economy grew strongly during these fiscal years, and as a
result, the General Fund took in substantially greater tax revenues
(around $2.2 billion in 1995-96, $1.6 billion in 1996-97, $2.1
billion in 1997-98, and $1.6 billion in 1998-99) than were initially
planned when the 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 about
$1.8 billion at June 30, 1998 and $3.1 billion at June 30, 1999.
The growth in General Fund revenues since the end of the recession
resulted in significant increases in State funding for local school
districts under Proposition 98. From the recession level of about
$4,300 per pupil, annual State funding has increased to over $6,000
per pupil in FY 1999-2000. A significant amount of the new moneys
have been directed to specific educational reforms, including
reduction of class sizes in many grade levels. The improved budget
condition also allowed annual increases in support for higher
education in the State, permitting increased enrollment and
reduction of student fees. Part of the 1997-98 Budget Act was
completion of State welfare reform legislation to implement the new
federal law passed in 1996. The new State program, called
"CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by
federal law, new time limits are placed on receipt of welfare aid.
Generally, health and welfare costs have been contained even during
the recent period of economic recovery, with the first real
increases (after inflation) in welfare support levels occurring in
1999-2000.
One of the most important elements of the 1998-99 Budget Act was
agreement on substantial tax cuts. The largest of these was a
phased-in cut in the Vehicle License Fee (an annual tax on the value
of cars registered in the State, the "VLF"). Starting on January 1,
1999, the VLF has been reduced by 25 percent. Under pre-existing
law, VLF funds are automatically transferred to cities and counties,
so the new legislation provided for the General Fund to make up the
reductions. If State General Fund revenues continue to grow above
certain targeted levels in future years, the cut could reach as much
as 67.5 percent by the year 2003. The initial 25 percent VLF cut
will be offset by about $500 million in General Fund money in FY
1998-99, and $1 billion annually for future years. Other tax cuts in
FY 1998-99 included an increase in the dependent credit exemption
for personal income tax filers, restoration of a renter's tax credit
for taxpayers, and a variety of business tax relief measures. The
total cost of these tax cuts was estimated at $1.4 billion for FY
1998-99.
1999-2000 Budget. The 1999-00 Budget Act was signed on June 29,
1999, only the second time in the decade the budget was in place at
the start of the fiscal year. After the Governor used his line-item
veto power to reduce expenditures by about $581 million, the final
spending plan called for about $63.7 billion of General Fund
expenditures, $16.1 billion of Special Fund expenditures, and $1.5
billion in bond funded expenditures. The Governor's final budget
actions left the SFEU with an estimated balance of $881 million at
June 30, 2000, but the Governor also reduced spending to set aside
$300 million for future appropriation for either employee pay raises
or potential litigation costs. The final Budget Act generally
provided increased funding for a wide range of programs. Education
spending under Proposition 98 received the largest increase (over
$2.3 billion above 1998-99), with other significant increases for
higher education, health and welfare, natural resources and capital
outlay. The budget provides several hundred million dollars in
direct new aid to cities and counties.
The final spending plan includes several targeted tax cuts for
businesses, totaling under $100 million in 1999-00. The plan also
includes a one-time, one-year additional cut of 10 percent in the
Vehicle License Fee for calendar year 2000. This cut will cost the
General Fund about $500 million in each of 1999-00 and 2000-01 to
make up lost funds for local governments. Under the 1998 law, the
VLF cut to 35 percent would become permanent in the year 2001 if
General Fund revenues reach a certain specified level in 2000-01.
Current estimates indicate this level will be reached.
In January, 2000, the Governor released his proposed budget for
fiscal year 2000-01 (the "2000 Governor's Budget"), which also
included updated revenue and expenditure projections for 1999-2000.
Reflecting the continued strong economy in the State, the
Administration revised its revenue estimates upward by $2.1 billion
to $65.2 billion; expenditures were also projected to increase by a
like amount. The Administration's projected balance in the SFEU at
June 30, 2000 increased from about $880 million to over $2.4
billion. In February, 2000 the State Legislative Analyst's Office
("LAO") released a report with more recent revenue estimates, based
in part on actual revenues for December, 1999 and January, 2000,
which were not available for the 2000 Governor's Budget. In the
fourth quarter of 1999, personal income tax revenues were 17% higher
than the year-earlier period. The LAO Report indicated revenues in
1999-2000 could be as much as $2.1 billion higher than the 2000
Governor's Budget estimate.
Although, as noted, the Administration projected a budget reserve in
the SFEU of about $2.4 billion on June 30, 1999, the General Fund
fund balance on that date also reflects $1.0 billion of "loans"
which the General Fund made to local schools in the recession years,
representing cash outlays above the mandatory minimum funding level.
Settlement of litigation over these transactions in July 1996 calls
for repayment of these loans over the period ending in 2001-02,
about equally split between outlays from the General Fund and from
schools' entitlements. The 1999-2000 Budget Act contained a $350
million appropriation from the General Fund toward this settlement.
Proposed 2000-01 Budget. In the 2000 Governor's Budget, the
Administration proposed General Fund expenditures of $68.8 billion,
based on expected revenues of $68.2 billion (including $390 million
from the tobacco litigation settlement and sale of assets). The
proposal included a balance in the SFEU at June 30, 2001 of $1.2
billion, plus set-aside of an additional $600 million for legal
contingencies and legislative initiatives. The Governor proposed
substantial additional funding for K-12 schools, higher education,
capital outlay and other programs. The February, 2000 LAO Report
indicated General Fund revenues for 2000-01 could be as much as $2.1
billion higher than projected in the 2000 Governor's Budget (in
addition to the $2.1 billion additional revenue for 1999-2000),
assuming continued strong economic growth in the State and in the
stock market. Final decisions for the 2000-01 Budget will be made by
the Governor and Legislature by July, 2000. Although the State's
strong economy is producing record revenues to the State government,
the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs
of a growing population with many immigrants. These factors which
limit State spending growth also put pressure on local governments.
There can be no assurances that, if economic conditions weaken, or
other factors intercede, the State will not experience budget gaps
in the future.
Bond Rating. The ratings on California's long-term general
obligation bonds were reduced in the early 1990's from "AAA" levels,
which had existed prior to the recession. After 1996, the three
major rating agencies raised their ratings of California's general
obligation bonds, which as of February, 2000 were assigned ratings
of "AA-" from Standard & Poor's, "Aa3" from Moody's and "AA" from
Fitch.
There can be no assurance that such ratings will be maintained in
the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to
creditworthiness of obligations issued by the State of California,
and that there is no obligation on the part of the State to make
payment on such local obligations in the event of default.
Legal Proceedings. The State is involved in certain legal
proceedings (described in the State's recent financial statements)
that if decided against the State, may require the State to make
significant future expenditures or may substantially impair
revenues. Trial courts have recently entered tentative decisions or
injunctions, which would overturn several parts of the State's
recent budget compromises. The matters covered by these lawsuits
include reductions in welfare payments and the use of certain
cigarette tax funds for health costs. All of these cases are subject
to further proceedings and appeals, and if California eventually
loses, the final remedies may not have to be implemented in one
year. The State recently lost cases involving a smog impact fee on
out-of-state automobiles (total liability of about $560 million) and
certain corporate tax credits ($100 million). The Administration has
proposed payment of the smog impact fee claims from current
revenues.
Other Issuers of California Municipal Obligations. There are a
number of State agencies, instrumentalities and political
subdivisions of the State that issue municipal obligations, some of
which may be conduit revenue obligations payable from payments from
private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to pay
interest and principal on their obligations remains unclear.
Furthermore, other measures affecting the taxing or spending
authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be
introduced which would modify existing taxes or other revenue-
raising measures or which either would further limit or,
alternatively, would increase the abilities of state and local
governments to impose new taxes or increase existing taxes. It is
not possible, at present, to predict the extent to which any such
legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California municipal
obligations in which the Fund may invest, future allocations of
state revenues to local governments or the abilities of state or
local governments to pay the interest on, or repay the principal of,
such California municipal obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and
Southern California in 1994 experienced major earthquakes causing
billions of dollars in damages. The federal government provided more
than $13 billion in aid for both earthquakes, and neither event has
had any long-term negative economic impact. Any California municipal
obligation in the Fund could be affected by an interruption of
revenues because of damaged facilities, or, consequently, income tax
deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be constrained
by the inability of (i) an issuer to have obtained earthquake
insurance coverage rates; (ii) an insurer to perform on its
contracts of insurance in the event of widespread losses; or (iii)
the federal or State government to appropriate sufficient funds
within their respective budget limitations.
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. SSB Citi 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.
Puerto Rico has a diversified economy dominated by the manufacturing
and service sectors. The North American Free Trade Agreement
("NAFTA"), which became effective January 1, 1994, has led to loss
of lower wage jobs such as textiles, but economic growth in other
areas, particularly tourism, construction and the high technology
areas have compensated for that loss. Puerto Rico's economy expanded
in the 1990's in step with the U.S. economy.
The Commonwealth of Puerto Rico differs from the states in its
relationship with the federal government. Most federal taxes, except
those such as social security taxes that are imposed by mutual
consent, are not levied in Puerto Rico. However, in conjunction with
the 1993 U.S. budget plan, Section 936 of the Code was amended and
provided for two alternative limitations to the Section 936 credit.
The first option limited the credit against such income to 40% of
the credit allowable under then current law, with a five year phase-
in period starting at 60% of the allowable credit. The second option
was a wage and depreciation based credit. Additional amendments to
Section 936 in 1996 imposed caps on these credits, beginning in 1998
for the first option and beginning in 2002 for the second option.
More importantly, the 1996 amendments eliminated both options for
taxable years beginning in 2006.
Also in 1996, a new Section 30A was added to the Code. Section 30A
permits a "qualifying domestic corporation" that meets certain gross
income tests to claim a 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 a
business. Section 30A will be phased out by January 1, 2006. The
Governor of Puerto Rico has proposed that Congress permanently
extend Section 30A until the Puerto Rican economy achieves certain
economic improvements. Similarly, President Clinton proposed
permanent extension of the Section 30A in both his 1998 and 1999
budgets. To date, however, no action has been taken.
The eventual elimination of tax benefits to those U.S. companies
with operations in Puerto Rico may lead to slower growth in the
future. There can be no assurance that this will not lead to a
weakened economy, a lower rating on Puerto Rico's debt or lower
prices for Puerto Rican bonds that may be held by the fund in the
long-term. The government of Puerto Rico has enacted its own tax
incentive programs for both industrial and tourist activities.
Puerto Ricans have periodically considered conversion to statehood
and such a vote is likely again in the future. The statehood
proposal was defeated in December, 1998.
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 1998,
1999 and 2000 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 1998, 1999 and
2000 fiscal years, the fund's portfolio turnover rates were 43%, 13%
and 29%, 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 1933 Act. 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 broker that clears through Salomon Smith Barney
("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
PFPC Global Fund Services ("PFPC" or "sub-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 Inc.
("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 the sub-transfer agent. Share
certificates are issued only upon a shareholder's written request to
the sub-transfer agent. It is not recommended that the fund be used
as a vehicle for Keogh, IRA or other qualified retirement plans.
Purchase orders received by the fund or 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 the sub-transfer agent is
authorized through preauthorized transfers of at least $25 on a
monthly basis or at least $50 on a quarterly basis to charge the
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 the sub-transfer agent. 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 or proceeds from a sale of 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 Citi
Fiduciary Trust Company (the "transfer agent") 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 the transfer agent
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.
In determining the applicability of any deferred sales charge, it
will be assumed that a redemption is made first of shares
representing capital appreciation, next of shares representing the
reinvestment of dividends and capital gain distributions and finally
of other shares held by the shareholder for the longest period of
time. 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 the transfer agent
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.
PFS Accounts
Initial purchase of shares of the fund must be made through a PFS
Investments Registered Representative by completing the appropriate
application. The completed application should
be forwarded to PFS Shareholder Services, P.O. Box 105033, Atlanta,
GA 30348. Checks drawn on foreign banks must be payable in U.S.
dollars and have the routing number of the U.S. bank encoded on the
check. Subsequent investments may be sent directly to PFS
Shareholder Services. In processing applications and investments,
PFS Shareholder Services acts as agent for the investor and for PFS
Investments Inc. ("PFSI") and also as agent for the distributor, in
accordance with the terms of the prospectus. If the transfer agent
ceases to act as such, a successor company named by the fund will
act in the same capacity so long as the account remains open.
Shares purchased will be held in the shareholder's account by PFS
Shareholder Services. Share certificates are issued only upon a
shareholder's written request to the sub-transfer agent. A
shareholder that has insufficient funds to complete any purchase
will be charged a fee of up to $30 per returned purchase by PFS
Shareholder Services.
Investors in Class A and Class B shares may open an account by
making an initial investment of at least $1,000 for each account in
each Class (except for Systematic Investment Plan accounts.
Subsequent investments of at least $50 may be made for each Class.
For the fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A and Class B shares and the
subsequent investment requirement for each Class is $25. There are
no minimum investment requirements in Class A shares for employees
of Citigroup and its subsidiaries, including Salomon Smith Barney,
Directors or 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. Purchase orders
received by the transfer agent or sub-transfer agent 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.
Initial purchases of fund shares may be made by wire. The minimum
investment that can be made by wire is $10,000. Before sending the
wire, the PFS Investments Registered Representative must contact the
PFS Shareholder Services at (800) 665-8677 to obtain proper wire
instructions. Once an account is open, a shareholder may make
additional investments by wire. The shareholder should contact PFS
Shareholder Services at (800) 544-5445 to obtain proper wire
instructions.
Shareholders who
establish telephone transaction authority on their account and
supply bank account information may make additions to their accounts
at any time. Shareholders should contact PFS Shareholder Services
at (800) 544-5445 between 8:00 a.m. and 8:00 p.m. eastern time any
day that the NYSE is open. If a shareholder does not wish to allow
telephone subsequent investments by any person in his account, he
should decline the telephone transaction option on the account
application. The minimum telephone subsequent investment is $250
and can be up to a maximum of $10,000. By requesting a subsequent
purchase by telephone, you authorize PFS Shareholder Services to
transfer funds from the bank account provided for the amount of the
purchase. A shareholder that has insufficient funds to complete the
transfer will be charged a fee of up to $30 by PFS Shareholder
Services. A shareholder who places a stop payment on a transfer or
the transfer is returned because the account has been closed, will
also be charged a fee of up to $30 by PFS Shareholder Services.
Subsequent investments by telephone may not be available if the
shareholder cannot reach PFS Shareholder Services whether because
all telephone lines are busy or for any other reason; in such case,
a shareholder would have to use the fund's regular subsequent
investment procedure described above.
Redemption proceeds can be sent by check to the address of record,
or deposited into your bank account designated on the
designated on the application via the Automated
Clearinghouse (ACH). A shareholder will be charged a $25 service
fee for wire transfers and a nominal service fee for transfers made
directly to the shareholder's bank by the ACH. Wire transfers are
not available on phone redemptions. PFS Shareholder
Services will process and mail a shareholder's redemption check
usually within two to three business days after receiving the
redemption request in good order. The shareholder may request the
proceeds to be mailed by two-day air express for an $8 fee that will
be deducted from the shareholder's account or by one-day air express
for a $15 fee that will be deducted from the shareholder's account.
An Account Transcript is available at a shareholder's request, which
identifies every financial transaction in an account since it has
opened. To defray administrative expenses involved with providing
multiple years worth of information, there is a $15 charge for each
Account Transcript requested. Additional copies of tax forms are
available at the shareholder's request. A $10 fee for each tax form
will be assessed.
Additional information regarding PFS Shareholder Services may be
obtained by contacting the Client Services Department at (800)
544-5445.
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.'s Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Because of the
differences in distribution fees and class-specific expenses, the
per share net asset value of each class may differ. The following is
a description of the procedures used by the fund in valuing its
assets.
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 fifteen 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 PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
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. Redempton proceeds will be mailed to
shareholder's address of record.
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
sub-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 the fund.)
Redemptions. Redemption requests of up to $10,000 of any class or
classes of shares of the 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 "Share Price" 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 the fund.
Shareholders who wish to participate in the Withdrawal Plan and who
hold their shares in certificate form must deposit their share
certificates with the sub-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 sub-transfer agent may continue to do so and
applications for participation in the Withdrawal Plan must be
received by the sub-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 - SSB Citi (Manager)
SSB Citi 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 of SSB Citi. SSB Citi 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, SSB Citi
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. SSB Citi pays the salary of any
officer and employee who is employed by both it and the fund. SSB
Citi bears all expenses in connection with the performance of its
services. SSB Citi (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, 2000 of approximately $218 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, 1998, 1999 and February 29, 2000, the fund paid
the manager $2,479,000, $2,989,089, and $2,983,546, 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, SSB Citi: (a) assists in supervising all aspects
of the fund's operations; b) supplies the fund with office
facilities (which may be in SSB Citi'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
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 years
ended February 28, 1998, 1999 and February 29, 2000, the fund paid
the manager $1,587,128, $1,893,181 and $1,890,814, respectively, 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.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, the fund, its investment
advisers and principal underwriter have adopted codes of ethics that
permit personnel to invest in securities for their own accounts,
including securities that may be purchased or held by the fund. All
personnel must place the interests of clients first and avoid
activities, interests and relationships that might interfere with
the duty to make decisions in the best interests of the clients.
All personal securities transactions by employees must adhere to the
requirements of the codes and must be conducted in such a manner as
to avoid any actual or potential conflict of interest, the
appearance of such a conflict, or the abuse of an employee's
position of trust and responsibility.
A copy of the fund's Code of Ethics is on file with the Securities
and Exchange Commission.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, New York
10019, serves as counsel to the fund.
Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York,
serves as counsel to the directors who are not "interested persons"
of the fund.
Auditors
KPMG LLP, 757 Third Avenue, New York, New York 10017, has been
selected to serve as independent auditor of the fund and to render
an opinion on the fund's financial statements for the fiscal year
ending February 28, 2001.
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.
Citi Fiduciary Trust Company, located at 388 Greenwich Street, New
York, New York 10013, serves as the fund's transfer and dividend-
paying agent. Under the transfer agency agreement, the transfer
agent maintains the shareholder account records for the fund,
handles certain communications between shareholders and the fund,
distributes dividends and distributions payable by the fund and
produces statements with respect to account activity for the fund
and its shareholders. For these services, the transfer agent
receives fees from the fund computed on the basis of the number of
shareholder accounts that the transfer agent maintains for the fund
during the month and is reimbursed for out-of-pocket expenses.
PFPC Global Fund Services, located at P.O. Box 9699, Providence, RI
02940-9699, serves as the fund's sub-transfer agent. Under the
transfer agency agreement, PFPC 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, PFPC
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
Effective June 5, 2000, Salomon Smith Barney, Inc., located at 388
Greenwich Street, New York, New York 10013 and PFS serve as the
fund's co-distributors pursuant to a written agreement dated June 5,
2000 (the "Distribution Agreement") which was approved by the fund's
Board of Directors, including a majority of the independent
directors, on April 17, 2000. Prior to and up to June 5, 2000,
CFBDS, Inc. served as the Fund's Distributor.
The Distributor may be deemed to be an underwriter for purposes of
the Securities Act of 1933. From time to time, the Distributor, or
PFS or its affiliates may also pay for certain non-cash sales
incentives provided to PFS Investments Registered Representatives.
Such incentives do not have any effect on the net amount invested.
In addition to the reallowances from the applicable public offering
price described above, PFS may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of
cash or other compensation to PFS Investments Registered
Representatives that sell shares of each portfolio.
The Distributor has entered into a selling agreement with PFS and
PFS has entered into an agreement with PFSI giving PFSI the right to
sell shares of each portfolio of the fund on behalf of the
Distributor. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take
and pay only for such shares of each portfolio as may be sold to the
public. The Distributor is not obligated to sell any stated number
of shares. The Distribution Agreement is renewable from year to
year if approved (a) by the directors or by a vote of a majority of
the fund's outstanding voting securities, and (b) by the affirmative
vote of a majority of directors who are not parties to the
Distribution Agreement or interested persons of any party by votes
cast in person at a meeting called for such purpose. The
Distribution Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on
60 days' written notice.
For the 1998 fiscal year, Salomon Smith Barney received $1,357,000
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 2000 fiscal year, the
aggregate dollar amount of sales charges on Class A shares was
$823,000, of which $740,700 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 2000 fiscal year, the aggregate
dollar amount of sales charges on Class L shares was $68,000, of
which $61,200 was paid to Salomon Smith Barney.
For the fiscal years ended February 28, 1999 and February 29, 2000,
Salomon Smith Barney received from shareholders $45,000 and
$31,000, respectively, in deferred sales charges on the redemption
of Class A shares. For the fiscal years ended February 28, 1999 and
February 29, 2000, Salomon Smith Barney received from shareholders
$212,000 and $503,000, respectively, in deferred sales charges on
the redemption of Class B shares. For the fiscal years ended
February 28, 1998 and 1999, and February 29, 2000 Salomon Smith
Barney or its predecessor received from shareholders $5,000, $8,000,
and $15,000, 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 each of Salomon Smith
Barney and PFSI 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. The only Classes
of shares being offered for sale through PFSI are Class A shares and
Class B shares. Under the Plan, Salomon Smith Barney is paid a fee
with respect to shares of each portfolio sold through Salomon Smith
Barney and PFSI is paid a fee with respect to shares of each
portfolio sold through PFS. Under the Plan, the fund pays Salomon
Smith Barney or PFSI (who pays its Registered Representative), as
the case may be, 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. The service fee is primarily used to pay Salomon
Smith Barney Financial Consultants (and PFS Investment
Representatives) for servicing shareholder accounts. In addition,
the fund pays Salomon Smith Barney a distribution fee with respect
to Class B and Class L shares (and pays PFSI with respect to Class
A and B shares) to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising
expenses; the cost of printing and mailing prospectuses to potential
investors; payment to and expenses of Salomon Smith Barney Financial
Consultants, PFS Investment Representatives, and other persons who
provide support services in connection with the distribution of
shares; interest and/or carrying charges; and indirect and overhead
costs of Salomon Smith Barney and PFSI associated with the sale of
portfolio shares, including lease, utility, communications and sales
promotion expenses. 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 29, 2000, Salomon Smith Barney
incurred distribution expenses totaling $2,882,478 consisting of
$196,635 for advertising, $18,725 for printing and mailing of
prospectuses, $1,091,221 for support services, $1,443,798 to Salomon
Smith Barney Financial Consultants, and $36,754 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.
Payments under each Plan are not tied exclusively to the distribution
and shareholder services expenses actually incurred by Salomon Smith
Barney or PFSI and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Directors will evaluate the
appropriateness of each Plan and its payment terms on a continuing
basis and in so doing will consider all relevant factors, including
expenses borne by Salomon Smith Barney and PFSI, amounts received
under the Plan and proceeds of the deferred sales charges.
The following service and distribution fees were incurred pursuant
to a Distribution Plan during the periods indicated:
Distribution Plan Fees
Fiscal Year
Ended 2/29/00
Fiscal Year
Ended 2/28/99
Fiscal Year
Ended 2/28/98
Class A
$ 1,081,175
$ 1,077,263
$ 915,346
Class B
$ 1,481,570
$ 1,519,558
$ 1,244,383
Class L*
$ 319,733
$ 274,706
$ 166,306
* Class L shares were called Class C shares until June 12,
1998.
Each of PFSI and Salomon Smith Barney will pay for the printing, at
printer's overrun cost, of prospectuses and periodic reports after
they have been prepared, set in type and mailed to shareholders, and
will also pay the cost of distributing such copies used in connection
with the offering to prospective investors and will also pay for
supplementary sales literature and other promotional costs. Such
expenses incurred by Salomon Smith Barney are distribution expenses
within the meaning of the Plan and may be paid from amounts received
by Salomon Smith Barney from the Fund under the Plan.
From time to time, PFSI or its affiliates may also pay for certain
non-cash sales incentives provided to PFS Investments
Representatives. Such incentives do not have any effect on the net
amount invested. In addition to the reallowances from the applicable
public offering price described above, PFSI may from time to time,
pay or allow additional reallowances or promotional incentives, in
the form of cash or other compensation to PFS Investments
Representatives that sell shares of each portfolio.
Under its terms, each 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 Plans,
Salomon Smith Barney and PFSI 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 the close
of regular trading on the NYSE on each day that the NYSE is open by
dividing the value of the fund's net assets attributable to each
Class by the total number of shares of that Class outstanding.
When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid
side of the market, these investments are valued at the mean between
the quoted bid and asked prices. Investments for which, in the
judgment of the pricing service, there is no readily obtainable
market quotation (which may constitute a majority of the portfolio
securities) are carried at fair value of securities of similar type,
yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from
municipal bond dealers, market transactions in comparable securities
and various relationships between securities. Short-term
investments that mature in 60 days or less are valued at amortized
cost whenever the 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 Redemption and Exchange
Program.'' Exchanges will be processed at the net asset value next
determined. Redemption procedures discussed below are also
applicable for exchanging shares, and exchanges will be made upon
receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical
to the registration of the shares of the fund exchanged, no
signature guarantee is required. 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.
The exchange privilege enables shareholders to acquire shares of the
same class in a fund with different investment objectives when they
believe that a shift between funds is an appropriate investment
decision. This privilege is available to shareholders residing in
any state in which the fund shares being acquired may legally be
sold. Prior to any exchange, the shareholder should obtain and
review a copy of the current prospectus of each fund into which an
exchange is being considered. Prospectuses may be obtained from a
Salomon Smith Barney Financial Consultant or a PFS Investments
Registered Representative.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-
current net asset value and the proceeds are immediately invested at
a price as described above in shares of the portfolio being
acquired. Salomon Smith Barney and PFS reserve the right to reject
any exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
As stated in the prospectus for shares distributed through PFS,
the exchange privilege is limited.
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 DATA
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 Business 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 29-day period ended February 29, 2000 was 4.98%, 4.63%,
4.47% and 5.04%, respectively. The equivalent taxable yield for
Class A, Class B, Class L and Class Y shares for that same period
was 9.09%, 8.45%, 8.16% and 9.20%, 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):
. (9.16)% for the one-year period ended February 29, 2000.
. 4.90% for the five-year period ended February 29, 2000.
. 6.33% for the ten-year period ended February 29, 2000.
. 7.71% per annum during the period from the fund's
commencement of operations on April 9, 1984 through
February 29, 2000.
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 not been deducted, Class A's average
annual total return would have been (5.36)%, 5.76%, 6.76% and 7.99%,
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):
. (9.93)% for the one-year period ended February 29, 2000.
. 5.06% for the five-year period ended February 29, 2000.
. 5.82% per annum during the period from the fund's
commencement of operations on November 6, 1992 through
February 29, 2000.
Had the maximum applicable deferred sales charge not been deducted
at the time of redemption, Class B's average annual total return
would have been (5.87)%, 5.22% and 5.82%, 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):
. (7.75)% for the one-year period ended February 29, 2000.
. 4.93% for the five-year period ended February 29, 2000.
. 6.87% per annum during the period from the fund's
commencement of operations on November 14, 1994 through
February 29, 2000.
Had the maximum applicable deferred sales charge not been deducted
at the time of redemption, Class L's average annual total return
would have been (5.92)%, 5.15% and 7.07%, 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):
. (5.14)% for the one-year period ended February 29, 2000.
. (2.7)% per annum during the period from the fund's
commencement of operations on September 22, 1998 through
February 29, 2000.
Class Y's shares do not incur sales charges or 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):
. (9.16)% for the one-year period ended February 29, 2000.
. 27.05% for the five-year period ended February 29, 2000.
. 84.72% for the ten-year period ended February 29, 2000.
. 225.87% for the period from the fund's commencement of
operations on April 9, 1984 through February 29, 2000.
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 (5.36)%, 32.33%, 92.41%
and 239.36%, 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):
. (9.93)% for the one-year period ended February 29, 2000.
. 27.97% for the five-year period ended February 29, 2000.
. 51.31% for the period from commencement of operations on
November 6, 1992 through February 29, 2000.
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 (5.87)%, 28.96% and 51.31%,
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):
. (7.75)% for the one-year period ended February 29, 2000.
. 27.21% for the five year period ended February 29, 2000.
. 42.19% for the period from commencement of operations on
November 14, 1994 through February 29, 2000.
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 (5.92)%, 28.53% and 43.60%,
respectively.
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):
. (5.14)% for the one-year ended February 29, 2000.
. (3.86)% for the period from commencement of operations
on September 22, 1998 through February 29, 2000.
Class Y's shares do not incur sales charges or 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
which 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
federal income tax on its investment company taxable income, i.e.,
taxable income other than any excess of its net realized long-term
capital gains over its net realized short-term capital losses ("net
realized capital gains") and its net realized 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, 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 with respect to certain
of its assets (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.
At February 29, 2000, the unused capital loss carryovers of the fund
were approximately $13,908,000. For federal income tax purposes,
these amounts are available to be applied against future realized
capital gains, if any. The carryovers expire as follows:
February 28, February
29,
2007
2008
Carryforward Amount
$2,923,000
$10,985,00
0
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 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
federal income tax purposes, 31% of dividends, distributions and
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 federal income tax liabilities.
Notices. Shareholders will be notified annually by the fund as to
the 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 one vote for
each full share owned and a proportionate, fractional vote for any
fractional share held of that Class. Generally, shares of the fund
will be voted on a fund-wide basis on all matters except matters
affecting only the interests of one Class.
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 29, 2000
was filed on April 25, 2000 and is incorporated in its entirety by
reference, Accession Number 0001005477-00-003420.
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 therefore 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, 2000
Smith Barney California Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
SALOMON SMITH BARNEY
A Member of
Citigroup [Symbol]
24
FUNDACCOUNTING\LEGAL\FUNDS\CAMU\SECDOCS\CAMU SAI 2000
