<PAGE>1
As filed with the Securities and Exchange Commission
on November 8, 1995
Registration No. 33-_____
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No.
Smith Barney Muni Funds
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (212) 816-6474
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip code)
Christina T. Sydor, Esq.
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
copies to:
John E. Baumgartner, Jr., Esq. Burton M. Leibert, Esq.
Sullivan & Cromwell Willkie Farr & Gallagher
125 Broad Street One Citicorp Center
New York, New York 10004 153 East 53rd Street
New York, New York 10022
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
<PAGE>2
Registrant has registered an indefinite amount of securities pursuant to Rule
24f-2 under the Investment Company Act of 1940, as amended; accordingly, no
fee is payable herewith. Registrant's Rule 24f-2 Notice for the fiscal period
ended March 31, 1995 was electronically filed with the Securities and Exchange
Commission on May 26, 1995.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>3
SMITH BARNEY MUNI FUNDS
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE>4
SMITH BARNEY MUNI FUNDS
FORM N-14 CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933, as amended
Prospectus/Proxy
Part A Item No. and Caption Statement Caption
Item 1. Beginning of Cover Page; Cross Reference
Registration Sheet
Statement and
Outside Front Cover
Page of Prospectus
Item 2. Beginning and Table of Contents
Outside Back Cover
Page of Prospectus
Item 3. Fee Table, Synopsis Fee Table; Summary; Risk
Information, and Factors; Comparison of
Risk Factors Investment Objectives
and Policies
Item 4. Information About Summary; Reasons for the
the Transaction Reorganization; Information
About the Reorganization;
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
Item 5. Information About Cover Page; Summary;
the Registrant Information About the
Reorganization; Comparison of
Investment Objectives and
Policies; Information on
Shareholders' Rights;
Information About the
Acquiring Fund; Additional
Information About Smith Barney
Investment Trust and Smith
Barney Muni Funds; Prospectus
of Smith Barney Muni Funds --
Limited Term Portfolio dated
July 31, 1995, as supplemented
by a Prospectus Supplement
dated October 2, 1995
<PAGE>5
Item 6. Information About Summary; Information About the
the Company Being Reorganization; Comparison of
Acquired Investment Objectives and
Policies; Information on
Shareholders' Rights;
Information About the Acquired
Fund; Additional Information
About Smith Barney Investment
Trust and Smith Barney Muni
Funds
Item 7. Voting Information Summary; Information About the
Reorganization; Information on
Shareholders' Rights; Voting
Information
Item 8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
Item 9. Additional Not Applicable
Information Required
for Reoffering By
Persons Deemed to be
Underwriters
Statement of Additional
Part B Item No. and Caption Information Caption
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. Additional Cover Page; Statement of
Information About Additional Information of
the Registrant Smith Barney Muni Funds dated
July 31, 1995
Item 13. Additional Not Applicable
Information About
the Company Being
Acquired
<PAGE>6
Item 14. Financial Statements Annual Report of Smith Barney
Limited Maturity Municipals
Fund; Semi-Annual Report of
Smith Barney Limited Maturity
Municipals Fund; Annual Report
of Smith Barney Muni Funds --
Limited Term Portfolio; Semi-
Annual Report of Smith Barney
Muni Funds -- Limited Term
Portfolio; Pro Forma Financial
Statements
Part C Item No. and Caption Other Information Caption
Item 15. Indemnification Incorporated by reference to
Part A caption "Information on
Shareholders' Rights --
Liability of Trustees"
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
<PAGE>7
[Smith Barney Letterhead]
A SPECIAL NOTICE TO SHAREHOLDERS OF
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
Your Vote is Important
Dear Shareholder:
The Board of Trustees of Smith Barney Investment Trust (formerly Smith Barney
Income Trust) has recently reviewed and unanimously endorsed a proposal for a
reorganization of Smith Barney Limited Maturity Municipals Fund, a separate
investment portfolio of Smith Barney Investment Trust ("Municipals Fund"),
which it judges to be in the best interests of Municipals Fund's shareholders.
Under the terms of the proposal, Smith Barney Muni Funds, on behalf of its
Limited Term Portfolio ("Limited Term Portfolio"), would acquire all or
substantially all of the assets and liabilities of Municipals Fund. After the
transaction, Municipals Fund would be liquidated and you would become a
shareholder of Limited Term Portfolio having received shares with an aggregate
value equivalent to the aggregate net asset value of your investment in
Municipals Fund at the time of the transaction. No sales charge would be
imposed in the transaction. The transaction would, in the opinion of counsel,
be free from federal income taxes to you, Municipals Fund and Limited Term
Portfolio, and it is intended that the combined fund would be managed by the
same portfolio manager who currently manages Municipals Fund.
The Board of Trustees of Smith Barney Investment Trust has determined that it
is advantageous to combine Municipals Fund with Limited Term Portfolio as part
of the consolidation and integration of the two separate and distinct groups
of mutual funds currently distributed by Smith Barney Inc. that resulted from
the acquisition by Travelers Group Inc. (formerly Primerica Corporation) of
certain assets of Lehman Brothers Inc. (formerly Shearson Lehman Brothers
Inc.), including its retail brokerage and domestic asset management business.
In particular, the combination of Municipals Fund and Limited Term Portfolio
is expected to eliminate investor confusion associated with the offering by
Smith Barney Inc. of two similar limited term municipal bond funds that
provide differing yields and also should permit the funds' investment
personnel to concentrate their efforts on the management of one fund rather
than having to divide their attention between two funds with similar
investment objectives.
In addition, the Board of Trustees of Smith Barney Investment Trust has
determined that the proposed reorganization should provide benefits to Class A
and Class C shareholders of
<PAGE>8
Municipals Fund due, in part, to savings in expenses borne by such
shareholders. Specifically, it is anticipated that the expense ratio for
Class A and Class C shares of the combined fund would be lower than the
expense ratio currently applicable to Class A and Class C shares of Municipals
Fund.
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS IMPORTANT
To consider this transaction, we have called a Special Meeting of Shareholders
to be held on January 12, 1996. We strongly invite your participation by
asking you to review, complete and return your proxy promptly.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. On behalf of the Board of Trustees, I thank you for
your participation as a shareholder and urge you to please exercise your right
to vote by completing, dating and signing the enclosed proxy card. A self-
addressed, postage-paid envelope has been enclosed for your convenience.
If you have any questions regarding the proposed transaction, please feel free
to call your Smith Barney Financial Consultant who will be pleased to assist
you.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED PROMPTLY.
Sincerely,
Heath B. McLendon
Chairman of the Board
November ___, 1995
<PAGE>9
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
388 Greenwich Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on January 12, 1996
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Smith Barney Limited Maturity Municipals Fund ("Municipals
Fund") will be held at 388 Greenwich Street, 22nd Floor, New York, New York on
January 12, 1996, commencing at 9:30 a.m. for the following purposes:
1. To approve or disapprove the Agreement and Plan of Reorganization
dated as of November __, 1995 providing for (i) the acquisition of
all or substantially all of the assets of Municipals Fund by Smith
Barney Muni Funds on behalf of its Limited Term Portfolio ("Limited
Term Portfolio") in exchange for shares of Limited Term Portfolio
and the assumption by Smith Barney Muni Funds on behalf of Limited
Term Portfolio of scheduled liabilities of Municipals Fund, (ii) the
distribution of such shares of Limited Term Portfolio to
shareholders of Municipals Fund in liquidation of Municipals Fund
and (iii) the subsequent termination of Municipals Fund.
2. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
The Board of Trustees of Smith Barney Investment Trust (formerly
Smith Barney Income Trust), of which the Municipals Fund is a separate
investment portfolio, has fixed the close of business on November 27, 1995 as
the record date for the determination of shareholders of Municipals Fund
entitled to notice of and to vote at the Meeting and any adjournment or
adjournments thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE
URGED TO SIGN AND RETURN WITHOUT DELAY THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. INSTRUCTIONS FOR THE PROPER
EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE. PROXIES MAY BE
REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY THE SUBSEQUENT EXECUTION AND
SUBMISSION OF A REVISED PROXY, BY GIVING WRITTEN NOTICE OF REVOCATION TO
MUNICIPALS FUND AT ANY TIME BEFORE THE PROXY IS EXERCISED OR BY VOTING IN
PERSON AT THE MEETING.
<PAGE>10
By Order of the Board of Trustees
Christina T. Sydor
Secretary
November __, 1995
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE
EXPENSE OF FURTHER SOLICITATION.
<PAGE>11
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and avoid the time and expense involved in validating your
vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration
on the proxy card.
3. All Other Accounts: The capacity of the individual signing the
proxy card should be indicated unless it is reflected in the form of
registration. For example:
Registration Valid Signatures
Corporate Accounts
(1) ABC Corp. . . . . . . . . . . . . ABC Corp.
(2) ABC Corp. . . . . . . . . . . . . John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer . . . . John Doe
(4) ABC Corp. Profit Sharing Plan . . John Doe, Trustee
Trust Accounts
(1) ABC Trust. . . . . . . . . . . . . Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78. . . . . . . . . Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA . John B. Smith
(2) John B. Smith. . . . . . . . . . . John B. Smith, Jr., Executor
<PAGE>12
PROSPECTUS/PROXY STATEMENT DATED NOVEMBER __, 1995
Acquisition Of The Assets Of
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
a separate investment portfolio of
SMITH BARNEY INVESTMENT TRUST
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Shares Of
LIMITED TERM PORTFOLIO
a separate investment portfolio of
SMITH BARNEY MUNI FUNDS
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Prospectus/Proxy Statement is being furnished to shareholders
of the Smith Barney Limited Maturity Municipals Fund (the "Acquired Fund"), a
separate investment portfolio of Smith Barney Investment Trust (formerly Smith
Barney Income Trust), in connection with a proposed plan of reorganization to
be submitted to shareholders of the Acquired Fund for consideration at a
Special Meeting of Shareholders to be held on January 12, 1996 at 9:30 a.m.
(the "Meeting"), at the offices of Smith Barney Inc. ("Smith Barney") located
at 388 Greenwich Street, 22nd Floor, New York, New York 10013, or any
adjournment or adjournments thereof.
The plan provides for all or substantially all of the assets of the
Acquired Fund to be acquired by Smith Barney Muni Funds on behalf of its
Limited Term Portfolio (the "Acquiring Fund"), in exchange for shares of the
Acquiring Fund and the assumption by Smith Barney Muni Funds on behalf of the
Acquiring Fund of scheduled liabilities of the Acquired Fund (hereinafter
referred to as the "Reorganization"). (The Acquiring Fund and the Acquired
Fund are sometimes referred to hereinafter as the "Funds" and individually as
a "Fund.") Shares of the Acquiring Fund will be distributed to shareholders
of the Acquired Fund in liquidation of the Acquired Fund and thereafter the
Acquired Fund would be terminated. As a result of the proposed
Reorganization, each shareholder of the Acquired Fund will receive that number
of shares of the Acquiring Fund having an aggregate value equal to the
aggregate net asset value of such shareholder's shares of the Acquired Fund
immediately prior to the Reorganization. Holders of Class A shares of the
Acquired Fund will receive Class A shares of the Acquiring Fund, and no sales
charge will be imposed on
<PAGE>13
the Class A shares of the Acquiring Fund received by the Acquired Fund Class A
shareholders. Holders of Class C shares of the Acquired Fund will receive
Class C shares of the Acquiring Fund. No contingent deferred sales charge
("CDSC") will be imposed on Class C shares of the Acquiring Fund upon
consummation of the Reorganization. However, any CDSC which is applicable to
a shareholder's investment will continue to apply and, in calculating the
applicable CDSC payable upon the subsequent redemption of Class C shares of
the Acquiring Fund, the period during which an Acquired Fund shareholder held
Class C shares of the Acquired Fund will be counted. Holders of Class Y
shares of the Acquired Fund will receive Class Y shares of the Acquiring Fund.
This transaction is structured to be tax-free for federal income tax purposes
to shareholders and to both the Acquiring Fund and the Acquired Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Acquired Fund is a separate investment portfolio of Smith Barney
Investment Trust, an open-end, diversified management investment company whose
investment objective is to seek as high a level of current income exempt from
federal income taxes as is consistent with preservation of principal. The
Acquiring Fund is a separate investment portfolio of Smith Barney Muni Funds,
an open-end, non-diversified management investment company, whose investment
objective is to seek as high a level of income exempt from federal income
taxes as is consistent with prudent investing.
Smith Barney Mutual Funds Management Inc., 388 Greenwich Street, New
York, New York 10013 (the "Manager"), serves as investment manager to both the
Acquiring Fund and the Acquired Fund. The Manager is a wholly owned
subsidiary of Smith Barney Holdings Inc. which, in turn, is a wholly owned
subsidiary of Travelers Group Inc. It is proposed that, in connection with
the Reorganization, Lawrence T. McDermott, the portfolio manager who manages
the Acquired Fund's portfolio, would manage the combined fund. Mr. McDermott,
a Managing Director of Smith Barney, has served as Vice President and
Investment Officer of the Acquired Fund since its inception on December 31,
1991, and manages the day-to-day operations of the Acquired Fund, including
making substantially all investment decisions.
The investment policies of the Acquiring Fund are generally similar
to those of the Acquired Fund. Certain differences in the investment policies
of the Acquiring Fund and
<PAGE>14
the Acquired Fund, however, are described under "Comparison of Investment
Objectives and Policies" in this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Fund that
a prospective investor should know before investing. Certain relevant
documents listed below, which have been filed with the Securities and Exchange
Commission ("SEC"), are incorporated in whole or in part by reference. A
Statement of Additional Information dated November __, 1995, relating to this
Prospectus/Proxy Statement and the Reorganization, has been filed with the SEC
and is incorporated by reference into this Prospectus/Proxy Statement. A copy
of such Statement of Additional Information is available upon request and
without charge by writing to the Acquired Fund at the address listed on the
cover page of this Prospectus/Proxy Statement or by contacting a Smith Barney
Financial Consultant.
1. The Prospectus of Smith Barney Muni Funds -- Limited Term Portfolio
dated July 31, 1995, as supplemented by a Prospectus Supplement
dated October 2, 1995, is incorporated in its entirety by reference,
and a copy accompanies this Prospectus/Proxy Statement.
2. The Prospectus of Smith Barney Limited Maturity Municipals Fund
dated January 29, 1995, as supplemented by Prospectus Supplements
dated May 25, 1995, July 11, 1995, July 20, 1995, August 22, 1995
and September 14, 1995 is incorporated in its entirety by reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a
copy of the Agreement and Plan of Reorganization (the "Plan") for the proposed
transaction.
<PAGE>15
TABLE OF CONTENTS
PAGE
ADDITIONAL MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FEE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
REASONS FOR THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . 18
INFORMATION ABOUT THE REORGANIZATION . . . . . . . . . . . . . . . . . . 22
INFORMATION ABOUT THE ACQUIRING FUND . . . . . . . . . . . . . . . . . . 28
INFORMATION ABOUT THE ACQUIRED FUND . . . . . . . . . . . . . . . . . . . 34
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . 40
INFORMATION ON SHAREHOLDERS' RIGHTS . . . . . . . . . . . . . . . . . . . 47
ADDITIONAL INFORMATION ABOUT SMITH BARNEY INVESTMENT
TRUST AND SMITH BARNEY MUNI FUNDS . . . . . . . . . . . . . . . . . 50
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
VOTING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
FINANCIAL STATEMENTS AND EXPERTS . . . . . . . . . . . . . . . . . . . . 53
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
EXHIBIT A: AGREEMENT AND PLAN OF REORGANIZATION . . . . . . . . . . . . A-1
<PAGE>16
ADDITIONAL MATERIALS
The following additional materials, which have been incorporated by
reference into the Statement of Additional Information dated November __, 1995
relating to this Prospectus/Proxy Statement and the Reorganization, will be
sent to all shareholders requesting a copy of such Statement of Additional
Information.
1. Statement of Additional Information of Smith Barney Muni Funds dated
July 31, 1995.
2. Annual Report of Smith Barney Muni Funds -- Limited Term Portfolio
for the fiscal year ended March 31, 1995.
3. Semi-Annual Report of Smith Barney Muni Funds -- Limited Term
Portfolio for the six-month period ended September 30, 1995.
4. Annual Report of Smith Barney Limited Maturity Municipals Fund for
the fiscal year ended November 30, 1994.
5. Semi-Annual Report of Smith Barney Limited Maturity Municipals Fund
for the six-month period ended May 31, 1995.
6. Pro Forma Financial Statements.
<PAGE>17
FEE TABLES
Following are tables showing current costs and expenses of the
Acquired Fund and the Acquiring Fund and the pro forma costs and expenses
expected to be incurred by the Acquiring Fund after giving effect to the
Reorganization, each based on the maximum sales charge or maximum CDSC that
may be incurred at the time of purchase or redemption.
CLASS A SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a
percentage of
offering price) . . . . . . . . . . . . . . . . . . 2.00% 2.00% 2.00%
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) . . . . . . None* None* None*
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . 0.55%**** 0.45%***** 0.50%******
12b-1 fees . . . . . . . . . . . . . . . . . . . . . 0.15 0.15 0.15
Other expenses** . . . . . . . . . . . . . . . . . 0.24 0.13 0.11
Total Operating Expenses . . . . . . . . . . . . . . . 0.94% 0.73%***** 0.76%******
</TABLE>
* Purchases of Class A shares, which when combined with current holdings
of Class A shares offered with a sales charge equal or exceed $500,000
in the aggregate, will be made at net asset value with no sales
charge, but will be subject to a CDSC of 1.00% on redemptions made
within 12 months.
** "Other expenses" for Class A shares of the Acquired Fund are based on
expenses for the six-month period ended May 31, 1995, for Class A
shares of the Acquiring Fund are based on expenses for the six-month
period ended September 30, 1995, and for the pro forma financial
figures are based on estimated expenses for the six-month period ended
September 30, 1995.
*** The pro forma financial figures are intended to provide
shareholders with information about the continuing impact of the
Reorganization as if the Reorganization had taken place as of April
1, 1995.
**** For investment advisory services, the Acquired Fund pays the Manager a
fee at the annual rate of 0.35% of average daily net assets. For
administrative services rendered, the Acquired Fund pays the Manager a
fee at the annual rate of 0.20% of average daily net assets. The
Manager has voluntarily waived a portion of the Acquired Fund's
aggregate management fees in an annual amount equal to 0.14% of the
Acquired Fund's average daily net assets. This has the effect of
lowering the Acquired Fund's overall expenses and increasing returns
available to investors. After
<PAGE>18
waiver of such management fees, "management fees" and "total operating
expenses" for Class A shares were 0.41% and 0.80%, respectively, of
the average daily net assets of the Acquired Fund. Effective on
November 17, 1995, the Manager has agreed to reduce the Acquired
Fund's aggregate management fee to 0.50% of the Acquired Fund's
average daily net assets.
***** The Manager has voluntarily agreed to waive its management fee with
respect to the Acquiring Fund to the extent that it is necessary if in
any fiscal year the aggregate expenses exclusive of 12b-1
fees, taxes, brokerage, interest and extraordinary
expenses, such as litigation costs, exceed 0.65% of the
Acquiring Fund's average daily net assets for that fiscal
year. The expense limitation will be in effect until it
is terminated by notice to shareholders and by supplement
to the then-current prospectus of the Acquiring Fund.
****** Assumes approval by shareholders of the Acquiring Fund of
a proposal to increase the management fees payable by the
Acquiring Fund from 0.45% to 0.50% of the Acquiring Fund's
average daily net assets and an increase from 0.65% to
0.70% in the expense limitation described in the
immediately preceding footnote. See "Reasons for the
Reorganization."
<PAGE>19
CLASS C SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma***
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a
percentage of offering price) . . . . . . . . . . . None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds,
whichever is lower) . . . . . . . . . . . . . . . 1.00% 1.00% 1.00%
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . 0.55%**** 0.45%***** 0.50%******
12b-1 fees* . . . . . . . . . . . . . . . . . . . . 0.35 0.35 0.35
Other expenses** . . . . . . . . . . . . . . . . . 0.22 0.14 0.12
Total Operating Expenses . . . . . . . . . . . . . . . . 1.12% 0.94%***** 0.97%******
</TABLE>
* Class C shares do not have a conversion feature and, therefore, are
subject to an ongoing distribution fee. As a result, long-term
shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
** "Other expenses" for Class C shares of the Acquired Fund are based on
expenses for the six-month period ended May 31, 1995, for Class C
shares of the Acquiring Fund are based on expenses for the six-month
period ended September 30, 1995, and for the pro forma financial
figures are based on estimated expenses for the six-month period ended
September 30, 1995.
*** The pro forma financial figures are intended to provide shareholders
with information about the continuing impact of the Reorganization as
if the Reorganization had taken place as of April 1, 1995.
**** For investment advisory services, the Acquired Fund pays the Manager a
fee at the annual rate of 0.35% of average daily net assets. For
administrative services rendered, the Acquired Fund pays the Manager a
fee at the annual rate of 0.20% of average daily net assets. The
Manager has voluntarily The Manager has voluntarily waived a portion
of the Acquired Fund's aggregate management fees in an annual amount
equal to 0.14% of the Acquired Fund's average daily net assets. This
has the effect of lowering the Acquired Fund's overall expenses and
increasing returns available to investors. After waiver of such
management fees, "management fees" and "total operating expenses" for
Class C shares were 0.41% and 0.98%, respectively, of the average
daily net assets of the Acquired Fund. Effective on November 17,
1995, the Manager has agreed to reduce the Acquired Fund's aggregate
management fee to 0.50% of the Acquired Fund's average daily net
assets.
***** The Manager has agreed to waive its management fee with respect to the
Acquiring Fund to the extent that it is necessary if in any fiscal year
the aggregate expenses exclusive of 12b-1 fees, taxes, brokerage,
<PAGE>20
interest and extraordinary expenses, such as litigation costs, exceed
0.65% of the Acquiring Fund's average daily net assets for that fiscal
year. The expense limitation will be in effect until it is terminated
by notice to shareholders and by supplement to the then-current
prospectus of the Acquiring Fund.
****** Assumes approval by shareholders of the Acquiring Fund of a proposal
to increase the management fees payable by the Acquiring Fund from
0.45% to 0.50% of the Acquiring Fund's average daily net assets and an
increase from 0.65% to 0/70% in the expense limitation described in
the immediately preceding footnote. See "Reasons for the
Reorganization."
<PAGE>21
CLASS Y SHARES
<TABLE>
<CAPTION>
Acquired Acquiring
Fund Fund Pro Forma**
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases (as a
percentage of offering price) . . . . . . None None None
Maximum CDSC (as a percentage of original cost or
redemption proceeds, whichever is lower) . . . . . . . None None None
Annual Operating Expenses
(as a percentage of average net assets)
Management fees . . . . . . . . . . . . . . . . . . . 0.55%*** 0.45%**** 0.50%*****
12b-1 fees . . . . . . . . . . . . . . . . . . . . . . 0.00 0.00 0.00
Other expenses* . . . . . . . . . . . . . . . . . . . 0.24 0.10 0.09
Total Operating Expenses . . . . . . . . . . . . . . . . 0.79% 0.55%**** 0.59%*****
</TABLE>
* "Other expenses" for Class Y shares of the Acquired Fund are based on
expenses for the six-month period ended May 31, 1995, for Class Y
shares of the Acquiring Fund are based on expenses for the six-month
period ended September 30, 1995, and for the pro forma financial
figures are based on estimated expenses for the six-month period ended
September 30, 1995.
** The pro forma financial figures are intended to provide shareholders
with information about the continuing impact of the Reorganization as
if the Reorganization had taken place as of April 1, 1995.
*** For investment advisory services, the Acquired Fund pays the Manager a
fee at the annual rate of 0.35% of average daily net assets. For
administrative services rendered, the Acquired Fund pays the Manager a
fee at the annual rate of 0.20% of average daily net assets. The
Manager has voluntarily waived a portion of the Acquired Fund's
aggregate management fees in an annual amount equal to 0.14% of the
Acquired Fund's average daily net assets. This has the effect of
lowering the Acquired Fund's overall expenses and increasing returns
otherwise available to investors. After waiver of such management
fees, "management fees" and "total operating expenses" for Class Y
shares were 0.41% and 0.65%, respectively, of the average daily net
assets of the Acquired Fund. Effective on November 17, 1995, the
Manager has agreed to reduce the Acquired Fund's aggregate management
fee to 0.50% of the Acquired Fund's average daily net assets.
**** The Manager has voluntarily agreed to waive its management fee with
respect to the Acquiring Fund to the extent that it is necessary if in
any fiscal year the aggregate expenses exclusive of 12b-1 fees, taxes,
brokerage, interest and extraordinary expenses, such as litigation
costs, exceed 0.65% of the Acquiring Fund's average daily net assets
for that fiscal year. The expense limitation will be in effect until
it is terminated by notice to shareholders and by supplement to the
then-current prospectus of the Acquiring Fund.
<PAGE>22
***** Assumes approval by shareholders of the Acquiring Fund of a proposal to
increase the management fees payable by the Acquiring Fund from 0.45%
to 0.50% of the Acquiring Fund's average daily net assets and an
increase from 0.65% to 0/70% in the expense limitation described in
the immediately preceding paragraph. See "Reasons for the
Reorganization."
<PAGE>23
Examples
The following examples are intended to assist an investor in
understanding the various costs that an investor will bear directly or
indirectly. The examples assume payment of operating expenses at the levels
set forth in the tables above.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual return
and (2) redemption at the end of each time period:
Class A
Acquired Fund . . . . . . . . . . . . . . . . . $29 $49 $71 $133
Acquiring Fund . . . . . . . . . . . . . . . . . 27 43 60 109
Pro Forma . . . . . . . . . . . . . . . . . . . 28 44 61 112
Class C
Acquired Fund . . . . . . . . . . . . . . . . . $21 $36 $62 $136
Acquiring Fund . . . . . . . . . . . . . . . . . 20 30 52 125
Pro Forma . . . . . . . . . . . . . . . . . . . 20 31 54 119
Class Y
Acquired Fund . . . . . . . . . . . . . . . . . $8 $25 $44 $98
Acquiring Fund . . . . . . . . . . . . . . . . . 6 18 31 69
Pro Forma . . . . . . . . . . . . . . . . . . . 6 19 33 74
</TABLE>
<PAGE>24
An investor would pay the following expenses on the same investment, assuming
the same annual return and no redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years*
<S> <C> <C> <C> <C>
Class A
Acquired Fund . . . . . . . . . . . . . . . $29 $49 $71 $133
Acquiring Fund . . . . . . . . . . . . . . . 27 43 60 109
Pro Forma . . . . . . . . . . . . . . . . . 28 44 61 112
Class C
Acquired Fund . . . . . . . . . . . . . . . $11 $36 $62 $136
Acquiring Fund . . . . . . . . . . . . . . . 10 30 52 115
Pro Forma . . . . . . . . . . . . . . . . . 10 31 54 119
Class Y
Acquired Fund . . . . . . . . . . . . . . . $8 $25 $44 $98
Acquiring Fund . . . . . . . . . . . . . . . 6 18 31 69
Pro Forma . . . . . . . . . . . . . . . . . 6 19 33 74
</TABLE>
The examples also provide a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00%
annual return assumption. However, each Fund's actual return will vary and
may be greater or less than 5.00%. These examples should not be considered
representations of past or future expenses and actual expenses may be greater
or less than those shown.
<PAGE>25
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
the Agreement and Plan of Reorganization, a copy of which is attached to this
Prospectus/Proxy Statement as Exhibit A, the accompanying Prospectus of the
Acquiring Fund dated July 31, 1995, as supplemented by a Prospectus Supplement
dated October 2, 1995, and the Prospectus of the Acquired Fund dated January
29, 1995, as supplemented by Prospectus Supplements dated May 25, 1995,
July 11, 1995, July 20, 1995, August 22, 1995 and September 14, 1995.
Proposed Reorganization. The Plan provides for the transfer of all
or substantially all of the assets of the Acquired Fund to Smith Barney Muni
Funds on behalf of the Acquiring Fund in exchange for shares of the Acquiring
Fund and the assumption by Smith Barney Muni Funds on behalf of the Acquiring
Fund of scheduled liabilities of the Acquired Fund. The Plan also calls for
the distribution of shares of the Acquiring Fund to the Acquired Fund's
shareholders in liquidation of the Acquired Fund. (The foregoing proposed
transaction is referred to in this Prospectus/Proxy Statement as the
"Reorganization.") As a result of the Reorganization, each shareholder of the
Acquired Fund will become the owner of that number of full and fractional
shares of the Acquiring Fund having an aggregate value equal to the aggregate
net asset value of such shareholder's shares of the Acquired Fund as of the
close of business on the date that the Acquired Fund's assets are exchanged
for shares of the Acquiring Fund. (Shareholders of Class A, Class C or Class
Y shares of the Acquired Fund will receive Class A, Class C or Class Y shares,
respectively, of the Acquiring Fund.) See "Information About the
Reorganization -- Plan of Reorganization."
For the reasons set forth below under "Reasons for the
Reorganization," the Board of Trustees of Smith Barney Investment Trust,
including the Trustees who are not "interested persons" (the "Independent
Trustees"), as that term is defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), has concluded that the Reorganization would be in
the best interests of the shareholders of the Acquired Fund and that the
interests of the Acquired Fund's existing shareholders will not be diluted as
a result of the transaction contemplated by the Reorganization and therefore
has submitted the Plan for approval by the Acquired Fund's shareholders. The
Board of Trustees of Smith Barney Muni Funds has reached similar conclusions
with respect to the Acquiring Fund and has also approved the Reorganization in
respect of the Acquiring Fund.
Approval of the Reorganization will require the affirmative vote of
a majority of the total number of votes entitled to be cast thereon, as
defined in the 1940 Act, of the outstanding shares of the Acquired Fund, which
is the lesser of: (i) 67% of the voting securities of the Acquired Fund
present at the Meeting, if the holders of more than 50% of the outstanding
voting securities of the Acquired Fund are present or represented by proxy,
<PAGE>26
or (ii) more than 50% of the outstanding shares of the Acquired Fund. For
purposes of voting with respect to the Reorganization, the Class A, Class C
and Class Y shares of the Acquired Fund will vote together as a single class.
See "Voting Information."
Tax Consequences. Prior to completion of the Reorganization, the
Funds will have received an opinion of counsel that, upon the Reorganization
and the transfer of the assets of the Acquired Fund, no gain or loss will be
recognized by the Acquired Fund or its shareholders for federal income tax
purposes. The holding period and aggregate tax basis of the Acquiring Fund
shares received by an Acquired Fund shareholder will be the same as the
holding period and aggregate tax basis of the shares of the Acquired Fund
previously held by such shareholder. In addition, the holding period and tax
basis of the assets of the Acquired Fund in the hands of the Acquiring Fund as
a result of the Reorganization will be the same as in the hands of the
Acquired Fund immediately prior to the Reorganization.
Investment Objectives and Policies. The Acquiring Fund and the
Acquired Fund have generally similar investment objectives, policies and
restrictions. The Acquired Fund is a separate investment portfolio of Smith
Barney Investment Trust, an open-end, diversified management investment
company, whose investment objective is to seek as a high a level of current
income exempt from federal income taxes as is consistent with preservation of
principal. The Acquiring Fund is a separate investment portfolio of Smith
Barney Muni Funds, an open-end, non-diversified management investment company,
whose investment objective is to seek as high a level of income exempt from
federal income taxes as is consistent with prudent investing. For a
discussion of the differences between the investment policies of the Acquiring
Fund and the Acquired Fund, see "Comparison of Investment Objectives and
Policies."
Purchase and Redemption Procedures. The purchase and redemption
procedures available to shareholders of the Acquiring Fund are virtually
identical to those of the Acquired Fund. Purchase of shares of the Acquiring
Fund and the Acquired Fund may be made through the Funds' distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group, at their respective public offering prices (net asset value
next determined plus any applicable sales charge). Class A shares of both the
Acquiring Fund and the Acquired Fund are sold subject to a maximum initial
sales charge of 2.00% of the public offering price. Class A shares of either
Fund may be purchased at a reduced sales charge or at net asset value,
determined by aggregating the dollar amount of a new purchase and the total
asset value of all Class A shares of such Fund offered by Smith Barney held by
such person and applying the (reduced) sales charge applicable to such
aggregate. Purchases of Class A shares of either Fund, which when combined
with current holdings of such Fund's Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months. Class C shares of both Funds are
<PAGE>27
sold without an initial sales charge but are subject to higher ongoing
expenses than Class A shares and are subject to a CDSC payable upon certain
redemptions. Class Y shares of both Funds are sold without an initial sales
charge or CDSC and are available only to investors meeting an initial
investment minimum of $5,000,000.
Class A shares and Class Y shares of both the Acquiring and the
Acquired Fund may be redeemed at their respective net asset values per share
next determined without charge, except as set forth in the preceding
paragraph. Class C shares of both Funds may be redeemed at their net asset
value per share, subject to a CDSC of 1.00% if such shares are redeemed during
the first 12 months following their purchase. Shares of both Funds held by
Smith Barney as custodian must be redeemed by submitting a written request to
a Smith Barney Financial Consultant. All other shares may be redeemed through
a Smith Barney Financial Consultant, Introducing Broker or dealer in the
selling group or by forwarding a written request for redemption to The
Shareholder Services Group, Inc. ("TSSG" or the "transfer agent"), a
subsidiary of First Data Corporation. See "Redemption of Shares" in the
accompanying Prospectus of the Acquiring Fund.
Exchange Privileges. The exchange privileges available to
shareholders of the Acquiring Fund are virtually identical to those available
to shareholders of the Acquired Fund. Shareholders of both the Acquired Fund
and the Acquiring Fund may exchange at net asset value all or a portion of
their shares for shares of the same class in certain other funds of the Smith
Barney Mutual Funds. Any exchange will be a taxable event for which a
shareholder may have to recognize a gain or a loss under federal income tax
provisions. No initial sales charge is imposed on the shares being acquired
in an exchange, and no CDSC is imposed on the shares being disposed of in the
exchange. A sales charge differential, however, may apply to exchanges of
Class A shares with other Smith Barney Mutual Funds. For purposes of
computing the CDSC that may be payable upon a disposition, the Class C shares
acquired in the exchange will be deemed to have been purchased on the same
date as the Class C shares that were exchanged therefor. See "Exchange
Privilege" in the accompanying Prospectus of the Acquiring Fund.
Dividends. Dividends from net investment income of the Acquired
Fund are declared monthly and paid on the last Friday of each month.
Dividends of substantially all of the Acquiring Fund's net investment income
are declared and paid monthly. Both Funds declare and distribute any realized
capital gains annually. With respect to both Funds, unless a shareholder
otherwise instructs, dividends and capital gains distributions will be
reinvested automatically in additional shares of the same class at net asset
value, subject to no sales charge or CDSC. The distribution option currently
in effect for a shareholder of the Acquired Fund will remain in effect after
the Reorganization. After the Reorganization, however, the former Acquired
Fund shareholders may change their distribution option at any time by
contacting a Smith Barney Financial Consultant. See "Dividends and
Distributions" in the accompanying Prospectus of the Acquiring Fund.
<PAGE>28
Shareholder Voting Rights. Smith Barney Investment Trust and Smith
Barney Muni Funds are both registered with the SEC as open-end, management
investment companies. The Acquired Fund is a separate series of Smith Barney
Investment Trust, a Massachusetts business trust having a Board of Trustees.
The Acquiring Fund is a separate series of Smith Barney Muni Funds, a
Massachusetts business trust having a Board of Trustees. Shareholders of both
Funds have similar voting rights. Neither Fund holds a meeting of
shareholders annually, and there is normally no meeting of shareholders held
for the purpose of electing Trustees unless and until such time as less than a
majority of the Fund's Trustees holding office has been elected by
shareholders of such Fund. At that time, the Fund's Trustees then in office
will call a shareholders' meeting for the election of Trustees.
In addition, under the laws of the Commonwealth of Massachusetts,
shareholders of the Acquired Fund do not have appraisal rights in connection
with a combination or acquisition of the assets of the Fund by another entity.
Shareholders of the Acquired Fund may, however, redeem their shares at net
asset value (subject to any applicable CDSC) prior to the date of the
Reorganization.
For purposes of voting with respect to the Reorganization, the Class
A, Class C and Class Y shares of the Acquired Fund will vote together as a
single class. See "Information on Shareholders' Rights -- Voting Rights."
RISK FACTORS
Due to the similarities of investment objectives and policies of the
Acquiring Fund and the Acquired Fund, the investment risks are substantially
similar. Such risks are generally those typically associated with investing
in a managed portfolio of limited term municipal obligations. The following
is a summary of certain risk factors associated with investing in shares of
the Acquiring Fund, certain of which are also applicable to the Acquired Fund.
This summary is qualified in its entirety by the accompanying Prospectus of
the Acquiring Fund. In addition, certain risks associated with various
investment strategies utilized by the Acquiring Fund, and where applicable, by
the Acquired Fund, are described herein under "Comparison of Investment
Objectives and Policies."
The ability of each Fund to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due.
The ability to achieve a high level of income is dependent on the yields of
the securities in a Fund's portfolio. Yields on municipal obligations are the
product of a variety of factors, including the general conditions of the
municipal bond markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue.
<PAGE>29
Changes in the market value of portfolio securities will not affect interest
income derived from those securities but will affect the Acquiring Fund's net
asset value. Since the Acquiring Fund's objective is to provide high current
income, it will invest in municipal obligations with an emphasis on income
rather than stability of net asset values.
The Acquiring Fund is classified as a non-diversified investment
company under the 1940 Act, which means that the Acquired Fund is not limited
by the 1940 Act in the proportion of its assets that it may invest in the
assets of a single issuer. A Fund's assumption of large positions in the
obligations of a small number of issuers may cause such Fund's share price to
fluctuate to a greater extent than of a diversified company as a result of
changes in the financial condition or in the market's assessment of the
issuers. Notwithstanding the foregoing, each Fund intends to conduct its
operations so as to qualify as a "regulated investment company" for purposes
of the Internal Revenue Code of 1986, as amended, 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, each
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 such 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.
From time to time, proposals have been introduced before Congress
for the purpose of restricting or eliminating the federal income tax exemption
for interest on municipal obligations and similar proposals may be introduced
in the future. If one of these proposals were enacted, the availability of
tax exempt obligations for investment by the Funds and the value of their
respective portfolio securities would be affected. The Trustees of each Fund
would then reevaluate the respective Fund's investment objectives and
policies.
There are several risks in connection with the use of certain
portfolio strategies by the Acquiring Fund, and where applicable, by the
Acquired Fund. These portfolio strategies include purchasing of when issued
securities and municipal bond index futures contracts. See "Comparison of
Investment Objectives and Policies."
REASONS FOR THE REORGANIZATION
The Board of Trustees of Smith Barney Investment Trust has
determined that it is advantageous to combine the Acquired Fund with the
Acquiring Fund. The Funds have generally similar investment objectives and
policies and have the same investment adviser, distributor and transfer agent.
In reaching this conclusion, the Board considered a number of factors as
described below.
<PAGE>30
Among the factors considered by the Board of Trustees of Smith
Barney Investment Trust was the 1993 transaction pursuant to which Travelers
Group Inc. (formerly Primerica Corporation) acquired certain assets of Lehman
Brothers Inc. (formerly Shearson Lehman Brothers Inc.), including its retail
brokerage and domestic asset management business. As a result of this
transaction, Smith Barney became the sponsor of two separate and totally
distinct families of mutual funds, each with, among other things, differing
pricing structures, classes of shares, exchange privileges, sweep functions
and types of funds. The Board was advised that, with the completion of the
merger of back-office brokerage operations and the implementation of a uniform
pricing and class structure on November 7, 1994, significant consolidation of
the two mutual fund groups had been made feasible and desirable. The Board
was further informed that the next step in this process would be to eliminate
the duplication of funds within the consolidated Smith Barney mutual fund
complex. The Board of Trustees of Smith Barney Investment Trust was presented
with information indicating that investors have been and will continue to be
confused in the face of similar limited term municipal bond funds managed by
the same investment adviser (although the Acquired Fund and the Acquiring Fund
have different portfolio managers, i.e., the individual primarily responsible
for each Fund's day-to-day investment decisions). In particular, the Board
was presented with information to the effect that, with two different funds,
Smith Barney was confronted with operational and shareholder services issues,
including, (i) dilution of the firm's money management and research expertise
due to the splitting of attention between the two highly similar funds; and
(ii) client confusion associated with offering similar funds that provide
differing yields. The Board of Trustees of Smith Barney Investment Trust also
considered that no sales charges would be imposed in effecting the
Reorganization and the advantages of eliminating duplication inherent in
marketing two funds with similar investment objectives.
At its July 19, 1995 meeting, the Board of Trustees of the Acquired
Fund was presented by the Manager with information reflecting operating
expenses of the Acquiring Fund and the Acquired Fund as of April 30, 1995.
The Board was shown pro forma financial information which indicated that,
assuming the same level of assets for the combined fund after the
Reorganization as on April 30, 1995, Class A and Class C shareholders of the
Acquired Fund should respectively experience a 0.04% and 0.03% decrease in
total operating expenses after giving effect to management fee waivers
currently in effect (a 0.18% and 0.17% decrease before management fee
waivers). The pro forma operating expenses for Class A and Class C shares
would represent a 0.05% decrease respectively in management fees payable to
the Manager (before fee waivers), accompanied by a 0.13% and 0.12% decrease in
other operating expenses. The Trustees recognized that while the pro forma
management fees would be 0.05% lower than management fees applicable to the
Acquired Fund, the pro forma management fees would be 0.09% higher than
currently paid by the Fund, because the Manager has voluntarily waived 0.14%
of the management fees payable by the Acquired Fund. This management fee
waiver had the effect of lowering the Acquired Fund's overall expenses and
increasing returns otherwise available
<PAGE>31
to investors. However, the Board recognized that there is no guaranty that
the Manager will continue to waive management fees, and even without a
management fee waiver, the pro forma total operating expenses of the Acquired
Fund would be reduced following the Reorganization.
Subsequently, information became available as to the expenses of the
Acquiring Fund for the six-month period ended September 30, 1995, and the
expenses of the Acquired Fund for the six-month period ended May 31, 1995.
This information is reflected under the caption "Fee Tables" in this
Prospectus/Proxy Statement. Based upon these levels of expenses, and assuming
the same level of assets of the combined fund after the Reorganization as on
September 30, 1995, it is estimated that Class A and Class C shareholders of
the Acquired Fund should respectively experience a 0.18% and 0.15% decrease in
total operating expenses before effect to management fee waivers currently in
effect (a 0.04% and 0.01% decrease after management fee waivers), resulting
from a 0.05% decrease in management fees paid to the Manager accompanied by a
0.13% and 0.12% decrease, respectively, in other operating expenses before
giving effect to management fee waivers. The Manager has voluntarily waived a
portion of management fees in an amount equal to 0.14% of the value of the
Acquired Fund's net assets with respect to Class A and Class C shares,
respectively. This fee waiver had the effect of lowering the Acquired Fund's
overall expenses and increasing returns otherwise available to investors.
There is no guaranty that the Manager will continue to waive a portion of the
management fees payable by the Acquired Fund. Nevertheless, even without a
management fee waiver, the pro forma total operating expenses of the Acquired
Fund would be reduced following the Reorganization.
The Board also considered, among other things, the impact of the
decreased operating expenses on the Acquired Fund's shareholders, the nature
and quality of services provided to shareholders, including performance, the
impact of economies of scale and comparative fee structures. The Board was
presented with information illustrating that the pro forma management fee to
be paid by the combined fund following the Reorganization would be lower than
the average management fee paid by the limited term municipal funds included
in a survey using data prepared by Lipper Analytical Services, Inc. (the
"Lipper Limited Term Muni Average") with respect to front-end load shares
(which are comparable to Class A shares of the Funds) as of April 30, 1995
(without giving effect to management fee waivers and expense reimbursements),
and that while the pro forma total operating expenses of the combined fund
following the Reorganization would be higher than the Lipper Limited Term Muni
Average, the pro forma total operating expenses of the combined fund following
the Reorganization would actually be lower than the Lipper Limited Term Muni
Average before fee waivers and expense reimbursements. The Board also
considered, among other things, the terms and conditions of the Reorganization
and the comparative investment performance of the Funds. In addition, the
Board was advised that the Reorganization would be effected as a tax-free
reorganization.
<PAGE>32
In light of the foregoing, the Board of Trustees of Smith Barney
Investment Trust, including the Independent Trustees, has determined that it
is in the best interests of the Acquired Fund and its shareholders to combine
with the Acquiring Fund. The Board of Trustees has also determined that a
combination of the Acquired Fund and the Acquiring Fund would not result in a
dilution of the interests of the Acquired Fund's shareholders.
The Board of Trustees of Smith Barney Muni Funds has also determined
that it is advantageous to the Acquiring Fund to acquire the assets of the
Acquired Fund. The Board of Trustees was presented with information that
indicated that investors have been and will continue to be confused in the
face of similar limited term municipal bond funds managed by the same adviser.
The Board was presented with information to the effect that, with two
different funds, Smith Barney experienced: (i) dilution of the firm's money
management and research expertise due to the splitting of attention between
the two highly similar funds; and (ii) client confusion associated with
offering similar funds that provide differing yields. At its June 7, 1995 and
September 6, 1995 meetings, the Board of Trustees of the Acquiring Fund was
presented by the Manager with information reflecting operating expenses as of
April 30, 1995, which took into account the effects of various changes in
operating expenses applicable to the Funds, such as changes in certain
transfer agency expenses. The Board was shown pro forma financial information
which indicated that operating expenses before management fees for the
Acquiring Fund should decrease by 0.01%, 0.02% and 0.01%of average daily net
assets with respect to Class A, Class C and Class Y shares of the Acquiring
Fund, respectively. However, data prepared for the Board also indicated that
Class A and Class C shares of the Acquiring Fund would each experience a 0.05%
increase in management fees, which is estimated to result in total operating
expenses of 0.76%, 0.97% and 0.59% of average daily net assets with respect to
Class A, Class C and Class Y shares of the Acquiring Fund, respectively.
Based upon the information regarding the operating expenses of the Acquiring
Fund and the Acquired Fund reflecting expenses of the Acquiring Fund for the
six-month period ended September 30, 1995, and expenses of the Acquired Fund
for the six-month period ended May 31, 1995, that is included under the
caption "Fee Tables" in this Prospectus/Proxy Statement, and, assuming the
same level of assets for the combined fund after the Reorganization, Class A,
Class C and Class Y shares of the Acquiring Fund would each experience a 0.05%
increase in management fees, accompanied by a 0.02%, 0.02% and 0.01% decrease
in other operating expenses with respect to Class A, Class C and Class Y
shares. This is also estimated to result in total operating expenses of
0.76%, 0.97% and 0.59% of average daily net assets with respect to Class A,
Class C and Class Y shares of the combined fund, respectively.
The Board of Trustees of Smith Barney Muni Funds was also informed
that the Reorganization was one of a number of proposed reorganizations
involving Smith Barney Muni Funds and other municipal bond funds within the
Smith Barney mutual fund complex. In connection with these reorganizations,
it has been proposed that the surviving fund's management fee be either
increased or decreased, as the case may be, to 0.50% of such
<PAGE>33
fund's average daily net assets. The Board members were also informed that
the pro forma total operating expenses for the combined fund would be
consistent with the reorganizations involving the other series of Smith Barney
Muni Funds, and that the pro forma management fee would be lower than the
Lipper Limited Term Muni Average (without giving effect to management fee
waivers and expense reimbursements). The Board of Trustees was further
informed that the Reorganization would increase the size of the Acquiring Fund
by approximately 25%, and considered that such an increase could in the long-
term help to stabilize the Acquiring Fund's operating expenses and contribute
to economies of operation. The Board of Trustees also considered the terms
and conditions of the Reorganization and representations that the
Reorganization would be effected as a tax-free reorganization. Accordingly,
the Board of Trustees, including a majority of the Independent Trustees, has
determined that the Reorganization is in the best interests of the Acquiring
Fund's shareholders and that the interests of the Acquiring Fund's
shareholders would not be diluted as a result of the Reorganization.
The Board of Trustees of Smith Barney Muni Funds has approved, and
intends to submit to shareholders of the Acquiring Fund, a proposal to adopt a
new management agreement which, if approved by shareholders, would increase
the management fees payable by the Acquiring Fund from 0.45% to 0.50% of the
Acquiring Fund's average daily net assets. In the event that the proposed new
management agreement is not approved by shareholders of the Acquiring Fund,
Smith Barney Muni Funds, on behalf of the Acquiring Fund, will consider the
various alternatives available to it, including postponing the consummation of
the Reorganization until such time as it determines that a satisfactory new
management agreement has been approved or such time as it determines not to
seek approval of a new management agreement.
INFORMATION ABOUT THE REORGANIZATION
Plan of Reorganization. The following summary of the Plan is
qualified in its entirety by reference to the Plan (Exhibit A hereto). The
Plan provides that Smith Barney Muni Funds on behalf of the Acquiring Fund
will acquire all or substantially all of the assets of the Acquired Fund in
exchange for shares of the Acquiring Fund and the assumption by Smith Barney
Muni Funds on behalf of the Acquiring Fund of scheduled liabilities of the
Acquired Fund on January 19, 1996 or such later date as may be agreed upon by
the parties (the "Closing Date").
Prior to the Closing Date, the Acquired Fund will endeavor to
discharge all of its known liabilities and obligations. The Acquiring Fund
will not assume any liabilities or obligations other than those reflected on
an unaudited statement of assets and liabilities of the Acquired Fund prepared
as of the close of regular trading on the New York Stock Exchange, currently
4:00 p.m., New York City time, on the Closing Date. The number of full and
<PAGE>34
fractional Class A, Class C and Class Y shares of the Acquiring Fund to be
issued to the Acquired Fund's shareholders will be determined on the basis of
the Acquiring Fund's and the Acquired Fund's relative net asset value per
Class A, Class C and Class Y shares, respectively. The net asset value per
share of each class will be determined by dividing assets, less liabilities,
by the total number of outstanding shares of the relevant class.
The Acquired Fund and the Acquiring Fund will utilize the procedures
set forth in the Prospectus of the Acquiring Fund to determine the value of
their respective portfolio securities and to determine the aggregate value of
each Fund's portfolio. The method of valuation employed will be consistent
with the requirements set forth in the Prospectus of the Acquiring Fund, Rule
22c-1 under the 1940 Act and the interpretation of such rule by the SEC's
Division of Investment Management.
At or prior to the Closing Date, the Acquired Fund will, and the
Acquiring Fund may, declare a dividend or dividends which, together with all
previous such dividends, will have the effect of distributing to their
respective shareholders all taxable income for the taxable year ending on or
prior to the Closing Date (computed without regard to any deduction for
dividends paid). In addition, the Acquired Fund's dividend will include its
net capital gains realized in the taxable period ending on or prior to the
Closing Date (after reductions for any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, the
Acquired Fund will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date the full and fractional shares
of the Acquiring Fund received by the Acquired Fund. Such liquidation and
distribution will be accomplished by the establishment of accounts in the
names of the Acquired Fund's shareholders on the share records of the
Acquiring Fund's transfer agent. Each account will represent the respective
pro rata number of full and fractional shares of the Acquiring Fund due to
each of the Acquired Fund's shareholders. After such distribution and the
winding up of its affairs, the Acquired Fund will be terminated.
The consummation of the Reorganization is subject to the conditions
set forth in the Plan. Notwithstanding approval of the Acquired Fund's
shareholders, the Plan may be terminated at any time at or prior to the
Closing Date: (i) by mutual agreement of Smith Barney Muni Funds on behalf of
the Acquiring Fund and Smith Barney Investment Trust on behalf of the Acquired
Fund; (ii) by Smith Barney Muni Funds on behalf of the Acquiring Fund in the
event that Smith Barney Investment Trust shall, or Smith Barney Investment
Trust on behalf of the Acquired Fund in the event that Smith Barney Muni Funds
shall, materially breach any representation, warranty or agreement contained
in the Plan to be performed at or prior to the Closing Date; or (iii) by Smith
Barney Muni Funds on behalf of the Acquiring Fund, or by Smith Barney
Investment Trust on behalf of the Acquired Fund, if
<PAGE>35
a condition to the Plan expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it will not
or cannot be met.
Approval of the Plan will require the affirmative vote of a majority
of the total number of votes entitled to be cast thereon, as defined in the
1940 Act, of the outstanding shares of the Acquired Fund, which is the lesser
of: (i) 67% of the voting securities of the Acquired Fund present at the
Meeting, if the holders of more than 50% of the outstanding voting securities
of the Acquired Fund are present or represented by proxy, or (ii) more than
50% of the outstanding shares of the Acquired Fund. If the Reorganization is
not approved by shareholders of the Acquired Fund, the Board of Trustees of
Smith Barney Investment Trust will consider other possible courses of action
available to it.
Description of the Acquiring Fund's Shares. Full and fractional
shares of beneficial interest of the Acquiring Fund will be issued to the
Acquired Fund in accordance with the procedures detailed in the Plan and as
described in the Acquiring Fund's Prospectus. Generally, the Acquiring Fund
does not issue share certificates to shareholders unless a specific request is
submitted to the Acquiring Fund's transfer agent. See "Information on
Shareholders' Rights" and the Prospectus of the Acquiring Fund for additional
information with respect to the shares of the Acquiring Fund.
Federal Income Tax Consequences. The exchange of assets for shares
of the Acquiring Fund is intended to qualify for federal income tax purposes
as a tax-free reorganization under Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). As a condition to the closing of the
Reorganization, the Acquiring Fund and Smith Barney Investment Trust on behalf
of the Acquired Fund will receive an opinion from Willkie Farr & Gallagher,
counsel to the Acquired Fund, to the effect that, on the basis of the existing
provisions of the Code, U.S. Treasury regulations issued thereunder, current
administrative rules, pronouncements and court decisions, for federal income
tax purposes, upon consummation of the Reorganization:
(1) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for the Acquiring Fund's shares and the assumption by
Smith Barney Muni Funds on behalf of the Acquiring Fund of scheduled
liabilities of the Acquired Fund will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and the Acquiring
Fund and the Acquired Fund are each a "party to a reorganization" within
the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Acquired Fund in exchange for the
Acquiring Fund's shares and the assumption of scheduled liabilities of
the Acquired Fund;
<PAGE>36
(3) no gain or loss will be recognized by the Acquired Fund upon
the transfer of the Acquired Fund's assets to the Acquiring Fund in
exchange for the Acquiring Fund's shares and the assumption of scheduled
liabilities of the Acquired Fund or upon the distribution (whether actual
or constructive) of the Acquiring Fund's shares to the Acquired Fund's
shareholders;
(4) no gain or loss will be recognized by shareholders of the
Acquired Fund upon the exchange of their shares of the Acquired Fund for
shares of the Acquiring Fund;
(5) the aggregate tax basis for shares of the Acquiring Fund
received by each shareholder of the Acquired Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of shares of
the Acquired Fund surrendered therefor, and the holding period of shares
of the Acquiring Fund to be received by each shareholder of the Acquired
Fund will include the period during which shares of the Acquired Fund
exchanged therefor were held by such shareholder (provided shares of the
Acquired Fund were held as capital assets on the date of the
Reorganization); and
(6) the tax basis to the Acquiring Fund of the Acquired Fund's
assets acquired by Smith Barney Muni Funds on behalf of the Acquiring
Fund will be the same as the tax basis of such assets to the Acquired
Fund immediately prior to the Reorganization, and the holding period of
the assets of the Acquired Fund in the hands of the Acquiring Fund will
include the period during which those assets were held by the Acquired
Fund.
Shareholders of the Acquired Fund should consult their tax advisors
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion only relates to the
federal income tax consequences of the Reorganization, shareholders of the
Acquired Fund should also consult their tax advisors as to state and local tax
consequences, if any, of the Reorganization.
<PAGE>37
Capitalization. The following table shows the capitalization of the
Acquiring Fund and the Acquired Fund as of [November 27], 1995, and on a pro
forma basis as of that date, giving effect to the proposed acquisition of
assets at net asset value.
<TABLE>
<CAPTION>
Smith Barney Limited Smith Barney Muni Funds - Pro Forma for
Maturity Municipal Fund Limited Reorganization
(Unaudited) Term Portfolio (Unaudited) (Unaudited)
(In thousands, except per share values)
<S> <C> <C> <C>
Class A Shares
Net assets . . . . . . . . . . . . . . . . .
Net asset value per share . . . . . . . . . .
Shares outstanding . . . . . . . . . . . . .
Class C Shares
Net assets . . . . . . . . . . . . . . . . .
Net asset value per share . . . . . . . . . .
Shares outstanding . . . . . . . . . . . . .
Class Y Shares
Net assets . . . . . . . . . . . . . . . . .
Net asset value per share . . . . . . . . . .
Shares outstanding . . . . . . . . . . . . .
</TABLE>
As of November 27, 1995 (the "Record Date"), there were _____
outstanding Class A shares, ______ outstanding Class C shares and __
outstanding Class Y shares of the Acquiring Fund, and ______ outstanding Class
A shares, ____ outstanding Class C shares and __ outstanding Class Y shares of
the Acquired Fund. As of the Record Date, the officers and Trustees of Smith
Barney Muni Funds beneficially owned as a group less than 1% of the
outstanding shares of each class of the Acquiring Fund. To the best knowledge
of the Trustees of Smith Barney Muni Funds, as of the Record Date, no
shareholder or "group" (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")), except as set forth in
the table below, owned beneficially or of record more than 5% of the
outstanding shares of a class of the Acquiring Fund. As of the Record Date,
the officers and Trustees of Smith Barney Investment Trust beneficially owned
as a group less than 1% of the outstanding shares of each class of the
Acquired Fund. Except as set forth in the table below, to the best knowledge
of the Trustees of Smith Barney Investment Trust, as
<PAGE>38
of the Record Date, no shareholder or "group" (as that term is used in Section
13(d) of the Exchange Act) owned beneficially or of record more than 5% of the
outstanding shares of a class of the Acquired Fund.
<TABLE>
<CAPTION>
Percentage of
Class Owned
of Record
or Beneficially
Name and Fund Upon Consummation of the
Address and Class As of the Record Date Reorganization
<S> <C> <C> <C>
</TABLE>
<PAGE>39
INFORMATION ABOUT THE ACQUIRING FUND
Management's Discussion and Analysis of Market Conditions and
Portfolio Review (through March 31, 1995).
Municipal bond prices posted extremely strong gains in the first
quarter of 1995, erasing most of the losses from last year's turbulent market.
The Fund had a total return of 5.69% (Class A shares) for the fiscal year.
This return compared favorably with the 5.59% average total return for all
intermediate-term municipal bond funds over the same period, as reported by
Lipper Analytical Services.
Over the past five years ended March 31, 1995, the Fund produced a
cumulative total return of 40.61%. It should be noted that this longer-term
performance has been achieved without the necessity for any capital-gains
distributions, an important consideration for investors interested in after-
tax income.
Market and Economic Overview
Since November 1994, the fixed-income markets, and municipal bonds
in particular, have enjoyed a powerful rally. Municipal bond yields have
declined more than a full percentage point, as evidenced by the drop in the
average yield on Moody's 10-Year AA Muni Bond Index from a high of 6.53% on
November 18, 1994 to 5.33% on March 31, 1995. This was substantially better
than the performance of the 10-year Treasury, which experienced a decline in
yield of 80 basis points from 8.13% to 7.20% during the same time frame.
The vastly improved bond markets reflect a growing consensus that
inflation will remain under control, and the Federal Reserve Board will be
successful in engineering a "soft landing" by slowing the economy down to a
more sustainable, non-inflationary rate of growth. The seven increases in the
federal funds rate (the rate banks charge each other for overnight loans),
orchestrated by the Federal Reserve since February 1994, appear to be slowing
the pace of economic growth. Recent economic reports show a slower rate of
increase in employment, producer prices and retail sales. Industrial
production and capacity utilization were also lower than expected, signalling
a possible slowdown in the country's strong manufacturing sector. These
generally favorable economic fundamentals are more than offsetting concerns
about the substantial decline in the value of the dollar relative to the
Japanese yen and German mark on the foreign exchange markets.
Late in April 1995, several tax-reform proposals which recommend a
flat federal income tax rate began to receive increased attention in the
national financial press and from municipal bond market participants.
Adoption of a flat tax would diminish the advantages of tax exemption for
municipal bonds. Although the various plans being
<PAGE>40
circulated are only proposals, the publicity surrounding them has recently
caused some investors to back away from the municipal bond market. In
management's opinion, it is much too early in the process to predict what
changes in the tax laws, if any, will actually take place, but tax reform will
certainly be a major topic of political debate over the next few years. Many
observers believe that the more radical proposals for changes in the way taxes
are collected have little chance for enactment.
Absent these tax-reform concerns, municipals would probably continue
to be strong performers relative to Treasuries and other taxable investments
due to the low supply of new issues. Not only did 1994's spike in interest
rates sharply reduce refinancing activity in the municipal market, but voter
pressure on states and municipalities to rein in spending and cut taxes, or at
least avoid tax increases, has also resulted in roughly a 30% decline in new
money financing. In addition, the universe of existing municipal bonds is
shrinking. In 1995, an estimated $230 billion of older, high-coupon issues
will mature or be called as they reach their first optional call dates. With
estimates of new-issue volume at less than $150 billion, the net reduction in
municipal debt outstanding could approach $100 billion this year, contracting
the market by about eight percent. Ordinarily, a reduction in supply of this
magnitude would be expected to provide a powerful boost for municipal bond
values as it did earlier this year. Uncertainties about various tax
proposals, however, will probably keep municipals from trading any better than
their normal relationship to taxable investment alternatives.
Portfolio Strategy and Outlook
While management generally has a positive outlook for the fixed-
income markets, the size of the rally the market has experienced so far would
seem to leave little room for disappointment, and any sign of a rebound in
economic activity is likely to result in a return to higher interest rates.
Management also believes that the unique supply and demand characteristics of
the municipal market and tax-reform uncertainties will tend to exaggerate
price swings relative to taxable investments.
In light of this viewpoint, management is taking a more cautious
approach to structuring the interest-rate sensitivity of the Fund. Relative
stability of principal is a key element of the Fund, which is positioned in
the short end of the five- to ten-year intermediate maturity range. In this
regard, management is placing emphasis on higher coupon issues trading at a
premium to their face value. Such bonds will decline less in price than
current coupon or market discount bonds should the economy rebound and cause a
rise in interest rates. In addition, the maturities of these holdings are
effectively shorter than their stated maturity date, which serves to further
reduce the Fund's interest-rate sensitivity. Examples of such issues are
bonds priced to a call date earlier than maturity, bonds with sinking funds
designed to retire a portion of the issue prior to maturity, and housing bonds
that are subject to early call from prepayments on mortgages. Management
believes that positioning the
<PAGE>41
Fund in this manner is the best way to achieve the Fund's objective of the
highest tax-free income consistent with prudent investment risk.
Management's Update (through November 1, 1995). [To be provided.]
<PAGE>42
Smith Barney Muni Funds -- Limited Term Portfolio
<TABLE>
<CAPTION>
Historical Performance Class A Shares
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
<S> <C> <C> <C> <C> <C>
3/31/95 $6.55 $6.54 $0.37 $0.00 5.69%
3/31/94 6.68 6.55 0.37 0.00 3.65
3/31/93 6.45 6.68 0.39 0.00 9.82
3/31/92 6.38 6.45 0.42 0.00 7.99
3/31/91 6.28 6.38 0.40 0.00 8.23
3/31/90 6.20 6.28 0.46 0.00 9.07
Inception* - 3/31/89 6.25 6.20 0.13 0.00 1.09
Total $2.54 $0.00
</TABLE>
<TABLE>
<CAPTION>
Historical Performance Class C Shares
Net Asset Value
Beginning End Income Capital Gains Total
Year Ended of Year of Year Dividends Distributions Returns(1)
<S> <C> <C> <C> <C> <C>
3/31/95 $6.54 $6.54 $0.35 $0.00 5.51%
3/31/94 6.68 6.54 0.35 0.00 3.15
Inception* - 3/31/93 6.62 6.68 0.09 0.00 2.28
Total $0.79 $0.00
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital
gains, if any, annually.
<PAGE>43
Smith Barney Muni Funds -- Limited Term Portfolio
<TABLE>
<CAPTION>
Average Annual Total Return
Without Sales Charge(1)
Class A Class C
<S> <C> <C>
Year Ended 3/31/95 5.69% 5.51%
Five Years Ended 3/31/95 7.05 N/A
Inception* through 3/31/95 7.16 4.92
<CAPTION>
With Sales Charge(2)
Class A Class C
Year Ended 3/31/95 3.64% 4.51%
Five Years Ended 3/31/95 6.62 N/A
Inception* through 3/31/95 6.82 4.92
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return
Without Sales Charge(1)
<S> <C>
Class A (Inception* through 3/31/95) 55.03%
Class C (Inception* through 3/31/95) 11.32
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions at
net asset value and does not reflect deduction of the applicable sales
charge with respect to Class A shares or the applicable CDSC with
respect to Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at
net asset value. In addition, Class A shares reflect the deduction of
the maximum initial sales charge of 2.00% and Class C shares reflect the
deduction of a 1.00% CDSC which applies if shares are redeemed within
the first year of purchase.
* Inception dates for Class A and Class C shares are November 28, 1988 and
January 5, 1993, respectively.
<PAGE>44
Growth of $10,000 Invested in
Class A Shares of Limited Term Portfolio vs. Lehman 5 Year Bond Index and
Lehman Long Bond Index*
(unaudited)
November 1988 - March 1995
[Graph Appears Here]
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on
November 1988 in Class A shares of the Acquired Fund as compared with the
growth of a $10,000 investment in the Lehman 5 Year Bond Index and the Lehman
Long Bond Index. The plot points used to draw the line graphs were as
follows:
<TABLE>
<CAPTION>
Growth of $10,000 Investment in Growth of $10,000 Investment in Growth of $10,000 Investment in
Month Ended Class A Shares Lehman 5 Year Bond Index Lehman Long Bond Index
<S> <C> <C> <C>
11/28/8 $ 9,796.24 $10,000.00 $10,000.00
3/89 9,899.70 10,023.99 10,100.00
3/90 10,781.32 10,994.09 11,199.58
3/91 11,653.54 12,021.99 12,071.42
3/92 12,567.94 13,046.06 13,439.83
3/93 13,785.75 14,394.90 15,402.35
3/94 14,273.46 14,821.36 15,574.13
3/95 15,075.90 15,666.58 16,980.37
</TABLE>
* Hypothetical illustration of $10,000 invested in Class A shares at
inception on November 28, 1988, assuming deduction of the maximum 2.00%
sales charge at the time of investment and reinvestment of dividends
(after deduction of applicable sales charges, if any) and capital gains
(at net asset value) through March 31, 1995. The indices are unmanaged
and are not subject to the same management and trading expenses of a
mutual fund. The performance of the Fund's other classes may be greater
or less than the Class A shares' performance indicated on this chart,
depending on whether greater or lesser sales charges and fees were
incurred by shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
<PAGE>45
INFORMATION ABOUT THE ACQUIRED FUND
Management's Discussion and Analysis of Market Conditions and
Portfolio Review (through November 30, 1994).
Since July 1994, prices for tax-exempt bonds continued to weaken as
the Federal Reserve raised interest rates. As a result, the net asset value
per Class A share of the Fund declined to $7.94 from $8.26; however, the
Fund's tax-exempt distributions of $0.34 per Class A share offset this
decline, and resulted in a slightly positive total return for this fiscal
period of 0.23% for Class A shares.
Economic and Interest Rate Overview
The Federal Reserve raised short-term interest rates six times in
1994 beginning in February, which is a remarkable number of increases in less
than one year. The Federal Reserve's goal was to curb any creeping inflation
before it actually appeared. However, the rise in short-term interest rates
also resulted in a rise in longer-term interest rates and consequently a
decline in the asset value of many longer-term investments. As a result, most
fixed income investments performed poorly in 1994, especially in comparison to
the strong performance they experienced in 1993.
1994 was also a politically intriguing year. First, higher federal
income tax rates that were retroactive to 1993 took effect. Second, Congress
became embroiled in controversial legislation on health care which, had it
been successful, could have led to higher taxes. Third, the NAFTA and GATT
trade agreements were successfully passed. Fourth, and perhaps most
significant, the Republicans achieved an overwhelming victory in both the
House and Senate by promising lower taxes and spending, and much less
government. The many Republican victories at the state level -- not only in
the state legislatures but also the governorships -- are even more significant
as these 30 states will have much power over the electoral process in 1996.
For many investors this was the first glance into a new and more
challenging investment environment that tested their ability to maintain a
long-term investment focus. However, management anticipates that interest
rates will soon stabilize as the results of the new Congress become more
apparent and the effects of the Federal Reserve's interest rate policy become
more positive. Management expects that the recent GATT and NAFTA trade pacts
will also demonstrate that the U.S. is still a world leader in both economic
policy and financial markets.
<PAGE>46
Portfolio Summary
In response to the Federal Reserve's policy of higher short-term
interest rates and generally declining prices in the tax-exempt market,
management's investment strategy has been to keep the Fund's average maturity
at approximately 3 years, which enables the Fund to maximize its tax-exempt
income yet minimize its exposure to rising interest rates. At the end of
1994, over half of the Acquired Fund's assets were invested in municipal bonds
rated AAA/Aaa and AA/Aa by Standard & Poor's Ratings Group or Moody's Investor
Services, Inc., respectively. Management believes these high-quality
investments provide the portfolio with greater protection against credit risk
and are also more liquid. The majority of the Fund's holdings were in general
obligation, hospital, education and housing issues.
Dividend Policy
The Fund does not pay a level monthly dividend rate but instead
distributes to shareholders the accrued monthly income earned by the
portfolio. The management will continue to strive to offer an attractive
dividend distribution as the Fund also faces uncertain interest rates and
continued volatility.
Management's Update (through November 1, 1995). [To be provided].
<PAGE>47
<TABLE>
<CAPTION>
Smith Barney Limited Maturity Municipals Fund
Historical Performance Class A Shares (Unaudited)
Year Ended November 30 Net Asset Value Capital Gains Paid Dividends Paid Total Return*
Beginning Ending
<S> <C> <C> <C> <C> <C>
12/31/91- $7.90 $8.07 ---- $0.36 6.88%
11/30/92
1993 8.07 8.26 $0.00** 0.36 6.98
1994 8.26 7.94 0.00** 0.34 0.23
Total $0.00** $1.06
Cumulative Total Return - (12/31/91 through 11/30/94) 14.59%
</TABLE>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the front-
end sales charge (maximum 2.00%).
** Amount represents less than $0.01 per share.
The Fund's policy is to distribute dividends monthly and capital gains, if
any, annually.
<TABLE>
<CAPTION>
Average Annual Total Return** -- Class A Shares (Unaudited)
Without Sales Charge With Sales Charge***
With Fee Waiver Without Fee With Fee Waiver Without Fee Waiver
Waiver
<S> <C> <C> <C> <C>
Year Ended 11/30/94 0.23% (0.09)% (1.78)% (1.92)%
Inception (12/31/91) through 11/30/94 4.78% 4.37% 4.06% 3.65%
</TABLE>
** All average annual total return figures shown reflect reinvestment of
dividends and capital gains distributions at net asset value. The Fund's
investment adviser and former administrator waived investment advisory
and administration fees from December 31, 1991 to November 30, 1994. A
shareholder's actual return for the period during which waivers were in
effect would be the higher of the two numbers shown.
*** Average annual total return figures shown assume the deduction of the
maximum 2.00% sales charge.
Note: On November 7, 1994, existing shares of the Acquired Fund were
designated Class A shares. Class A shares are sold subject to a 2.00%
front-end sales charge; however, purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net
asset value with no initial sales charge but will be subject to a 1.00%
CDSC if redeemed within 12 months of purchase. Class A shares of the
Acquired Fund are subject to an annual service fee of 0.15% of the value
of the average daily net assets attributable to that class.
<PAGE>48
Growth of $10,000 Invested in Class A Shares of Smith Barney Limited Maturity
Municipals Fund vs. Lehman Brothers 5-Year Municipal Bond Index and Lipper
Analytical Services, Inc. Peer Group Average Index
December 31, 1991 - November 30, 1994
[Graph Appears Here]
A line graph depicting the total growth (including reinvestment of
dividends and capital gains) of a hypothetical investment of $10,000 on
December 31, 1991 in Class A shares of the Acquired Fund as compared with the
growth of a $10,000 investment in the Lehman Brothers 5-Year Municipal Bond
Index and Lipper Analytical Services, Inc. Peer Group Average Index. The plot
points used to draw the line graphs were as follows:
<TABLE>
<CAPTION>
Growth of $10,000
Growth of $10,000 Investment in the Growth of $10,000 Investment in
Month Invested in Class A Lehman Municipal the Lipper Analytical Services,
Ended Shares of the Fund Bond Index Inc. Peer Group Average Index
<S> <C> <C> <C>
12/31/91 $9,800 $10,000 $10,000
12/91 $9,800 -- --
3/92 $9,889 $10,006 $10,066
6/92 $10,139 $10,342 $10,301
9/92 $10,350 $10,611 $10,489
12/92 $10,547 $10,762 $10,636
3/93 $10,790 $11,045 $10,852
6/93 $11,004 $11,301 $11,022
9/93 $11,214 $11,560 $11,190
12/93 $11,310 $11,701 $11,306
3/94 $11,107 $11,372 $11,139
6/94 $11,196 $11,494 $11,222
9/94 $11,303 $11,605 $11,314
11/94 $11,230 $11,422 $11,234
</TABLE>
* Illustration of $10,000 invested in Class A shares on December 31, 1991
through November 30, 1994 assuming deduction of the maximum 2.00% front-end
sales charge at the time of investment and reinvestment of dividends and
capital gains distributions at net asset value.
The Lehman Brothers 5-Year Municipal Bond Index is an unmanaged, broad-
based index which includes about 3,400 tax-free issues totaling
approximately $39 billion of market capitalization. The average maturity
of the securities in the index is approximately 5.09 years.
Lipper Analytical Services, Inc. Peer Group Average Index is composed of an
average of the Acquired Fund's peer group of mutual funds (47 as of
November 30, 1994) investing in limited maturity municipal securities.
<PAGE>49
This period was one in which municipal bond prices fluctuated and the
results should not be considered as a representation of the dividend income
or capital gain or loss which may be realized from an investment in the
Fund today. No adjustment has been made for shareholder tax liability on
dividends or capital gains distributions.
Note: All figures cited here represent past performance and do not
guarantee future results.
<PAGE>50
<TABLE>
<CAPTION>
Smith Barney Limited Maturity Municipals Fund
Historical Performance Class C Shares (Unaudited)
Net Asset Value Capital Gains Dividends Paid
Beginning Ending Distributed Total Return*
<S> <C> <C> <C> <C> <C>
Inception (11/17/94 $7.92 $7.94 $0.00 $0.00 0.31%
through 11/30/94)
</TABLE>
*Figures assume reinvestment of all dividends and capital gains distributions
at net asset value and do not assume deduction of the CDSC.
<TABLE>
<CAPTION>
Average Annual Total Return** Class C Shares (Unaudited)
Without Fee Waiver With Fee Waiver
<S> <C> <C>
Inception (11/17/94)
through 11/30/94 0.31% 0.31%
</TABLE>
** All cumulative total return figures shown reflect reinvestment of
dividends and capital gains distributions
at net asset value. The Fund's investment advisor and administrator
waived investment advisory and administration fees from November 17, 1994
to November 30, 1994. A shareholder's actual return for the period
during which waivers were in effect would be the higher of the two
numbers shown.
Note: On November 7, 1994, the Fund began offering Class C and Class Y
shares. Class C shares may be subject to a 1.00% CDSC if redeemed within
12 months of purchase and are subject to annual service and distribution
fees of 0.15% and 0.20%, respectively, of the value of the average daily
net assets attributable to that class.
[Performance information is not available for Class Y shares of the
Acquired Fund because, as of the Record Date, no Class Y shares of the
Acquired Fund had been sold.]
<PAGE>51
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing investment objectives, policies
and restrictions of the Acquiring Fund and the Acquired Fund is based upon and
qualified in its entirety by the disclosure in the prospectuses of the
Acquiring Fund and the Acquired Fund with respect to the Funds' respective
investment objective, policies and restrictions. For a full discussion of
these issues as they relate to the Acquiring Fund, refer to the Prospectus of
the Acquiring Fund, which accompanies this Prospectus/Proxy Statement, under
the caption "Investment Objective and Management Policies," and for a
discussion of these issues as they relate to the Acquired Fund, refer to the
Prospectus of the Acquired Fund under the caption "Investment Objective and
Management Policies."
Investment Objective. The Acquiring Fund and the Acquired Fund have
generally similar investment objectives. The Acquired Fund seeks as high a
level of current income exempt from federal income taxes as is consistent with
preservation of principal. The Acquiring Fund seeks as high a level of income
exempt from federal income taxes as is consistent with prudent investing.
There can be no assurance that either Fund will be able to achieve its
investment objective.
Primary Investments. In seeking its objective, the Acquired Fund
will invest in a diversified portfolio of investment-grade debt obligations
issued by, or on behalf of, states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities or multistate agencies or authorities, the interest from
which is, in the opinion of bond counsel for the issuer, excluded from gross
income for federal income tax purposes ("Municipal Obligations"). Municipal
Obligations are issued to raise money for a variety of public projects such as
health facilities, housing, airports, schools, highways and bridges. The
Acquired Fund operates subject to a fundamental investment policy providing
that, under normal market conditions, it will invest at least 80% of its net
assets in Municipal Obligations. It is a fundamental policy that under normal
market conditions, the Acquiring Fund will seek to invest 100% of its assets,
and it will not invest less than 80% of its assets, in Municipal Obligations
the interest on which was, in the opinion of bond counsel to the issuer,
exempt from federal income taxes (other than the alternative minimum tax) at
the time of their issuance. The Acquiring Fund may invest up to 20% of its
assets in taxable fixed income securities, but only in obligations issued or
guaranteed by the full faith and credit of the United States ("U.S. Government
securities"), and may invest more than 20% of its assets in U.S. Government
securities during periods when in the Manager's opinion a temporary defensive
posture is warranted, including any period when the Acquiring Fund's monies
available for investment exceed Municipal Obligations available for purchase
that meet the Acquiring Fund's rating, maturity and other investment criteria.
<PAGE>52
The Acquired Fund generally will invest at least 80% of its total
assets in Municipal Obligations rated investment-grade, that is, rated no
lower than Baa, MIG3 or Prime-1 by Moody's Investors Services, Inc.
("Moody's"), BBB, SP-2 or A-1 by Standard & Poor's Ratings Group ("S&P") or
BBB or F-1 by Fitch Investor Services, Inc. ("Fitch"). Up to 20% of the
Acquired Fund's total assets may be invested in unrated obligations that are
deemed by the Manager to be of comparable quality. The Acquired Fund will not
invest in Municipal Obligations that are rated lower than Baa by Moody's or
BBB by S&P or Fitch. Although Municipal Obligations rated Baa by Moody's, BBB
by S&P or BBB by Fitch are considered to be investment-grade, they may be
viewed as being subject to greater risk than other investment-grade
securities.
Municipal bonds purchased by the Acquiring Fund must, at the time of
purchase, be investment-grade municipal bonds and at least two-thirds of the
Acquiring Fund's municipal bonds must be rated in the category of A or better.
Investment-grade bonds are those rated Aaa, Aa, A or Baa by Moody's or AAA,
AA, A or BBB by S&P or have an equivalent rating by any nationally recognized
statistical rating organization; pre-refunded bonds escrowed by U.S. Treasury
obligations will be considered AAA rated even though the issuer does not
obtain a new rating. Up to one-third of the assets of the Acquiring Fund may
be invested in municipal bonds rated Baa or BBB (this grade, while regarded as
having an adequate capacity to pay interest and repay principal, is considered
to be of medium quality and has speculative characteristics; in addition,
changes in economic conditions or other circumstances are more likely to lead
to a weakened capacity to make principal and interest payments than is the
case with higher grade bonds) or in unrated municipal bonds if, based upon
credit analysis by the Manager, it is believed that such securities are at
least of comparable quality to those securities in which the Acquiring Fund
may invest. After the Acquiring Fund purchases a municipal bond, the issuer
may cease to be rated or its rating may be reduced below the minimum required
for purchase. Such an event would not require the elimination of the issue
from the Acquiring Fund's portfolio but the Manager will consider such an
event in determining whether the Acquiring Fund should continue to hold the
security. The Acquiring Fund's short-term municipal obligations will be
limited to high grade obligations (U.S. Government securities or obligations
rated MIG1 or MIG2, VMIG1 or VMIG2 or Prime-1 or Aa or better by Moody's or
SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or having an equivalent
rating by any nationally recognized statistical rating organization or
obligations determined by the Manager to be equivalent). Among the types of
short-term instruments in which the Acquired Fund may invest are floating or
variable rate term demand instruments, tax-exempt commercial paper (generally
having a maturity of less than nine months), and other types of notes
generally having maturities of less than three years, such as Tax Anticipation
Notes, Revenue Anticipation Notes, Tax and Revenue Anticipation Notes and Bond
Anticipation Notes. Demand instruments usually have an indicated maturity of
more than one year, but contain a demand feature that enables the holder to
redeem the investment on no more than 30 days' notice; variable rate demand
instruments provide for automatic establishment of a new interest rate
<PAGE>53
on set dates; floating rate demand instruments provide for automatic
adjustment of their interest rates whenever some other specified interest rate
changes (e.g., the prime rate). The Acquiring Fund may purchase participation
interests ("Participations") in variable rate tax-exempt securities (such as
Industrial Development Bonds) owned by banks. Participations are frequently
backed by an irrevocable letter of credit or guarantee of a bank that the
Manager has determined meets the prescribed quality standards for the
Acquiring Fund. Participations will be purchased only if management believes
interest income on such Participations will be tax-exempt when distributed as
dividends to shareholders.
Each Fund's average weighted maturity will vary from time to time
based on the judgment of the Manager. Under normal circumstances, the
Acquired Fund will invest exclusively in limited maturity securities; the
weighted average maturity of the Acquired Fund's portfolio securities will
normally be no less than two nor more than five years. The maximum remaining
maturity of the securities in which the Acquired Fund will normally invest
will be no greater than 10 years. The Acquiring Fund invests at least 80% of
its assets in Municipal Obligations with remaining maturities of less than ten
years, and the dollar-weighted average maturity of the Acquiring Fund will not
normally exceed six years.
Each Fund may invest without limitation in private activity bonds.
Interest income on certain types of private activity bonds issued after August
7, 1986 to finance non-governmental activities is a specific tax preference
item for purposes of the federal individual and corporate alternative minimum
taxes. Individual and corporate shareholders may be subject to a federal
alternative minimum tax to the extent that a Fund's dividends are derived from
interest on those bonds. Dividends derived from interest income on Municipal
Obligations are a "current earnings" adjustment item for purposes of the
federal corporate alternative minimum tax. Because interest income on certain
types of private activity bonds is taxable to certain investors, it is
expected, although there can be no guarantee, that such Municipal Obligations
generally will provide somewhat higher yields than other Municipal Obligations
of comparable quality and maturity.
Municipal Obligations. Municipal Obligations are classified as
general obligation bonds, revenue bonds and notes. General obligation bonds
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue bonds are payable from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source, but not from the general taxing power. Notes are short-term
obligations of issuing municipalities or agencies and are sold in anticipation
of a bond sale, collection of taxes or receipt of other revenues.
<PAGE>54
In attempting to achieve its investment objective, the Funds may
employ, among others, the following portfolio strategies:
When-Issued Securities. Each Fund may purchase new issues of
Municipal Obligations on a when-issued basis, which means that delivery and
payment for such securities normally take place within 45 days after the date
of the commitment to purchase. Each Fund will not accrue income with respect
to a when-issued security prior to its stated delivery date. When-issued
securities may decline in value before this actual delivery to a Fund. Each
Fund will establish a segregated account with the Fund's custodian consisting
of cash or U.S. Government securities (or in the case of the Acquiring Fund,
other liquid high grade debt obligations) in an amount equal to the purchase
price of the Fund's when-issued commitments. The Acquiring Fund generally
will purchase Municipal Obligations on a when-issued basis only with the
intention of actually acquiring the securities, but the Acquiring Fund may
sell such securities before the delivery date if it is deemed advisable.
Temporary Investments. Under normal market conditions, the Acquired
Fund may hold up to 20% of its total assets in cash or money market
instruments, including taxable money market instruments ("Temporary
Investments"). In addition, when the Manager believes that market conditions
warrant, the Acquired Fund may take a temporary defensive posture and invest
without limitation in short-term Municipal Obligations and Temporary
Investments. Money market instruments in which the Acquired Fund may invest
include: U.S. Government securities; tax-exempt notes of municipal issuers
rated, at the time of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or
F-1 by Fitch or, if not rated, by issuers having outstanding, unsecured debt
then rated within the three highest rating categories; bank obligations;
commercial paper rated no lower than P-1 by Moody's, A-1 by S&P or F-1 by
Fitch or the equivalent from another major rating service or, if unrated, of
an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements. At no time will
the Acquired Fund's investments in bank obligations, including time deposits,
exceed 25% of the value of its assets. Similarly, the Acquiring Fund may
invest up to 20% of its assets in taxable fixed income securities, but only in
U.S. Government securities, and may invest more than 20% of its assets in U.S.
Government securities during periods when in the Manager's opinion a temporary
defensive posture is warranted, including any period when the Acquiring Fund's
monies available for investments exceed Municipal Obligations available for
purchase that meet the Acquiring Fund's rating, maturity and other investment
criteria.
Municipal Bond Index Futures Contracts. The Acquiring Fund may
invest in municipal bond index futures contracts (currently traded on the
Chicago Board of Trade) or in listed contracts based on U.S. Government
securities as a hedging policy in pursuit of its investment objective;
provided that immediately thereafter not more than 33-1/3% of its net assets
would be hedged or the amount of margin deposit on the Acquired Fund's
existing futures contracts would not exceed 5% of the value of its total
assets. Since any income
<PAGE>55
would be taxable, it is anticipated that such investments would be made only
in those circumstances when the Manager anticipates the possibility of an
extreme change in interest rates or in market conditions but does not wish to
liquidate the Acquiring Fund's securities. The Acquired Fund does not have
express policies regarding these types of investments.
Illiquid Securities. Each of the Acquired Fund and the Acquiring
Fund may invest up to 10% of its net assets in illiquid securities, including
those that are not readily marketable or for which there is no established
market.
The Acquired Fund may also purchase municipal leases, zero coupon
Municipal Obligations, and custodial receipts. The Acquiring Fund does not
have expressed policies regarding these types of investments.
Investment Restrictions. Each Fund has adopted the following
fundamental investment restrictions for the protection of its shareholders.
These restrictions may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the voting securities of the Fund.
1. The Acquired Fund may not invest more than 25% of its total
assets in securities of issuers in the same industry, except that this
limitation is not applicable to the Fund's investment in U.S. Government
securities. Similarly, the Acquiring Fund may not invest more than 25% of its
total assets taken at market value in any one industry, except that securities
of the U.S. Government, its agencies and instrumentalities, and Municipal
Obligations are not considered an industry for purposes of this limitation.
2. Neither Fund may borrow money, except that a 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, in an amount not exceeding 10% of the value of such
Fund's total assets (in the case of the Acquired Fund, including the amount
borrowed and valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made.) Whenever borrowings exceed 5%
of the value of a Fund's total assets, such Fund will not make any additional
investments. Each Fund is further prohibited from pledging, hypothecating,
mortgaging or otherwise encumbering its assets, except to secure permitted
borrowing.
3. Neither Fund may make loans. For the Acquired Fund, this
restriction does not apply to the purchase of Municipal Obligations and other
permitted investments and the entering into repurchase agreements, each in a
manner consistent with the Fund's investment objective. For the Acquiring
Fund, this restriction does not apply to the extent the purchase of bonds or
other evidences of indebtedness, the entry into repurchase agreements or
deposits with banks, including the Acquiring Fund's custodian, may be
considered loans.
<PAGE>56
4. The Acquired Fund may not purchase securities other than
Municipal Obligations and other investments permitted under its prospectus or
its statement of additional information. The Acquiring Fund does not have a
similar investment restriction.
5. The Acquired Fund may not purchase securities (other than U.S.
Government securities) of any issuer if, as a result of the purchase, more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer, except that up to 25% of the value of the Acquired
Fund's total assets may be invested without regard to this 5% limitation. The
Acquiring Fund does not have a similar investment restriction.
6. The Acquired Fund may not purchase more than 10% of the voting
securities of any one issuer, except that this limitation is not applicable to
the Fund's investments in U.S. Government securities, and up to 25% of the
Fund's assets may be invested without regard to this 10% limitation. The
Acquiring Fund does not have a similar investment restriction.
7. The Acquired Fund may not purchase securities on margin, except
that the Fund may obtain any short-term credits necessary for the clearance of
purchases and sales of securities. Similarly, the Acquiring Fund may not
purchase securities on margin.
8. The Acquired Fund may not make short sales of securities or
maintain a short position. Similarly, the Acquiring Fund may not make short
sales of securities.
9. The Acquired Fund may not purchase or sell real estate or real
estate limited partnership interests. Similarly, the Acquiring Fund may not
purchase or hold any real estate, except that it may invest in securities
secured by real estate or interests therein or issued by persons (other than
real estate investment trusts) which deal in real estate or interests therein.
10. The Acquired Fund may not purchase or sell commodities or
commodity contracts. The Acquiring Fund may not purchase or sell commodities
or commodity contracts, except that it may invest in or sell municipal bond
index futures contracts as described above.
11. The Acquired Fund may not act as underwriter of securities,
except that the Acquired Fund may acquire securities under circumstances in
which, if the securities were sold, the Fund could be deemed to be an
underwriter for purposes of the Securities Act of 1933, as amended.
Similarly, the Acquiring Fund may not underwrite the securities of other
issuers.
<PAGE>57
12. The Acquired Fund may not invest in oil, gas or other mineral
leases or explorations or development programs. The Acquiring Fund has a
similar investment restriction; however, it is an non-fundamental operating
policy.
13. The Acquired Fund may not write or sell puts, calls, straddles,
spreads or combinations of those transactions, except as permitted under the
Acquired Fund's investment objective and policies (as summarized above).
Similarly, the Acquiring Fund may not write or purchase put, call, straddle or
spread options.
Other Non-Fundamental Investment Restrictions
1. The Acquired Fund may not purchase any security if, as a result
(unless the security is acquired pursuant to a plan of reorganization or an
offer of exchange), the Acquired Fund would own any securities of an open-end
investment company or more than 3% of the total outstanding voting stock of
any closed-end investment company, or more than 5% of the value of the
Acquired Fund's total assets would be invested in securities of any one or
more closed-end investment companies. This is not a fundamental investment
restriction with respect to the Acquired Fund and may be changed by the
Acquired Fund's Board of Trustees at any time. The Acquiring Fund does not
have a similar investment restriction.
2. The Acquired Fund may not purchase a security if, as a result,
the Acquired Fund would then have more than 5% of its total assets invested in
securities of issuers (including predecessors) that have been in continuous
operation for fewer than three years except that in the case of private
activity bonds purchased, this limitation will be deemed to apply to the
entity supplying the revenues from which the issue is to be paid. This is not
a fundamental investment restriction with respect to the Acquired Fund and may
be changed by the Acquired Fund's Board of Trustees at any time. The
Acquiring Fund has a similar investment restriction.
3. The Acquired Fund may not make investments for the purpose of
exercising control of management. This is not a fundamental investment
restriction with respect to the Acquired Fund and may be changed by the
Acquired Fund's Board of Trustees at any time. The Acquiring Fund does not
have a similar investment restriction.
4. The Acquired Fund may not purchase or retain securities of any
issuer if any of the officers or Trustees of Smith Barney Investment Trust or
any officer or director of the Manager individually owns more than 1/2 of 1%
of the outstanding securities of the issuer and together they own beneficially
more than 5% of the securities. This is not a fundamental investment
restriction with respect to the Acquired Fund and may be changed by the
Acquired Fund's Board of Trustees at any time. The Acquiring Fund does not
have a similar investment restriction.
<PAGE>58
5. The Acquired Fund may not lend its portfolio securities. This
is not a fundamental investment restriction with respect to the Acquired Fund
and may be changed by the Acquired Fund's Board of Trustees at any time. The
Acquiring Fund does not have an express policy regarding the lending of its
portfolio securities.
INFORMATION ON SHAREHOLDERS' RIGHTS
General. Smith Barney Investment Trust and Smith Barney Muni Funds
are open-end, management investment companies registered under the 1940 Act,
which continuously offer to sell shares at their current net asset value. The
Acquiring Fund is a series of Smith Barney Muni Funds, which was organized on
August 14, 1985 under the laws of Massachusetts and is a business entity
commonly known as a "Massachusetts business trust." Smith Barney Muni Funds
is governed by its Declaration of Trust, By-Laws and Trustees. The Acquired
Fund is a series of Smith Barney Investment Trust, also a Massachusetts
business trust governed by its Master Trust Agreement, By-Laws, and Board of
Trustees. Each Fund is also governed by Massachusetts state and federal law.
The Acquired Fund has an unlimited number of authorized shares with a par
value of $.001 per share. The Trustees of Smith Barney Investment Trust have
authorized the issuance of four series of shares, each representing shares in
one of the four separate portfolios, and may authorize the issuance of
additional series of shares in the future. The beneficial interest in the
Acquiring Fund is divided into shares, all with a par value of $.001 per
share. The number of authorized shares of Smith Barney Muni Funds that may be
issued is unlimited. The Trustees of Smith Barney Muni Funds have authorized
the issuance of twenty series of shares, each representing shares in one of
twenty separate portfolios, and may authorize the issuance of additional
series of shares in the future. In both the Acquiring Fund and the Acquired
Fund, Class A shares, Class C shares and Class Y shares represent interests in
the assets of the Fund and have identical voting, dividend, liquidation and
other rights on the same terms and conditions except that expenses related to
the distribution of each class of shares are borne solely by each class and
each class of shares has exclusive voting rights with respect to provisions of
each Fund's Rule 12b-1 distribution plan which pertains to a particular class.
Trustees. The Master Trust Agreement of Smith Barney Investment
Trust provides that each Trustee shall serve as a Trustee of Smith Barney
Investment Trust during the lifetime of the trust and until its termination
(as provided in the Master Trust Agreement), his death, resignation or
removal. The Declaration of Trust of Smith Barney Muni Funds provides that
the term of office of each Trustee shall be from the time of his or her
election until the termination of the trust or until such Trustee sooner dies,
resigns or is removed. Any Trustee of the Smith Barney Investment Trust may
be removed by the vote of at least two-thirds of the number of Trustees prior
to such removal or by vote or written declaration of shareholders holding not
less than two-thirds of the shares of the trust then
<PAGE>59
outstanding. A Trustee of Smith Barney Muni Funds may be removed with cause
by written instrument, signed by at least two-thirds of the remaining
Trustees. Vacancies on the Boards of either Smith Barney Investment Trust or
Smith Barney Muni Funds may be filled by the respective Trustees remaining in
office. A meeting of shareholders will be required for the purpose of
electing additional Trustees whenever fewer than a majority of the Trustees
then in office were elected by shareholders.
Voting Rights. Neither the Acquired Fund nor the Acquiring Fund
holds a meeting of shareholders annually, and there normally is no meeting of
shareholders for the purpose of electing Trustees unless and until such time
as less than a majority of the Trustees holding office have been elected by
shareholders. A meeting of shareholders of the Acquiring Fund, for any
purpose, must be called upon the written request of shareholders holding at
least 25% of such Fund's outstanding shares. A meeting of shareholders of the
Acquired Fund may be called by the Trustees, who shall call such meeting for
the purpose of removing any Trustee upon written request of shareholders
holding not less than 10% of the shares then outstanding. On each matter
submitted to a vote of the shareholders of the Acquired Fund or the Acquiring
Fund, each shareholder is entitled to one vote for each whole share owned and
a proportionate, fractional vote for each fractional share outstanding in the
shareholder's name on the Fund's books. With respect to Smith Barney
Investment Trust, a majority of the votes cast on an action at a shareholder
meeting at which a quorum is present shall decide any questions except when a
different vote is required or permitted by any provision of the 1940 Act or
other applicable law or as may otherwise be set forth in the Acquired Fund's
organizational documents, or in cases where the vote is submitted to the
holders of one or more but not all classes, a majority of the votes cast of
the particular class affected by the matter shall decide such matter. With
respect to matters relating to Smith Barney Muni Funds requiring a majority
shareholder vote as described in the Declaration of Trust, a majority of
shares represented in person or by proxy and entitled to vote at a meeting of
shareholders at which a quorum is present shall decide such matter. In cases
where the vote is submitted to the holders of one or more but not all series
or classes, a majority of the outstanding shares of the particular series or
class affected by the matter shall decide such matter.
Liquidation or Termination. In the event of the liquidation or
termination of any of the portfolios of Smith Barney Muni Funds or of Smith
Barney Investment Trust, the shareholders of the respective Fund are entitled
to receive, when, and as declared by the Trustees, as the case may be, the
excess of the assets over the liabilities belonging to the liquidated or
terminated portfolio of Smith Barney Muni Funds or of Smith Barney Investment
Trust, as the case may be. The assets so distributed to shareholders of the
liquidated or terminated portfolio of Smith Barney Muni Funds or Smith Barney
Investment Trust will be distributed among the shareholders in proportion to
the number of shares of the particular class held by them and recorded on the
books of the liquidated or terminated
<PAGE>60
portfolio of Smith Barney Muni Funds or Smith Barney Investment Trust, as the
case may be.
Liability of Trustees. The Master Trust Agreement of Smith Barney
Investment Trust provides that the Acquired Fund shall indemnify each Trustee
and officer against liabilities in connection with the defense or disposition
of any action, suit or other proceeding. Under the Master Trust Agreement of
Smith Barney Investment Trust, a Trustee or officer will be personally liable
only if he did not act in good faith in the reasonable belief that his action
was in or not opposed to the best interest of the Fund, and for his or her own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. The Master Trust
Agreement further provides that Trustees and officers will be indemnified for
the expenses of litigation against them. Under the Declaration of Trust and
By-Laws of the Smith Barney Muni Funds, a Trustee will be personally liable
only for his or her own willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee. The Declaration of Trust of Smith Barney Muni Funds further provides
that Trustees and officers will be indemnified for the expenses of litigation
against them unless it is determined that the person did not act in good faith
in the reasonable belief that the person's actions were in or not opposed to
the best interest of the Smith Barney Muni Funds or the person's conduct is
determined to constitute willful misfeasance, bad faith, gross negligence or
reckless disregard of the person's duties.
Rights of Inspection. Shareholders of Smith Barney Muni Funds and
the Acquired Fund have the same inspection rights as are permitted
shareholders of a Massachusetts corporation under Massachusetts corporate law.
Currently, each shareholder of a Massachusetts corporation is permitted to
inspect the records, accounts and books of a corporation for any legitimate
business purpose.
Shareholder Liability. Under Massachusetts law, shareholders of
the Acquiring Fund and the Acquired Fund may, under certain circumstances, be
held personally liable for the obligations of each Fund. Smith Barney Muni
Funds' Declaration of Trust and Smith Barney Investment Trust's Master Trust
Agreement, however, disclaim shareholder liability for acts or obligations of
the Acquiring Fund or the Acquired Fund and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into
or executed by each Fund. Smith Barney Muni Fund's Declaration of Trust and
Smith Barney Investment Trust's Master Trust Agreement also provide for
indemnification out of the property of each Fund for all losses and expenses
of any shareholder held personally liable for the obligations of the Fund.
Shares of the Acquiring Fund issued to the shareholders of the Acquired Fund
in the Reorganization will be fully paid and nonassessable when issued,
transferable without restrictions and will have no preemptive rights.
<PAGE>61
The foregoing is only a summary of certain characteristics of the
operations of the Acquiring Fund and the Acquired Fund. The foregoing is not
a complete description of the documents cited. Shareholders should refer to
the provisions of the trust documents and state laws governing each Fund for a
more thorough description.
ADDITIONAL INFORMATION ABOUT
SMITH BARNEY INVESTMENT TRUST
AND
SMITH BARNEY MUNI FUNDS
Smith Barney Investment Trust. Information about the Acquired Fund
is included in its current Prospectus dated January 29, 1995, as supplemented
by Prospectus Supplements dated May 25, 1995, July 11, 1995, July 20, 1995 and
August 22, 1995 and in the Statement of Additional Information of Smith Barney
Investment Trust dated January 29, 1995, as supplemented on July 11, 1995,
August 22, 1995 and September 14, 1995, that have been filed with the SEC,
both of which are incorporated herein by reference. A copy of the Prospectus
and the Statement of Additional Information are available upon request and
without charge by writing to the Acquired Fund at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling (800) 224-7523.
Smith Barney Muni Funds. Information about the Acquiring Fund is
incorporated herein by reference from its current Prospectus dated July 31,
1995, as supplemented by a Prospectus Supplement dated October 2, 1995, a copy
of which accompanies this Prospectus/Proxy Statement, and the Statement of
Additional Information of Smith Barney Muni Funds dated July 31, 1995. A copy
of such Statement of Additional Information is available upon request and
without charge by writing to the Acquired Fund at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling (800) 224-7523.
Both Smith Barney Investment Trust and Smith Barney Muni Funds are
subject to the informational requirements of the Exchange Act and in
accordance therewith file reports and other information including proxy
material, reports and charter documents with the SEC. These materials can be
inspected and copies obtained at the Public Reference Facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the New York
Regional Office of the SEC at 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can also be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services, SEC,
Washington, D.C. 20549 at prescribed rates.
<PAGE>62
OTHER BUSINESS
The Trustees of Smith Barney Investment Trust do not intend to
present any other business at the Meeting. If, however, any other matters are
properly brought before the Meeting, the persons named in the accompanying
form of proxy will vote thereon in accordance with their judgment.
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of Smith Barney Investment
Trust to be used at the Special Meeting of Shareholders to be held at 9:30
a.m. on January 12, 1996, at 388 Greenwich Street, New York, New York 10013,
and at any adjournment or adjournments thereof. This Prospectus/Proxy
Statement, along with a Notice of the Meeting and a proxy card, is first being
mailed to shareholders of the Acquired Fund on or about November __, 1995.
Only shareholders of record as of the close of business on the Record Date
will be entitled to notice of, and to vote at, the Meeting or any adjournment
thereof. The holders of a majority of the shares of the Acquired Fund
outstanding at the close of business on the Record Date present in person or
represented by proxy will constitute a quorum for the Meeting. For purposes
of determining a quorum for transacting business at the Meeting, abstentions
and broker "non-votes" (that is, proxies from brokers or nominees indicating
that such persons have not received instructions from the beneficial owner or
other persons entitled to vote shares on a particular matter with respect to
which the brokers or nominees do not have discretionary power) will be treated
as shares that are present but which have not been voted. For this reason,
abstentions and broker non-votes will have the effect of a "no" vote for
purposes of obtaining the requisite approval of the Plan. If the enclosed
form of proxy is properly executed and returned in time to be voted at the
Meeting, the proxies named therein will vote the shares represented by the
proxy in accordance with the instructions marked thereon. Unmarked proxies
will be voted FOR approval of the proposed Reorganization and FOR approval of
any other matters deemed appropriate. A proxy may be revoked at any time on
or before the Meeting by written notice to the Secretary of the Acquired Fund,
Christina T. Sydor, Esq., 388 Greenwich Street, New York, New York 10013.
Unless revoked, all valid proxies will be voted in accordance with the
specifications thereon or, in the absence of such specifications, FOR approval
of the Plan and the Reorganization contemplated thereby.
Approval of the Plan will require the affirmative vote of a majority
of the total number of votes entitled to be cast thereon, as defined in the
1940 Act, of the outstanding shares of the Acquired Fund, which is the lesser
of: (1) 67% of the voting securities of the Acquired Fund present at the
Meeting, if the holders of more than 50% of the outstanding voting securities
of the Acquired Fund are present or represented by proxy, or (ii) more than
<PAGE>63
50% of the outstanding shares of the Acquired Fund. For purposes of voting
with respect to the Reorganization, the Class A, Class C and Class Y shares of
the Acquired Fund will vote together as a single class. Fractional shares are
entitled to proportional voting rights.
Proxy solicitations will be made primarily by mail, but proxy
solicitations also may be made by telephone, telegraph or personal interviews
conducted by officers and employees of Smith Barney and its affiliates and/or
by TSSG. In addition, Applied Mailing Systems, Inc., an affiliate of TSSG
("Applied Mailing"), or an agent of Applied Mailing, may call shareholders of
the Acquired Fund to ask if they would be willing to have their votes recorded
by telephone. The latter telephone voting procedure is designed to
authenticate the shareholder's identity by asking the shareholder to provide
his or her social security number (in the case of an individual) or taxpayer
identification number (in the case of an entity). The shareholder's telephone
vote will be recorded and a confirmation will be sent to the shareholder to
ensure that the vote has been taken in accordance with the shareholder's
instructions. Although a shareholder's vote may be taken by telephone, each
shareholder of the Acquired Fund will receive a copy of this Prospectus/Proxy
Statement and may vote by mail using the enclosed proxy card. Smith Barney
Investment Trust has been advised by Massachusetts counsel that this
telephonic voting system complies with Massachusetts law. The aggregate cost
of solicitation of the shareholders of the Acquired Fund is expected to be
approximately $_______. Expenses of the Reorganization, including the costs
of the proxy solicitation and the preparation of enclosures to the
Prospectus/Proxy Statement, reimbursement of expenses of forwarding
solicitation material to beneficial owners of shares of the Acquired Fund and
expenses incurred in connection with the preparation of this Prospectus/Proxy
Statement will be borne by Smith Barney.
In the event that a quorum necessary for a meeting of shareholders
of the Acquired Fund is not present or sufficient votes to approve the
Reorganization are not received by January 12, 1996, the persons named as
proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. In determining whether to adjourn the Meeting, the
following factors may be considered: the percentage of votes actually cast,
the percentage of negative votes actually cast, the nature of any further
solicitation and the information to be provided to shareholders with respect
to the reasons for the solicitation. Any such adjournment will require an
affirmative vote by the holders of a majority of the shares of the Acquired
Fund present in person or by proxy and entitled to vote at the Meeting. The
persons named as proxies will vote upon a decision to adjourn the Meeting.
The votes of the shareholders of the Acquiring Fund are not being
solicited by this Prospectus/Proxy Statement.
<PAGE>64
FINANCIAL STATEMENTS AND EXPERTS
The statement of assets and liabilities of the Acquiring Fund,
including the schedule of investments, as of March 31, 1995, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended
have been incorporated by reference into this Prospectus/Proxy Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent accountants,
given on the authority of such firm as experts in accounting and auditing.
The statement of assets and liabilities of the Acquired Fund, including the
schedule of investments, as of November 30, 1994, the related statement of
operations for the year then ended, the statements of changes in net assets
and financial highlights for the two-year period then ended and for the period
December 31, 1991 (commencement of operations) through November 30, 1992, have
been incorporated by reference into this Prospectus/Proxy Statement in
reliance upon the report of Coopers & Lybrand L.L.P., independent accountants,
and upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the
Acquiring Fund will be passed upon by Sullivan & Cromwell, 125 Broad Street,
New York, New York 10004. In rendering such opinion, Sullivan & Cromwell may
rely on an opinion of Ropes & Gray as to certain matters under Massachusetts
law.
THE BOARD OF TRUSTEES OF SMITH BARNEY INVESTMENT TRUST, INCLUDING
THE INDEPENDENT TRUSTEES, UNANIMOUSLY RECOMMENDS APPROVAL OF THE PLAN, AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR
OF APPROVAL OF THE PLAN.
<PAGE>65
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made
as of this day of November, 1995, by and between Smith Barney Investment
Trust, a Massachusetts business trust with its principal place of business at
388 Greenwich Street, New York, New York 10013, on behalf of its Smith Barney
Limited Maturity Municipals Fund (the "Acquired Fund") and Smith Barney Muni
Funds, a Massachusetts business trust with its principal place of business at
388 Greenwich Street, New York, New York 10013, on behalf of its Limited Term
Portfolio (the "Acquiring Fund").
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of
the United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of all or
substantially all of the assets of the Acquired Fund in exchange for Class A,
Class C and Class Y shares of beneficial interest of the Acquiring Fund
(collectively, the "Acquiring Fund Shares" and each, an "Acquiring Fund
Share") and the assumption by Smith Barney Muni Funds on behalf of the
Acquiring Fund of scheduled liabilities of the Acquired Fund and the
distribution, after the Closing Date herein referred to, of Acquiring Fund
Shares to the shareholders of the Acquired Fund in liquidation of the Acquired
Fund and the subsequent termination of the Acquired Fund, all upon the terms
and conditions hereinafter set forth in this Agreement.
WHEREAS, Smith Barney Investment Trust and Smith Barney Muni Funds
are registered investment companies of the management type and Smith Barney
Investment Trust on behalf of the Acquired Fund owns securities that generally
are assets of the character in which the Acquiring Fund is permitted to
invest;
WHEREAS, Smith Barney Muni Funds is authorized to issue shares of
beneficial interest in respect of its sub-trusts and Smith Barney Investment
Trust is authorized to issue shares of beneficial interest in respect of its
sub-trusts;
WHEREAS, the Board of Trustees of Smith Barney Investment Trust has
determined that the exchange of all or substantially all of the assets and
scheduled liabilities of the Acquired Fund for Acquiring Fund Shares and the
assumption of such liabilities by Smith Barney Muni Funds on behalf of the
Acquiring Fund is in the best interests of the Acquired Fund's shareholders
and that the interests of the existing shareholders of the Acquired Fund would
not be diluted as a result of this transaction;
<PAGE>66
WHEREAS, the Board of Trustees of Smith Barney Muni Funds has
determined that the exchange of all or substantially all the assets and
scheduled liabilities of the Acquired Fund for Acquiring Fund Shares and the
assumption of such liabilities by Smith Barney Muni Funds on behalf of the
Acquiring Fund is in the best interests of the Acquiring Fund's shareholders
and that the interests of the existing shareholders of the Acquiring Fund
would not be diluted as a result of this transaction.
NOW, THEREFORE, in consideration of the premises and of the
covenants and agreements hereinafter set forth, the parties hereto covenant
and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ACQUIRING FUND
SHARES AND ASSUMPTION OF SCHEDULED LIABILITIES OF THE ACQUIRED FUND AND
LIQUIDATION AND TERMINATION OF THE ACQUIRED FUND
1.1. Subject to the terms and conditions herein set forth and on
the basis of the representations and warranties contained herein, Smith Barney
Investment Trust on behalf of the Acquired Fund agrees to transfer the
Acquired Fund's assets as set forth in paragraph 1.2 to Smith Barney Muni
Funds on behalf of the Acquiring Fund, and Smith Barney Muni Funds on behalf
of the Acquiring Fund agrees in exchange therefor: (i) to deliver to Smith
Barney Investment Trust on behalf of the Acquired Fund the number of Class A
Acquiring Fund Shares, including fractional Class A Acquiring Fund Shares,
determined by dividing the value of the Acquired Fund's net assets
attributable to its Class A shares, computed in the manner and as of the time
and date set forth in paragraph 2.1, by the net asset value of one Class A
Acquiring Fund Share, computed in the manner and as of the time and date set
forth in paragraph 2.2; (ii) to deliver to the Acquired Fund the number of
Class C Acquiring Fund Shares, including fractional Class C Acquiring Fund
Shares, determined by dividing the value of the Acquired Fund's net assets
attributable to its Class C shares, computed in the manner and as of the time
and date set forth in paragraph 2.1, by the net asset value of one Class C
Acquiring Fund Share, computed in the manner and as of the time and date set
forth in paragraph 2.2; (iii) to deliver to the Acquired Fund the number of
Class Y Acquiring Fund Shares, including fractional Class Y Acquiring Fund
Shares, determined by dividing the value of the Acquired Fund's net assets
attributable to its Class Y shares, computed in the manner and as of the time
and date set forth in paragraph 2.1, by the net asset value of one Class Y
Acquiring Fund Share, computed in the manner and as of the time and date set
forth in paragraph 2.2; and (iv) to assume scheduled liabilities of the
Acquired Fund, as set forth in paragraph 1.3. Such transactions shall take
place at the closing provided for in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Acquired Fund to be acquired by Smith
Barney Muni Funds on behalf of the Acquiring Fund shall consist of all or
substantially all property, including, without limitation, all cash,
securities and dividends or interest receivables which
<PAGE>67
are owned by the Acquired Fund and any deferred or prepaid expenses shown as
an asset on the books of the Acquired Fund on the closing date provided in
paragraph 3.1 (the "Closing Date").
(b) The Acquired Fund has provided the Acquiring Fund with a
list of all of the Acquired Fund's assets as of the date of execution of this
Agreement. The Acquired Fund reserves the right to sell any of these
securities but will not, without the prior approval of the Acquiring Fund,
acquire any additional securities other than securities of the type in which
the Acquiring Fund is permitted to invest. The Acquiring Fund will, within a
reasonable time prior to the Closing Date, furnish the Acquired Fund with a
statement of the Acquiring Fund's investment objectives, policies and
restrictions and a list of the securities, if any, on the Acquired Fund's list
referred to in the first sentence of this paragraph which do not conform to
the Acquiring Fund's investment objectives, policies and restrictions. In the
event that the Acquired Fund holds any investments which the Acquiring Fund
may not hold, the Acquired Fund will dispose of such securities prior to the
Closing Date. In addition, if it is determined that the portfolios of the
Acquired Fund and the Acquiring Fund, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Acquired Fund, if
requested by the Acquiring Fund, will dispose of and/or reinvest a sufficient
amount of such investments as may be necessary to avoid violating such
limitations as of the Closing Date.
1.3. The Acquired Fund will endeavor to discharge all the Acquired
Fund's known liabilities and obligations prior to the Closing Date. The
Acquiring Fund shall assume all liabilities, expenses, costs, charges and
reserves reflected on an unaudited Statement of Assets and Liabilities of the
Acquired Fund prepared by Smith Barney Mutual Fund Management Inc. (the
"Manager"), as investment manager of the Acquired Fund, as of the Valuation
Date (as defined in paragraph 2.1), in accordance with generally accepted
accounting principles consistently applied from the prior audited period.
Smith Barney Muni Funds on behalf of the Acquiring Fund shall assume only
those liabilities of the Acquired Fund reflected in that unaudited Statement
of Assets and Liabilities and shall not assume any other liabilities, whether
absolute or contingent, not reflected thereon.
1.4. As provided in paragraph 3.3, as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), the Acquired Fund
will liquidate and distribute pro rata to the Acquired Fund's shareholders of
record determined as of the close of business on the Closing Date (the
"Acquired Fund Shareholders"), the Acquiring Fund Shares it receives pursuant
to paragraph 1.1. Shareholders of Class A, Class C and Class Y of the
Acquired Fund shall receive Class A, Class C and Class Y shares, respectively,
of the Acquiring Fund. Such liquidation and distribution will be accomplished
by the transfer of the Acquiring Fund Shares then credited to the account of
the Acquired Fund on the books of the Acquiring Fund to open accounts on the
share records of the Acquiring Fund in the name of the Acquired Fund
Shareholders and representing the respective pro rata number of the
<PAGE>68
Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Acquired Fund will simultaneously be cancelled on the books of
the Acquired Fund, although any outstanding share certificates representing
interests in the Acquired Fund will represent a number of Acquiring Fund
Shares after the Closing Date as determined in accordance with paragraph 1.1.
The Acquiring Fund shall not issue certificates representing the Acquiring
Fund Shares in connection with such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown on the books
of the Acquiring Fund's transfer agent. Acquiring Fund Shares will be issued
in the manner described in the Acquiring Fund's current prospectus and
statement of additional information.
1.6. Any transfer taxes payable upon issuance of the Acquiring Fund
Shares in a name other than the registered holder of the Acquired Fund Shares
on the books of the Acquired Fund as of that time shall, as a condition of
such issuance and transfer, be paid by the person to whom such Acquiring Fund
Shares are to be issued and transferred.
1.7. Any reporting responsibility of the Acquired Fund is and shall
remain the responsibility of the Acquired Fund up to and including the Closing
Date and such later date on which the Acquired Fund is terminated.
1.8. The Acquired Fund shall, following the Closing Date and the
making of all distributions pursuant to paragraph 1.4, be terminated under the
laws of the Commonwealth of Massachusetts and in accordance with its governing
documents.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") on
the Closing Date (such time and date being hereinafter called the "Valuation
Date"), using the valuation procedures set forth in the Acquiring Fund's then
current prospectus or statement of additional information.
2.2. The net asset value of Acquiring Fund Shares shall be the net
asset value per share computed as of the close of regular trading on the NYSE
on the Valuation Date, using the valuation procedures set forth in the
Acquiring Fund's then current prospectus or statement of additional
information.
2.3. All computations of value shall be made by the Manager in
accordance with its regular practice as pricing agent for the Acquired Fund
and the Acquiring Fund, respectively.
<PAGE>69
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be January 19, 1996, or such later date
as the parties may agree to in writing. All acts taking place at the Closing
shall be deemed to take place simultaneously as of the close of business on
the Closing Date unless otherwise provided. The Closing shall be held as of
5:00 p.m. at the offices of Smith Barney Inc., 388 Greenwich Street, New York,
New York 10013, or at such other time and/or place as the parties may agree.
3.2. In the event that on the Valuation Date (a) the NYSE or
another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereon shall be
restricted or (b) trading or the reporting of trading on the NYSE or elsewhere
shall be disrupted so that accurate appraisal of the value of the net assets
of the Acquiring Fund or the Acquired Fund is impracticable, the Closing Date
shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
3.3. The Acquired Fund shall deliver at the Closing a list of the
names and addresses of the Acquired Fund's Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing, certified on behalf of the Acquired Fund by
the Chairman of the Board or President of the Acquired Fund. The Acquiring
Fund shall issue and deliver a confirmation evidencing the Acquiring Fund
Shares to be credited to the Acquired Fund's account on the Closing Date to
the Secretary of the Acquired Fund, or provide evidence satisfactory to the
Acquired Fund that such Acquiring Fund Shares have been credited to the
Acquired Fund's account on the books of the Acquiring Fund. At the Closing,
each party shall deliver to the other such bills of sale, checks, assignments,
share certificates, if any, receipts or other documents as such other party or
its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. Smith Barney Investment Trust and the Acquired Fund represent
and warrant to Smith Barney Muni Funds and the Acquiring Fund as follows:
(a) The Acquired Fund is a portfolio of Smith Barney Investment
Trust, a business trust duly organized and validly existing under the laws of
the Commonwealth of Massachusetts;
(b) Smith Barney Investment Trust is a registered investment
company classified as a management company of the open-end type, and its
registration with the Securities and Exchange Commission (the "Commission") as
an investment company under the Investment Company Act of 1940, as amended
(the "1940 Act) is in full force and effect;
<PAGE>70
(c) Smith Barney Investment Trust is not, and the execution,
delivery and performance of this Agreement will not result, in a material
violation of its Master Trust Agreement or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking with respect to
the Acquired Fund to which the trust or the Acquired Fund is a party or by
which it or the Acquired Fund is bound;
(d) Smith Barney Investment Trust and the Acquired Fund have no
material contracts or other commitments (other than this Agreement) which will
be terminated with liability to the Acquired Fund prior to the Closing Date;
(e) No litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to Smith
Barney Investment Trust's knowledge threatened against the Acquired Fund or
Smith Barney Investment Trust with respect to the Acquired Fund or any of the
Acquired Fund's properties or assets (other than that previously disclosed to
the other party to the Agreement) which, if adversely determined, would
materially and adversely affect its financial condition or the conduct of its
business. Smith Barney Investment Trust and the Acquired Fund know of no
facts which might form the basis for the institution of such proceedings and
neither Smith Barney Investment Trust nor the Acquired Fund is a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the Acquired Fund
for the two years ended November 30, 1994 and for the period from December 31,
1991 (commencement of operations) through November 30, 1992 have been audited
by Coopers & Lybrand L.L.P., independent accountants, and are in accordance
with generally accepted accounting principles consistently applied, and such
statements (copies of which have been furnished to the Acquiring Fund) fairly
reflect the financial condition of the Acquired Fund as of such dates, and
there are no known contingent liabilities of the Acquired Fund as of such
dates not disclosed therein;
(g) The Acquired Fund will file its final federal and other tax
returns for the period ending on the Closing Date in accordance with the Code.
At the Closing Date, all federal and other tax returns and reports of the
Acquired Fund required by law then to have been filed prior to the Closing
Date shall have been filed, and all federal and other taxes shown as due on
such returns shall have been paid so far as due, or provision shall have been
made for the payment thereof and, to the best of Smith Barney Investment
Trust's knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
<PAGE>71
(h) For the most recent fiscal year of its operation, the Acquired
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company;
(i) All issued and outstanding shares of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable. All of the issued and outstanding shares of the
Acquired Fund will, at the time of Closing, be held by the persons and in the
amounts set forth in the records of the transfer agent as provided in
paragraph 3.3. The Acquired Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any shares of the
Acquired Fund, nor is there outstanding any security convertible into any
shares of the Acquired Fund;
(j) At the Closing Date, the Acquired Fund will have good and
marketable title to its assets to be transferred to the Acquiring Fund
pursuant to paragraph 1.2 and full right, power and authority to sell, assign,
transfer and deliver such assets hereunder and, upon delivery and payment for
such assets, the Acquiring Fund will acquire good and marketable title
thereto, subject to no restrictions on the full transfer thereof, including
such restrictions as might arise under the Securities Act of 1933, as amended
(the "1933 Act"), other than as disclosed to the Acquiring Fund;
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action on the part of the Board of
Trustees of Smith Barney Investment Trust on behalf of the Acquired Fund, and
subject to the approval of the Acquired Fund's shareholders, this Agreement,
assuming due authorization, execution and delivery by Smith Barney Muni Funds
on behalf of the Acquiring Fund, will constitute a valid and binding
obligation of Smith Barney Investment Trust on behalf of the Acquired Fund,
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting creditors' rights and to general equity principles;
(l) The information to be furnished by Smith Barney Investment
Trust or the Acquired Fund for use in no-action letters, applications for
exemptive orders, registration statements, proxy materials and other documents
which may be necessary in connection with the transactions contemplated hereby
shall be accurate and complete in all material respects and shall comply in
all material respects with federal securities and other laws and regulations
thereunder applicable thereto; and
(m) The proxy statement of Smith Barney Investment Trust in respect
of the Acquired Fund (the "Proxy Statement") to be included in the
Registration Statement referred to in paragraph 5.7 (other than information
therein that relates to Smith Barney Muni Funds or the Acquiring Fund) will,
on the effective date of the Registration Statement and on the Closing Date,
not contain any untrue statement of a material fact or omit to state a
material
<PAGE>72
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which such statements were made,
not misleading.
4.2. Smith Barney Muni Funds and the Acquiring Fund represent and
warrant to Smith Barney Investment Trust and the Acquired Fund as follows:
(a) The Acquiring Fund is a portfolio of Smith Barney Muni Funds,
which is a business trust duly organized and validly existing under the laws
of the Commonwealth of Massachusetts;
(b) Smith Barney Muni Funds is a registered investment company
classified as a management company of the open-end type and its registration
with the Commission as an investment company under the 1940 Act is in full
force and effect;
(c) The current prospectus of the Acquiring Fund and statement of
additional information of Smith Barney Muni Funds conform in all material
respects to the applicable requirements of the 1933 Act and the 1940 Act and
the rules and regulations of the Commission thereunder and do not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not materially
misleading;
(d) At the Closing Date, Smith Barney Muni Funds will have good and
marketable title to the Acquiring Fund's assets;
(e) Smith Barney Muni Funds is not, and the execution, delivery and
performance of this Agreement on behalf of the Acquiring Fund will not result,
in a material violation of its Declaration of Trust or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking with
respect to the Acquiring Fund to which Smith Barney Muni Funds or the
Acquiring Fund is a party or by which it is bound;
(f) No litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against the Acquiring Fund or Smith Barney Muni Funds with respect to the
Acquiring Fund or any of the Acquiring Fund's properties or assets. Smith
Barney Muni Funds and the Acquiring Fund know of no facts which might form the
basis for the institution of such proceedings and neither Smith Barney Muni
Funds nor the Acquiring Fund is a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially
and adversely affects the Acquiring Fund's business or Smith Barney Muni
Funds' ability on behalf of the Acquiring Fund to consummate the transactions
contemplated herein;
(g) The Statements of Assets and Liabilities of the Acquiring Fund
for the six fiscal years ended March 31, 1995 and for the period November 28,
1988 (commencement
<PAGE>73
of operations) to March 31, 1989, have been audited by KPMG Peat Marwick LLP,
independent accountants and are in accordance with generally accepted
accounting principles consistently applied; and such statements (copies of
which have been furnished to the Acquired Fund) fairly reflect the financial
condition of the Acquiring Fund as of such dates, and there are no known
contingent liabilities of the Acquiring Fund as of such dates not disclosed
therein;
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to have been filed by such
date shall have been filed, and all federal and other taxes shown as due on
said returns and reports shall have been paid so far as due, or provision
shall have been made for the payment thereof and, to the best of the Acquiring
Fund's knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
(i) For the most recent fiscal year of its operation, the Acquiring
Fund has met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company and the Acquiring Fund intends
to do so in the future;
(j) At the date hereof, all issued and outstanding shares of the
Acquiring Fund are, and at the Closing Date will be, duly and validly issued
and outstanding, fully paid and non-assessable. The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for or
purchase any shares of the Acquiring Fund, nor is there outstanding any
security convertible into shares of the Acquiring Fund;
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action, if any, on the part of Smith
Barney Muni Funds' Board of Trustees, and this Agreement, assuming due
authorization, execution and delivery by Smith Barney Investment Trust on
behalf of the Acquired Fund, constitutes a valid and binding obligation of
Smith Barney Muni Funds on behalf of the Acquiring Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(l) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to
the terms of this Agreement, will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly issued
Acquiring Fund Shares, and will be fully paid and non-assessable;
(m) The information to be furnished by the Acquiring Fund for use
in no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions
<PAGE>74
contemplated hereby shall be accurate and complete in all material respects
and shall comply in all material respects with federal securities and other
laws and regulations applicable thereto;
(n) The Proxy Statement to be included in the Registration
Statement (only insofar as it relates to Smith Barney Muni Funds and the
Acquiring Fund) will, on the effective date of the Registration Statement and
on the Closing Date, not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which such
statements were made, not misleading; and
(o) Smith Barney Muni Funds, on behalf of the Acquiring Fund,
agrees to use all reasonable efforts to obtain the approvals and
authorizations required by the 1933 Act, the 1940 Act and such of the state
Blue Sky or securities laws as it may deem appropriate in order to continue
the Acquiring Fund's operations after the Closing Date.
5. COVENANTS OF THE ACQUIRING FUND, SMITH BARNEY MUNI FUNDS, THE ACQUIRED
FUND AND SMITH BARNEY INVESTMENT TRUST
5.1. Smith Barney Investment Trust on behalf of the Acquired Fund
and Smith Barney Muni Funds on behalf of the Acquiring Fund each will operate
its business in the ordinary course between the date hereof and the Closing
Date. It is understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions and any other
dividends and distributions deemed advisable, in each case payable either in
cash or in additional shares.
5.2. Smith Barney Investment Trust on behalf of the Acquired Fund
will call a meeting of the Acquired Fund's shareholders to consider and act
upon this Agreement and to take all other action necessary to obtain approval
of the transactions contemplated herein.
5.3. Smith Barney Investment Trust and the Acquired Fund covenant
that the Acquiring Fund Shares to be issued hereunder are not being acquired
for the purpose of making any distribution thereof other than in accordance
with the terms of this Agreement.
5.4. Smith Barney Investment Trust and the Acquired Fund will
assist the Acquiring Fund in obtaining such information as the Acquiring Fund
reasonably requests concerning the beneficial ownership of the Acquired Fund's
shares.
5.5. Subject to the provisions of this Agreement, Smith Barney
Investment Trust on behalf of the Acquired Fund and Smith Barney Muni Funds on
behalf of the Acquiring Fund, each will take, or cause to be taken, all
action, and do or cause to be done,
<PAGE>75
all things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.6. As promptly as practicable, but in any case within sixty days
after the Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in
such form as is reasonably satisfactory to the Acquiring Fund, a statement of
the earnings and profits of the Acquired Fund for federal income tax purposes
which will be carried over to the Acquiring Fund as a result of Section 381 of
the Code and which will be certified by the Chairman of the Board or President
and the Treasurer of Smith Barney Investment Trust.
5.7. The Acquired Fund will provide the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus (the
"Prospectus") which will include the Proxy Statement, referred to in paragraph
4.1(m), all to be included in a Registration Statement on Form N-14 of the
Acquiring Fund (the "Registration Statement"), in compliance with the 1933
Act, the Securities Exchange Act of 1934 (the "1934 Act") and the 1940 Act in
connection with the meeting of the Acquired Fund's shareholders to consider
approval of this Agreement and the transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH BARNEY INVESTMENT TRUST ON
BEHALF OF THE ACQUIRED FUND
The obligations of Smith Barney Investment Trust in respect of the
Acquired Fund to consummate the transactions provided for herein shall be
subject, at its election, to the performance by Smith Barney Muni Funds and
the Acquiring Fund of all of the obligations to be performed by them hereunder
on or before the Closing Date and, in addition thereto, the following further
conditions:
6.1. All representations and warranties of Smith Barney Muni Funds
and the Acquiring Fund contained in this Agreement shall be true and correct
in all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the Closing
Date with the same force and effect as if made on and as of the Closing Date;
6.2. Smith Barney Muni Funds on behalf of the Acquiring Fund shall
have delivered to Smith Barney Investment Trust on behalf of the Acquired Fund
a certificate executed in its name by its Chairman of the Board, President or
Vice President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to the Acquired Fund and dated as of the Closing Date, to the
effect that the representations and warranties of Smith Barney Muni Funds and
the Acquiring Fund made in this Agreement are true and correct in all material
respects at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement; and
<PAGE>76
6.3. Smith Barney Investment Trust on behalf of the Acquired Fund
shall have received on the Closing Date a favorable opinion from Sullivan &
Cromwell, counsel to the Acquiring Fund, dated as of the Closing Date, in a
form reasonably satisfactory to Christina T. Sydor, Esq., Secretary of the
Acquired Fund, covering the following points:
That (a) Smith Barney Muni Funds is a business trust duly organized and
validly existing under the laws of the Commonwealth of Massachusetts; (b)
Smith Barney Muni Funds is an open-end management investment company
registered under the 1940 Act; (c) this Agreement, the Reorganization
provided for hereunder and the execution of this Agreement have been duly
authorized and approved by all requisite action of Smith Barney Muni
Funds, and this Agreement has been duly executed and delivered by Smith
Barney Muni Funds and, assuming due authorization by Smith Barney
Investment Trust on behalf of the Acquired Fund, is a valid and binding
obligation of Smith Barney Muni Funds with respect to the Acquiring Fund,
enforceable in accordance with its terms against the assets of the
Acquiring Fund, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles; and (d) the Acquiring Fund Shares to be issued to the
Acquired Fund for distribution to its shareholders pursuant to this
Agreement have been duly authorized and, when issued in accordance with
this Agreement, will be validly issued and fully paid and non-assessable.
Such opinion may state that it is solely for the benefit of the
Acquired Fund, Smith Barney Investment Trust, its Trustees and its officers.
Such counsel may rely, as to matters governed by the laws of the Commonwealth
of Massachusetts, on an opinion of Massachusetts counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH BARNEY MUNI FUNDS IN RESPECT
OF THE ACQUIRING FUND
The obligations of Smith Barney Muni Funds on behalf of the
Acquiring Fund to complete the transactions provided for herein shall be
subject, at its election, to the performance by Smith Barney Investment Trust
and the Acquired Fund of all the obligations to be performed by them hereunder
on or before the Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of Smith Barney Investment
Trust and the Acquired Fund contained in this Agreement shall be true and
correct in all material respects as of the date hereof and, except as they may
be affected by the transactions contemplated by this Agreement, as of the
Closing Date with the same force and effect as if made on and as of the
Closing Date;
<PAGE>77
7.2. Smith Barney Investment Trust on behalf of the Acquired Fund
shall have delivered to Smith Barney Muni Funds on behalf of the Acquiring
Fund a statement of the Acquired Fund's assets and liabilities, together with
a list of the Acquired Fund's portfolio securities showing the tax basis of
such securities by lot and the holding periods of such securities, as of the
Closing Date, certified by the Treasurer or Assistant Treasurer of Smith
Barney Investment Trust;
7.3. Smith Barney Investment Trust on behalf of the Acquired Fund
shall have delivered to Smith Barney Muni Funds on behalf of the Acquiring
Fund on the Closing Date a certificate executed in its name by its Chairman of
the Board, President or Vice President and its Treasurer or Assistant
Treasurer, in form and substance satisfactory to the Acquiring Fund and dated
as of the Closing Date, to the effect that the representations and warranties
of Smith Barney Investment Trust and the Acquired Fund made in this Agreement
are true and correct in all material respects at and as of the Closing Date,
except as they may be affected by the transactions contemplated by this
Agreement; and
7.4. Smith Barney Investment Trust on behalf of the Acquiring Fund
shall have received on the Closing Date a favorable opinion of Willkie Farr &
Gallagher, counsel to the Acquired Fund, in a form satisfactory to Christina
T. Sydor, Esq., Secretary of the Acquiring Fund, covering the following
points:
That (a) the Acquired Fund is a portfolio of Smith Barney Investment
Trust, a voluntary association of the type commonly referred to as a
Massachusetts business trust duly organized and validly existing under
the laws of the Commonwealth of Massachusetts pursuant to its Master
Trust Agreement; (b) Smith Barney Investment Trust is an open-end
management investment company registered under the 1940 Act; and (c) this
Agreement, the Reorganization provided for hereunder and the execution of
this Agreement have been duly authorized and approved by all requisite
action of Smith Barney Investment Trust on behalf of the Acquired Fund,
and this Agreement has been duly executed and delivered by Smith Barney
Investment Trust on behalf of the Acquired Fund and, assuming due
authorization, execution and delivery by Smith Barney Muni Funds on
behalf of the Acquiring Fund, is a valid and binding obligation of Smith
Barney Investment Trust on behalf of the Acquired Fund, enforceable in
accordance with its terms against the assets of the Acquired Fund,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
Such opinion may state that it is solely for the benefit of the
Acquiring Fund, Smith Barney Muni Funds, its Trustees and its officers. Such
counsel may rely, as to matters governed by the laws of the Commonwealth of
Massachusetts, on an opinion of Massachusetts counsel.
<PAGE>78
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF SMITH BARNEY INCOME TRUST,
THE ACQUIRED FUND, SMITH BARNEY MUNI FUNDS AND THE ACQUIRING FUND
If any of the conditions set forth below do not exist on or before
the Closing Date with respect to Smith Barney Muni Funds on behalf of the
Acquiring Fund or Smith Barney Investment Trust on behalf of the Acquired
Fund, the other party to this Agreement shall, at its option, not be required
to consummate the transactions contemplated by this Agreement:
8.1. This Agreement and the transactions contemplated herein shall
have been approved by the requisite vote of the holders of the outstanding
shares of the Acquired Fund in accordance with the provisions of Smith Barney
Investment Trust's Master Trust Agreement and By-Laws and certified copies of
the votes evidencing such approval shall have been delivered to the Acquiring
Fund. Notwithstanding anything herein to the contrary, neither Smith Barney
Investment Trust on behalf of the Acquired Fund nor Smith Barney Muni Funds on
behalf of the Acquiring Fund may waive the conditions set forth in this
paragraph 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall
be pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders
and permits of federal, state and local regulatory authorities (including
those of the Commission and of state Blue Sky and securities authorities,
including "no-action" positions of and exemptive orders from such federal and
state authorities) deemed necessary by the Acquiring Fund or the Acquired Fund
to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain
any such consent, order or permit would not involve a risk of a material
adverse effect on the assets or properties of the Acquiring Fund or the
Acquired Fund, provided that either party hereto may for itself waive any of
such conditions;
8.4. The Registration Statement shall have become effective under
the 1933 Act and no stop orders suspending the effectiveness thereof shall
have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or be
pending, threatened or contemplated under the 1933 Act;
8.5. Smith Barney Investment Trust shall have declared and paid a
dividend or dividends on the outstanding shares of the Acquired Fund which,
together with all previous such dividends, shall have the effect of
distributing to shareholders of the Acquired
<PAGE>79
Fund all of the investment company taxable income of the Acquired Fund for all
taxable years ending on or prior to the Closing Date. The dividend declared
and paid by Smith Barney Investment Trust in respect of the Acquired Fund
shall also include all of such fund's net capital gain realized in all taxable
years ending on or prior to the Closing Date (after reduction for any capital
loss carryforward);
8.6. The parties shall have received a favorable opinion of Willkie
Farr & Gallagher, addressed to Smith Barney Investment Trust in respect of the
Acquired Fund and Smith Barney Muni Funds in respect of the Acquiring Fund and
satisfactory to Christina T. Sydor, Esq., as Secretary of each of the Funds,
substantially to the effect that for federal income tax purposes:
(a) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for Acquiring Fund Shares and the assumption by Smith
Barney Investment Trust on behalf of the Acquiring Fund of scheduled
liabilities of the Acquired Fund will constitute a "reorganization"
within the meaning of Section 368(a)(1)(C) of the Code, and the Acquiring
Fund and the Acquired Fund are each a "party to a reorganization" within
the meaning of Section 368(b) of the Code; (b) no gain or loss will be
recognized by the Acquiring Fund upon the receipt of the assets of the
Acquired Fund in exchange for the Acquiring Fund Shares and the
assumption by Smith Barney Investment Trust on behalf of the Acquiring
Fund of scheduled liabilities of the Acquired Fund; (c) no gain or loss
will be recognized by the Acquired Fund upon the transfer of the Acquired
Fund's assets to the Acquiring Fund in exchange for Acquiring Fund Shares
and the assumption by Smith Barney Investment Trust on behalf of the
Acquiring Fund of scheduled liabilities of the Acquired Fund or upon the
distribution (whether actual or constructive) of Acquiring Fund Shares to
Acquired Fund's shareholders; (d) no gain or loss will be recognized by
shareholders of the Acquired Fund upon the exchange of their Acquired
Fund shares for the Acquiring Fund Shares; (e) the aggregate tax basis
for Acquiring Fund Shares received by each of the Acquired Fund's
shareholders pursuant to the Reorganization will be the same as the
aggregate tax basis of the Acquired Fund shares held by such shareholder
immediately prior to the Reorganization, and the holding period of
Acquiring Fund Shares to be received by each Acquired Fund shareholder
will include the period during which the Acquired Fund shares exchanged
therefor were held by such shareholder (provided that the Acquired Fund
shares were held as capital assets on the date of the Reorganization);
and (f) the tax basis to the Acquiring Fund of the Acquired Fund's assets
acquired by the Acquiring Fund will be the same as the tax basis of such
assets to the Acquired Fund immediately prior to the Reorganization, and
the holding period of the assets of the Acquired Fund in the hands of the
Acquiring Fund will include the period during which those assets were
held by the Acquired Fund.
<PAGE>80
Notwithstanding anything herein to the contrary, neither Smith
Barney Investment Trust on behalf of the Acquired Fund nor Smith Barney Muni
Funds on behalf of the Acquiring Fund may waive the conditions set forth in
this paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1. Smith Barney Investment Trust on behalf of the Acquired Fund
represents and warrants to Smith Barney Muni Funds on behalf of the Acquiring
Fund, and Smith Barney Muni Funds on behalf of the Acquiring Fund represents
and warrants to Smith Barney Investment Trust on behalf of the Acquired Fund,
that there are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
9.2. (a) Except as may be otherwise provided herein, Smith Barney
Inc., the distributor of the Acquiring Fund and the Acquired Fund, shall each
be liable for the expenses incurred in connection with entering into and
carrying out the provisions of this Agreement, including the expenses of: (i)
counsel and independent accountants associated with the Reorganization; (ii)
printing and mailing the Prospectus/Proxy Statement and soliciting proxies in
connection with the meeting of shareholders of the Acquired Fund referred to
in paragraph 5.2 hereof; (iii) any special pricing fees associated with the
valuation of the Acquired Fund's or the Acquiring Fund's portfolio on the
Closing Date; (iv) expenses associated with preparing this Agreement and
preparing and filing the Registration Statement under the 1933 Act covering
the Acquiring Fund Shares to be issued in the Reorganization; and (v)
registration or qualification fees and expenses of preparing and filing such
forms, if any, necessary under applicable state securities laws to qualify the
Acquiring Fund Shares to be issued in connection with the Reorganization. The
Acquired Fund shall be liable for: (x) all fees and expenses related to the
liquidation and termination of the Acquired Fund; and (y) fees and expenses of
the Acquired Fund's custodian and transfer agent incurred in connection with
the Reorganization. The Acquiring Fund shall be liable for any fees and
expenses of the Acquiring Fund's custodian and transfer agent incurred in
connection with the Reorganization.
(b) Consistent with the provisions of paragraph 1.3, the Acquired
Fund, prior to the Closing, shall pay for or include in the unaudited
Statement of Assets and Liabilities prepared pursuant to paragraph 1.3 all of
its known and reasonably estimated expenses associated with the transactions
contemplated by this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that no party has made any
representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
<PAGE>81
10.2. The representations, warranties and covenants contained in
this Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any time prior to the
Closing Date by: (i) the mutual agreement of Smith Barney Muni Funds on
behalf of the Acquiring Fund and Smith Barney Investment Trust on behalf of
the Acquired Fund; (ii) Smith Barney Muni Funds on behalf of the Acquiring
Fund in the event that Smith Barney Investment Trust or the Acquired Fund
shall, or Smith Barney Investment Trust on behalf of the Acquired Fund in the
event that Smith Barney Muni Funds or the Acquiring Fund shall, materially
breach any representation, warranty or agreement contained herein to be
performed at or prior to the Closing Date; or (iii) Smith Barney Muni Funds on
behalf of the Acquiring Fund or Smith Barney Investment Trust on behalf of the
Acquired Fund, if a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably
appears that it will not or cannot be met.
11.2. In the event of any such termination, there shall be no
liability for damages on the part of either Smith Barney Muni Funds on behalf
of the Acquiring Fund or Smith Barney Investment Trust on behalf of the
Acquired Fund or their respective Trustees or officers to the other party, but
each shall bear the expenses incurred by it incidental to the preparation and
carrying out of this Agreement as provided in paragraph 9.
12. AMENDMENTS; WAIVERS
12.1. This Agreement may be amended, modified or supplemented in
such manner as may be mutually agreed upon in writing by the authorized
officers of Smith Barney Muni Funds and Smith Barney Investment Trust;
provided, however, that following the meeting of the Acquired Fund
Shareholders called by Smith Barney Investment Trust on behalf of the Acquired
Fund pursuant to paragraph 5.2 of this Agreement, no such amendment may have
the effect of changing the provisions for determining the number of Acquiring
Fund Shares to be issued to the Acquired Fund Shareholders under this
Agreement to the detriment of such shareholders without their further
approval.
12.2. At any time prior to the Closing Date either party hereto
may by written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein.
<PAGE>82
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by hand
delivery, prepaid telegraph, telecopy or certified mail addressed to Smith
Barney Muni Funds, 388 Greenwich Street, 22nd Floor, New York, New York 10013,
Attention: Heath B. McLendon; or to Smith Barney Limited Maturity Municipals
Fund, 388 Greenwich Street, 22nd Floor, New York, New York 10013, Attention:
Jessica Bibliowicz.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF
LIABILITY
14.1. The article and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
14.4. This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no assignment
or transfer hereof or of any rights or obligations hereunder shall be made by
any party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm, corporation or other entity, other than the parties hereto
and their respective successors and assigns, any rights or remedies under or
by reason of this Agreement.
14.5. It is expressly agreed that the obligations of Smith
Barney Investment Trust in respect of the Acquired Fund, and Smith Barney Muni
Funds in respect of the Acquiring Fund, shall not be binding upon any of their
respective Trustees, shareholders, nominees, officers, agents or employees
personally, but bind only the trust property of the Acquired Fund or the
Acquiring Fund, as the case may be, as provided in the trust instruments of
Smith Barney Investment Trust and Smith Barney Muni Funds. The execution and
delivery of this Agreement have been authorized by the Trustees of each of
Smith Barney Investment Trust and of Smith Barney Muni Funds and this
Agreement has been executed by authorized officers of each of Smith Barney
Investment Trust and Smith Barney Muni Funds, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such
officers shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
<PAGE>83
property of the Acquired Fund or the Acquiring Fund, as the case may be, as
provided in Smith Barney Investment Trust's Master Trust Agreement and Smith
Barney Muni Funds' Declaration of Trust, respectively.
<PAGE>84
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its Chairman of the Board, President or Vice
President and attested by its Secretary or Assistant Secretary.
Attest: SMITH BARNEY MUNI FUNDS
on behalf of LIMITED TERM PORTFOLIO
By:
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
Attest: SMITH BARNEY INVESTMENT TRUST
on behalf of SMITH BARNEY LIMITED MATURITY
MUNICIPALS FUND
By:
Name: Christina T. Sydor Name: Jessica Bibliowicz
Title: Secretary Title: President
<PAGE>85
PROSPECTUS
OF
SMITH BARNEY MUNI FUNDS -- LIMITED TERM PORTFOLIO
DATED JULY 31, 1995
AS SUPPLEMENTED BY A PROSPECTUS SUPPLEMENT
DATED OCTOBER 2, 1995
<PAGE>86
SMITH BARNEY MUNI FUNDS
Florida Portfolio
Limited Term Portfolio
New York Portfolio
Supplement dated October 2, 1995 to
Prospectuses dated July 31, 1995
The Trustees of Smith Barney Muni Funds (the "Fund") have approved a
new management agreement on behalf of each of the Florida Portfolio, the
Limited Term Portfolio and the New York Portfolio (each a "Portfolio" and
collectively, the "Portfolios") to increase the effective management fee paid
by the Fund on behalf of each Portfolio.
Under the current management agreement the Fund pays an effective
management fee at an annual rate of 0.45% of each Portfolio's average daily
net assets. Under the proposed management agreement the Fund would pay an
effective management fee at an annual rate of 0.50% of each Portfolio's
average daily net assets.
The proposed changes are subject to the approval of each Portfolio's
shareholders. Proxy materials describing the proposed changes are being
mailed to the Fund's shareholders of record as of September 29, 1995 in
anticipation of the Special Meeting of Shareholders scheduled to be held on
November 13, 1995. If the proposed management agreement is not approved, the
current management agreement will remain in effect.
<PAGE>87
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
Limited
Term
Portfolio
JULY 31, 1995
Prospectus begins on page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>88
Smith Barney Muni Funds - Limited Term
Portfolio
================================================================================
Prospectus JULY 31, 1995
================================================================================
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Limited Term Portfolio (the "Portfolio") is one of thirteen
investment portfolios that currently comprise Smith Barney Muni Funds
(the "Fund"). The Portfolio seeks to pay its shareholders as high a level
of monthly income exempt from Federal income taxes as is consistent with
prudent investing. At least 80% of the Portfolio's assets will be invested in
obligations with remaining maturities of less than ten years and the
dollar-weighted average maturity of the entire portfolio will normally not
exceed six years. The Portfolio may invest without limit in municipal
obligations whose interest is a tax preference for purposes of the
Federal alternative minimum tax.
This Prospectus sets forth concisely certain information about the
Fund and the Portfolio, including sales charges, distribution and
service fees and expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this
Prospectus carefully and retain it for future reference.
Additional information about the Portfolio is contained in a
Statement of Additional Information dated JULY 31, 1995, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Fund at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into
this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>89
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Table of Contents
================================================================================
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 9
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 11
- --------------------------------------------------------------------------------
Valuation of Shares 15
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 15
- --------------------------------------------------------------------------------
Purchase of Shares 18
- --------------------------------------------------------------------------------
Exchange Privilege 24
- --------------------------------------------------------------------------------
Redemption of Shares 27
- --------------------------------------------------------------------------------
Minimum Account Size 29
- --------------------------------------------------------------------------------
Performance 29
- --------------------------------------------------------------------------------
Management of the Fund 30
- --------------------------------------------------------------------------------
Distributor 32
- --------------------------------------------------------------------------------
Additional Information 32
- --------------------------------------------------------------------------------
================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those
contained in this Prospectus and, if given or made, such other information
and representations must not be relied upon as having been authorized by
the Fund or the Distributor. This Prospectus does not constitute an offer
by the Fund or the Distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such
jurisdiction.
2
<PAGE>90
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Prospectus Summary
================================================================================
The following summary is qualified in its entirety by detailed
information appearing elsewhere in this Prospectus and in the Statement of
Additional Information. Cross references in this summary are to headings in
the Prospectus. See "Table of Contents."
INVESTMENT OBJECTIVE The Portfolio seeks to pay its shareholders as high
a level of monthly income exempt from Federal income taxes as is consistent
with prudent investing. At least 80% of the Portfolio's assets will be
invested in obligations with remaining maturities of less than ten years and
the dollar-weighted average maturity of the entire portfolio will
normally not exceed six years. The Portfolio may invest without limit in
municipal obligations whose interest is a tax preference for
purposes of the Federal alternative minimum tax. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers three classes
of shares ("Classes") to investors designed to provide them with the
flexibility of selecting an investment best suited to their needs. The
general public is offered two Classes of shares: Class A shares and Class C
shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject. A third Class of shares, Class Y
shares, is offered only to investors meeting an initial investment minimum
of $5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge of 2.00% and are subject to an annual service fee of
0.15% of the average daily net assets of the Class. The initial sales
charge may be waived for certain purchases. Purchases of Class A shares,
which when combined with current holdings of Class A shares offered with a
sales charge equal or exceed $500,000 in the aggregate, will be made at net
asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within
12 months of purchase. See "Prospectus Summary -- No Initial Sales Charge."
Class C Shares. Class C shares are sold at net asset value with no
initial sales charge. They are subject to an annual service fee of 0.15% and
an annual distribution fee of 0.20% of the average daily net assets of
the Class, and investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of purchase. The CDSC may be waived for certain redemptions.
The Class C shares' distribution fee may cause that Class to have higher
expenses and pay lower dividends than Class A shares. Purchases of Portfolio
shares, which when combined with current holdings of Class C shares of the
Portfolio equal or exceed $500,000 in the aggregate, should be made in Class
A shares at net asset value with no sales charge, and will be subject to
a CDSC of 1.00% on redemptions made within 12 months of purchase.
3
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Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Prospectus Summary (continued)
================================================================================
Class Y Shares. Class Y shares are available only to investors
meeting an initial investment minimum of $5,000,000. Class Y shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any service or distribution fees.
In deciding which Class of Portfolio shares to purchase, investors
should consider the following factors, as well as any other relevant facts
and circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of
his or her investment. Shareholders who are planning to establish a program of
regular investment may wish to consider Class A shares; as the
investment accumulates shareholders may qualify for purchase of shares
without an initial sales charge and the shares are subject to lower ongoing
expenses over the term of the investment. As an alternative, Class C shares
are sold without any initial sales charge so the entire purchase price
is immediately invested in the Portfolio. Any investment return on these
additional invested amounts may partially or wholly offset the higher annual
expenses of this Class. Because the Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period in the
context of their own investment time frame.
Investors investing a minimum of $5,000,000 must purchase Class Y
shares, which are not subject to an initial sales charge, CDSC or service
or distribution fees. The maximum purchase amount for Class A shares is
$4,999,999 and Class C shares is $499,999. There is no maximum purchase
amount for Class Y shares.
No Initial Sales Charge. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
would be immediately invested in the Portfolio. In addition, Class A share
purchases, which when combined with current holdings of Class A shares
offered with a sales charge equal or exceed $500,000 in the aggregate,
will be made at net asset value with no initial sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 aggregate investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge
held in funds sponsored by Smith Barney Inc. ("Smith Barney") listed under
"Exchange Privilege." See "Purchase of Shares." Because the ongoing expenses
of Class A shares will be lower than those for Class C shares, purchasers
eligible to purchase Class A shares at net asset value should consider doing
so.
Smith Barney Financial Consultants may receive different compensation
for selling each Class of shares. Investors should understand that the
purpose of the CDSC on the Class C shares is the same as that of the initial
sales charge on the Class A shares.
4
<PAGE>92
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Prospectus Summary (continued)
================================================================================
See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the
Classes of shares.
PURCHASE OF SHARES Shares may be purchased through the
Portfolio's distributor, Smith Barney, a broker that clears securities
transactions through Smith Barney on a fully disclosed basis (an
"Introducing Broker") or an investment dealer in the selling group. See
"Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class C shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be
made for all Classes. The minimum initial investment requirement for Class
A and Class C shares and the subsequent investment requirement for all Classes
through the Systematic Investment Plan described below is $50. It is not
recommended that the Portfolio be used as a vehicle for Keogh, IRA or other
qualified retirement plans. There is no minimum investment requirement in
Class A for unitholders who invest distributions from a unit investment
trust ("UIT") sponsored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic
placement of a purchase order each month or quarter for Portfolio shares
in an amount of at least $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New
York Stock Exchange, Inc. ("NYSE") is open for business. See "Purchase of
Shares" and "Redemption of Shares."
MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") serves as the Portfolio's investment manager.
SBMFM provides investment advisory and management services to investment
companies affiliated with Smith Barney. SBMFM is a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversified financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. As of March 31, 1995, SBMFM had aggregate assets under
management in excess of $54 billion. See "Management of the Fund."
5
<PAGE>93
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Prospectus Summary (continued)
================================================================================
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined, plus any applicable sales charge
differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and
is also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are
paid monthly. Distributions of net realized capital gains, if any, are
paid annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of
any Class will be reinvested automatically, unless otherwise specified
by an investor, in additional shares of the same Class at current net asset
value. Shares acquired by dividend and distribution reinvestments will not be
subject to any sales charge or CDSC. See "Dividends, Distributions and
Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that
the Portfolio's investment objective will be achieved. The value of the
Portfolio's investments, and thus the net asset value of the Portfolio's
shares, will fluctuate in response to changes in market and economic
conditions, as well as the financial condition and prospects of issuers
of municipal obligations purchased by the Portfolio. See "Investment
Objective and Management Policies."
6
<PAGE>94
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Prospectus Summary (continued)
================================================================================
THE PORTFOLIO'S EXPENSES The following expense table lists the costs
and expenses an investor will incur either directly or indirectly as a
shareholder of the Portfolio, based on the maximum sales charge or maximum
CDSC that may be incurred at the time of purchase or redemption and,
unless otherwise noted, the Portfolio's operating expenses for its most
recent fiscal year:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class A Class C Class Y
- -----------------------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 2.00% None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds,whichever is lower) None* 1.00% None
Annual Portfolio Operating Expenses**
(as a percentage of average net assets)
Management fees 0.45% 0.45% 0.45%
12b-1 fees*** 0.15% 0.35% --
Other expenses 0.12% 0.09% 0.11%
---- ---- ----
Total Portfolio Operating Expenses 0.72% 0.89% 0.56%
==== ==== ====
- ----------------------------------------------------------------------------------------------
<FN>
* Purchases of Class A shares, which when combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with no sales charge, but will be subject to a
CDSC of 1.00% on redemptions made within 12 months.
** "Management Fees" and "Other Expenses" for Class A shares are based on actual amounts for the fiscal year ended
March 31, 1995. 12b-1 fees have been restated to reflect the anticipated level of 12b-1 fees for the current fiscal
period. "Other Expenses" for Class Y shares have been estimated because no Class Y shares were outstanding for
the period ended March 31, 1995.
*** Upon conversion of Class B shares to Class A shares, such shares will no longer be subject to a distribution fee.
Class C shares do not have a conversion feature and, therefore, are subject to an ongoing distribution fee. As a result,
long-term shareholders of Class C shares may pay more than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and
investors may actually pay lower or no charges, depending on the
amount purchased and, in the case of Class C shares and certain Class A
shares, the length of time the shares are held. See "Purchase of Shares" and
"Redemption of Shares." Smith Barney receives an annual 12b-1 service fee of
0.15% of the value of average daily net assets of Class A shares. Smith
Barney also receives with respect to Class C shares an annual 12b-1 fee of
0.35% of the value of average daily net assets of that Class, consisting of a
0.20% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
7
<PAGE>95
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Prospectus Summary (continued)
================================================================================
EXAMPLE
The following example is intended to assist an investor in
understanding the various costs that an investor in the Portfolio will
bear directly or indirectly. The example assumes payment by the Portfolio
of operating expenses at the levels set forth in the table above. See
"Purchase of Shares," "Redemption of Shares" and "Management of the Fund."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------------
An investor would pay the following expenses on
a $1,000 investment, assuming (1) 5.00% annual return and
(2) redemption at the end of each time period:
Class A............................... $27 $43 $59 $108
Class C............................... 19 28 49 110
Class Y............................... 6 18 31 70
An investor would pay the following expenses on the same
investment, assuming the same annual return and no redemption:
Class A............................... $27 $43 $59 $108
Class C............................... 9 28 49 110
Class Y............................... 6 18 31 70
- --------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00%
annual return assumption. However, the Portfolio's actual return will vary
and may be greater or less than 5.00%. This example should not be
considered a representation of past or future expenses and actual expenses may
be greater or less than those shown.
8
<PAGE>96
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Financial Highlights
================================================================================
The following schedule of the Limited Term Portfolio of Smith Barney
Muni Funds has been audited in conjunction with the annual audits of the
financial statements of Smith Barney Muni Funds by KPMG Peat Marwick LLP,
independent auditors. The 1995 financial statements and the independent
auditors' report thereon appear in the March 31, 1995 Annual Report to
Shareholders. No information is presented for Class Y Shares, because no
Class Y Shares were outstanding for the periods shown.
For a Portfolio share outstanding throughout each period:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Period Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Shares: 1995 1994 1993 1992 1991 1990 1989(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $6.55 $6.68 $6.45 $6.38 $6.28 $6.20 $6.25
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.36 0.37 0.39 0.42 0.43 0.44 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(or loss) on investments -- (0.13) 0.23 0.07 0.07 0.10 (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.36 0.24 0.62 0.49 0.50 0.54 0.08
- ------------------------------------------------------------------------------------------------------------------------------------
Less Dividends from Net Investment Income (0.37) (0.37) (0.39) (0.42) (0.40) (0.46) (0.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions from Net Realized Gains 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.37) (0.39) (0.42) (0.40) (0.36) (0.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period 6.54 6.55 6.68 6.45 6.38 6.28 6.20
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return# 5.69% 3.65% 9.82% 7.99% 8.23% 9.07% 1.09%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (in millions) $245 $282 $242 $157 $65 $20 $5
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (1) 0.61% 0.53% 0.55% 0.49% 0.33% 0.30% 0.30%+
Net investment income 5.61% 5.53% 5.90% 6.42% 6.77% 6.98% 6.58%+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21.80% 24.72% 24.53% 26.27% 14.92% 64.50% 14.27%
====================================================================================================================================
</TABLE>
9
<PAGE>97
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Financial Highlights (continued)
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Period Ended March 31,
- --------------------------------------------------------------------------------------------
Class C Shares (c): 1995 1994 1993 (b)
- --------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $6.54 $6.68 $6.62
- --------------------------------------------------------------------------------------------
Net Investment Income 0.35 0.35 0.10
- --------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (or Loss) on Investments 0.00 (0.14) 0.05
- --------------------------------------------------------------------------------------------
Total from Investment Operations 0.35 0.21 0.15
- --------------------------------------------------------------------------------------------
Less Dividends from Net Investment Income (0.35) (0.35) (0.09)
- --------------------------------------------------------------------------------------------
Less Distributions from Net Realized Gains 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.35) (0.09)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Period $6.54 $6.54 $6.68
Total Return# 5.51% 3.15% 2.28%++
- --------------------------------------------------------------------------------------------
Net Assets, End of Period (in millions) $27 $27 $6
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (1) 0.89% 0.88% 0.88%+
Net investment income 5.34% 5.10% 5.35%+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21.80% 24.72% 24.53%
============================================================================================
<FN>
(1) The Manager has waived all or a part of its fees for each of the years in the six-year period ended March 31, 1992. If
such fees were not waived, the per share effect on expenses and ratios of expenses to average net assets would be as follows:
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase in Per Share Expenses 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------
Class A -- -- -- $.003 $.011 $.018 $.022(b) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets
- ------------------------------------------------------------------------------------------------------------------------------
Class A -- -- -- .56% .30%* .30%* .30%*+(b) -- --
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
* As a result of expense limitations.
+ Annualized.
++ Figures are not annualized, as they may not be representative of the total return for the year.
# Total returns do not reflect sales loads or contingent deferred sales charges.
(a) From November 28, 1988 (commencement of operations) to March 31, 1989.
(b) From January 5, 1993 (inception date) to March 31, 1993.
(c) On November 7, 1994 the former Class B Shares were renamed Class C Shares.
</TABLE>
10
<PAGE>98
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Investment Objective and Management Policies
================================================================================
The Portfolio seeks as high a level of income exempt from Federal
income taxes as is consistent with prudent investing.
The Portfolio invests at least 80% of its assets in a diversified
portfolio of municipal obligations with remaining maturities of less
than ten years, and the dollar-weighted average maturity of the entire
Portfolio will normally not exceed six years.
The Portfolio will seek to be fully invested in obligations that are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities
that were, in the opinion of bond counsel to the issuer, exempt from Federal
income taxes at the time of their issuance. (For certain
shareholders, a portion of the Portfolio's income may be subject to the
alternative minimum tax ("AMT") on tax-exempt income discussed below.) Such
obligations are issued to raise money for a variety of public projects that
enhance the quality of life including health facilities, housing,
airports, schools, highways and bridges.
Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities"
("AMT-Subject Bonds") becomes an item of "tax preference" which is subject to
the AMT when received by a person in a tax year during which he or she is
subject to that tax. Such private activity bonds include bonds issued to
finance such projects as certain solid waste disposal facilities, student loan
programs, and water and sewage projects. Because interest income on AMT-
Subject Bonds is taxable to certain investors, it is expected, although there
can be no guarantee, that such municipal obligations generally will provide
somewhat higher yields than other municipal obligations of comparable
quality and maturity. There is no limitation on the percent or amount of the
Portfolio's assets that may be invested in AMT-Subject Bonds.
Municipal bonds purchased for the Portfolio must, at the time of
purchase, be investment grade municipal bonds and at least two thirds of
the Portfolio's municipal bonds must be rated in the category of A or better.
Investment grade bonds are those rated Aaa, Aa, A and Baa by Moody's
Investors Service, Inc. ("Moody's") or AAA, AA, A and BBB by Standard &
Poor's Corporation ("S&P") or have an equivalent rating by any nationally
recognized statistical rating organization; pre-refunded bonds escrowed by
U.S. Treasury obligations will be considered AAA rated even though the
issuer does not obtain a new rating. Up to one third of the assets of the
Portfolio may be invested in municipal bonds rated Baa or BBB (this grade,
while regarded as having an adequate capacity to pay interest and repay
principal, is considered to be of medium quality and has speculative
characteristics; in addition, changes in economic conditions or
11
<PAGE>99
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds) or
in unrated municipal bonds if, based upon credit analysis by the Manager, it
is believed that such securities are at least of comparable quality to those
securities in which the Portfolio may invest. In determining the suitability
of an investment in an unrated municipal bond, the Manager will take into
consideration debt service coverage, the purpose of the financing,
history of the issuer, existence of other rated securities of the
issuer and other general conditions as may be relevant, including
comparability to other issues. After the Portfolio purchases a municipal bond,
the issue may cease to be rated or its rating may be reduced below the
minimum required for purchase. Such an event would not require the
elimination of the issue from the Portfolio but the Manager will consider
such an event in determining whether the Portfolio should continue to hold
the security.
The Portfolio's short-term municipal obligations will be limited to
high grade obligations (obligations that are secured by the full faith
and credit of the United States or are rated MIG I or MIG 2, VMIG I or VMIG
2 or Prime-1 or Aa or better by Moody's or SP-I +, SP-I, SP-2, or A-l or AA
or better by S&P or have an equivalent rating by any nationally recognized
statistical rating organization, or obligations determined by the Manager
to be equivalent). Among the types of short-term instruments in which the
Portfolio may invest are floating or variable rate demand instruments,
tax-exempt commercial paper (generally having a maturity of less than nine
months), and other types of notes generally having maturities of less
than three years, such as Tax Anticipation Notes, Revenue Anticipation Notes,
Tax and Revenue Anticipation Notes and Bond Anticipation Notes. Demand
instruments usually have an indicated maturity of more than one year, but
contain a demand feature that enables the holder to redeem the investment
on no more than 30 days' notice; variable rate demand instruments
provide for automatic establishment of a new interest rate on set
dates; floating rate demand instruments provide for automatic adjustment
of their interest rates whenever some other specified interest rate
changes (e.g., the prime rate). The Portfolio may purchase participation
interests in variable rate tax-exempt securities (such as Industrial
Development Bonds) owned by banks. Participations are frequently backed by
an irrevocable letter of credit or guarantee of a bank that the Manager has
determined meets the prescribed quality standards for the Portfolio.
Participation interests will be purchased only if management believes
interest income on such interests will be tax-exempt when distributed
as dividends to shareholders.
The Portfolio will not invest more than 10% of the value of its net
assets in illiquid securities, including those that are not readily
marketable or for which there is no established market.
12
<PAGE>100
Smith Barney Muni Funds - Limited TermPortfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45
days after the purchase date. The payment obligation and the interest
rate to be received are each fixed on the purchase date, although no interest
accrues with respect to a when-issued security prior to its stated delivery
date. During the period between purchase and settlement, assets
consisting of cash or liquid high grade debt securities,
marked-to-market daily, of a dollar amount sufficient to make payment at
settlement will be segregated at the custodian bank. Interest rates at
settlement may be lower or higher than on the purchase date, which would
result in appreciation or depreciation, respectively. Although the Portfolio
will only purchase a municipal obligation on a when- issued basis with the
intention of actually acquiring the securities, the Portfolio may sell
these securities before the settlement date if it is deemed advisable.
Portfolio transactions will be undertaken principally to
accomplish the Portfolio's objective in relation to anticipated
movements in the general level of interest rates, but the Portfolio may also
engage in short-term trading consistent with its objective.
Though it has not done so, the Portfolio may invest in municipal bond
index futures contracts (currently traded on the Chicago Board of Trade) or
in listed contracts based on U.S. Government securities as a hedging policy in
pursuit of its investment objective; provided that immediately
thereafter not more than 331/3% of its net assets would be hedged or the
amount of margin deposits on the Portfolio's existing futures contracts would
not exceed 5% of the value of its total assets. Since any income would
be taxable, it is anticipated that such investments will be made only in
those circumstances when the Manager anticipates the possibility of an
extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures
contracts and their associated risks is contained in the Statement of
Additional Information.
In each of the Fund's prior fiscal years, 100% of the Portfolio's
dividends were exempt-interest dividends, excludable from gross income for
Federal income tax purposes. It is a fundamental policy that under normal
market conditions, the Portfolio will seek to invest 100% of its assets -- and
the Portfolio will invest not less than 80% of its assets -- in municipal
obligations the interest on which is exempt from Federal income taxes (other
than the alternative minimum tax.) The Portfolio may invest up to 20% of its
assets in taxable fixed-income securities but only in obligations issued or
guaranteed by the full faith and credit of the United States and may invest
more than 20% of its assets in U.S. Government securities during periods when
in the Manager's opinion a temporary defensive posture is warranted, including
any period when the Fund's monies
13
<PAGE>101
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
available for investment exceed the municipal obligations available for
purchase that meet the Fund's rating, maturity and other investment
criteria.
RISK AND INVESTMENT CONSIDERATIONS
The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing
ability to meet their obligations for the payment of interest and
principal when due. The ability to achieve a high level of income is
dependent on the yields of the securities in the portfolio. Yields on
municipal obligations are the product of a variety of factors, including the
general conditions of the municipal bond markets, the size of a particular
offering, the maturity of the obligation and the rating of the issue. In
general, the longer the maturity of a municipal obligation, the higher the
rate of interest it pays. However, a longer average maturity is generally
associated with a higher level of volatility in the market value of a
municipal obligation. During periods of falling interest rates, the values
of long-term municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of Portfolio securities will not affect
interest income derived from those securities but will affect the Portfolio's
net asset value. Since the Portfolio's objective is to provide high current
income, they will invest in municipal obligations with an emphasis on income
rather than stability of net asset values.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption
for interest on municipal obligations and similar proposals may be introduced
in the future. If one of these proposals were enacted, the availability
of tax exempt obligations for investment by the Portfolios and the value of
the portfolio securities would be affected. The Trustees would then
reevaluate the Portfolios' investment objectives and policies.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Portfolio's portfolio securities ordinarily are purchased from
and sold to parties acting as either principal or agent. Newly issued
securities ordinarily are purchased directly from the issuer or from an
underwriter; other purchases and sales usually are placed with those dealers
from which it appears that the best price or execution will be obtained.
Usually no brokerage commissions, as such, are paid by the Portfolio
for purchases and sales undertaken through principal transactions, although
the price paid usually includes an undisclosed compensation to the dealer
acting as agent.
14
<PAGE>102
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Investment Objective and Management Policies (continued)
================================================================================
The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio
are replaced one time during a period of one year. The Manager will not
consider turnover rate a limiting factor in making investment decisions
consistent with the investment objective and policies of the Portfolio.
================================================================================
Valuation of Shares
================================================================================
The Portfolio'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 Portfolio's net assets attributable to
each Class by the total number of shares of the 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 instruments maturing within 60 days will be valued at cost plus
(minus) amortized discount (premium), if any, when the Trustees have
determined that amortized cost equals fair value. 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 Trustees.
================================================================================
Dividends, Distributions and Taxes
================================================================================
DIVIDENDS AND DISTRIBUTIONS
Dividends of substantially all of the Portfolio's net investment
income are declared and paid monthly and any realized capital gains are
declared and distributed annually.
If a shareholder does not otherwise instruct, dividends and capital
gain distributions will be reinvested automatically in
additional shares of the same Class at net asset value, subject to no sales
charge or CDSC.
15
<PAGE>103
Smith Barney Muni Funds - Limited Term Portfolio
===============================================================================
Dividends, Distributions and Taxes (continued)
===============================================================================
Income dividends and capital gain distributions that are invested
are credited to shareholders' accounts in additional shares at the net
asset value as of the close of business on the payment date. A shareholder
may change the option at any time by notifying his or her Financial
Consultant. Accounts held directly by the Fund's transfer agent, The
Shareholder Services Group Inc. ("TSSG"), should notify TSSG in writing at
least five business days prior to the payment date to permit the change
to be entered in the shareholder's account.
The per share dividends on Class C shares of the Portfolio may be
lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class C
shares. The per share dividends on Class A shares of the Portfolio may be
lower than the per share dividends on Class Y shares principally as a result
of the service fee applicable to Class A shares. Distributions of capital
gains, if any, will be in the same amount for Class A, Class C and Class
Y shares.
TAXES
The Portfolio intends to qualify as a "regulated investment company"
and to meet the requirements for distributing "exempt-interest
dividends" under the Internal Revenue Code (the "Code") so that no Federal
income taxes will be payable by the Portfolio and dividends
representing net interest received on municipal obligations will not be
includable by shareholders in their gross income for Federal income tax
purposes. To the extent dividends are derived from taxable income from
temporary investments, from market discounts or from the excess of net
short-term capital gain over net long-term capital loss, they are treated
as ordinary income whether the shareholder has elected to receive them in
cash or in additional shares. No portion of such dividends would qualify for
the corporate dividends-received deduction. Distributions derived from the
excess of net long-term capital gain over net short-term capital loss are
treated as long-term capital gain regardless of the length of time a
shareholder has owned shares of the Portfolio and regardless of
whether such distributions are received in cash or in additional shares.
Exempt-interest dividends allocable to interest received by the
Portfolio from the AMT-Subject Bonds in which the Portfolio may invest
will be treated as interest paid directly on such obligations and will give
rise to an "item of tax preference" that will increase a
shareholder's alternative minimum taxable income. In addition, for
corporations, alternative minimum taxable income will be increased by a
percentage of the amount by which a special measure of income (including
exempt-interest dividends) exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, investment in the
Portfolio
16
<PAGE>104
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Dividends, Distributions and Taxes (continued)
================================================================================
may cause shareholders to be subject to (or result in an increased liability
under) the AMT. The Fund will annually furnish to its shareholders a
report indicating the ratable portion of exempt- interest dividends
attributable to AMT-Subject Bonds.
The Portfolio will be treated as a separate regulated investment
company for Federal tax purposes. Accordingly, the Portfolio's net
investment income is determined separately based on the income earned on
its securities less its costs of operations. The Portfolio's net long- term
and short-term gain (loss) realized on investments is determined
separately and net capital gains distributed by the Portfolio are determined
after offsetting any capital loss carryover of the Portfolio from
prior periods.
Under the Code, interest on indebtedness incurred or continued to
purchase or carry shares of the Fund will not be deductible to the
extent that the Fund's distributions are exempt from Federal income tax. In
addition, any loss realized upon the redemption of shares held less than 6
months will be disallowed to the extent of any exempt-interest dividends
received by the shareholder during such period. However, this holding period
may be shortened by the Treasury Department to a period of not less than the
greater of 31 days or the period between regular dividend distributions.
Further, persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by industrial development bonds
should consult their tax advisors before purchasing Fund shares.
Distributions that are exempt for Federal income tax purposes will
not necessarily result in exemption under the income or other tax laws of
any state or local taxing authority. Generally, only interest earned on
obligations issued by the state or locality in which the investor
resides will be exempt from state and local taxes; however, the laws of
the several states and local taxing authorities vary with respect to the
taxation of exempt-interest income paid by investment companies, and each
shareholder should consult a tax advisor in that regard.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of relevance to particular investors is
contained in the Statement of Additional lnformation. Investors are
urged to consult their tax advisors with specific reference to their own tax
situation.
17
<PAGE>105
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Purchase of Shares
================================================================================
GENERAL
The Portfolio offers three Classes of shares. Class A shares are sold
to investors with an initial sales charge and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon
certain redemptions. Class Y shares are sold without an initial sales
charge or a CDSC and are available only to investors investing a minimum
of $5,000,000. See "Prospectus Summary -- Alternative Purchase Arrangements"
for a discussion of factors to consider in selecting which Class of shares
to purchase.
Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer
in the selling group. When purchasing shares of the Portfolio, investors must
specify whether the purchase is for Class A, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Portfolio.
Investors in Class Y shares may open an account by making an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made
for all Classes. For participants in the Portfolio's Systematic Investment
Plan, the minimum initial investment requirement for Class A and Class C
shares and the subsequent investment requirement for all Classes is $50.
There are no minimum investment requirements in Class A shares for employees
of Travelers and its subsidiaries, including Smith Barney, unitholders
who invest distributions from a UIT sponsored by Smith Barney and Trustees of
the Fund and their spouses and children. The Fund reserves the right to
waive or change minimums, to decline any order to purchase its shares and
to suspend the offering of shares from time to time. Shares purchased will be
held in the shareholder's account by the Fund's transfer agent, TSSG, a
subsidiary of First Data Corporation. Share certificates are issued
only upon a shareholder's written request to TSSG. It is not recommended
that the Portfolio be used as a vehicle for Keogh, IRA or other qualified
retirement plans.
Purchase orders received by the Fund or Smith Barney prior to the close
of regular trading on the NYSE, on any day the Portfolio calculates its net
asset value, are priced according to the net asset value determined on that
day (the "trade date"). Orders received by dealers or Introducing Brokers
prior to the close of regular trading on the NYSE on any day the Portfolio
calculates its net asset value, are priced according to the net asset value
determined on that day, provided the order is received by the Fund or Smith
Barney prior to Smith Barney's close of business. Payment for Portfolio
shares is due on the third business day after the trade date.
18
<PAGE>106
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment
Plan. Under the Systematic Investment Plan, Smith Barney or TSSG is
authorized through preauthorized transfers of $50 or more to charge the
regular bank account or other financial institution indicated by the
shareholder on a monthly or quarterly basis to provide systematic
additions to the shareholder's Portfolio account. A shareholder who has
insufficient funds to complete the transfer will be charged a fee of up to $25
by Smith Barney or TSSG. The Systematic Investment Plan also authorizes Smith
Barney to apply cash held in the shareholder's Smith Barney brokerage
account or redeem the shareholder's shares of a Smith Barney money market
fund to make additions to the account. Additional information is available
from the Fund or a Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
The sales charges applicable to purchases of Class A shares of
the Portfolio are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
================================================================================
Sales Charge
------------ Dealer's
% of % of Amount Reallowance as % of
Amount of Investment Offering Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than $500,000 2.00% 2.04% 1.80%
$500,000 and over * * *
================================================================================
<FN>
* Purchases of Class A shares, which when combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value without any initial sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months of purchase. The CDSC on Class A shares is payable to
Smith Barney, which compensates Smith Barney Financial Consultants and other dealers whose clients make purchases of
$500,000 or more. The CDSC is waived in the same circumstances in which the CDSC applicable to Class C shares is waived. See
"Deferred Sales Charge Alternatives" and "Waivers of CDSC."
</TABLE>
Members of the selling group may receive up to 90% of the sales charge
and may be deemed to be underwriters of the Fund as defined in the Securities
Act of 1933, as amended.
The $500,000 investment may be met by aggregating the purchases of
Class A shares of the Portfolio made at one time by "any person," which
includes an individual, his or her spouse and children, or a trustee or
other fiduciary of a single trust estate or single fiduciary account. It
may also be met by
19
<PAGE>107
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
aggregating the purchase with the net asset value of all Class A shares
offered with a sales charge held in funds sponsored by Smith Barney listed
under "Exchange Privilege."
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 of Class A shares to
Trustees of the Fund, employees of Travelers and its subsidiaries and
employees of members of the National Association of Securities Dealers,
Inc., or to the spouses and children of such persons (including the
surviving spouse of a deceased Trustee or employee, and retired Trustees
or employees); (b) offers of Class A shares to any other investment
company in connection with the combination of such company with the
Portfolio by merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with Smith Barney), on the condition the
purchase of Class A shares is made with the 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) shareholders who have redeemed
Class A shares in the Portfolio (or Class A shares of another fund of the
Smith Barney Mutual Funds that are offered with a sales charge equal to
or greater than the maximum sales charge of the Portfolio) and who wish to
reinvest their redemption proceeds in the Portfolio, provided the
reinvestment is made within 60 calendar days of the redemption; (e)
accounts managed by registered investment advisory subsidiaries of
Travelers; and (f) investments of distributions from a UIT sponsored by
Smith Barney. 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 a Portfolio may be purchased by "any person" (as
defined above) 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 Portfolio and of funds sponsored by Smith Barney which are offered
with a sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for
purchase at net asset value. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares
purchased thereafter.
20
<PAGE>108
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
GROUP PURCHASES
Upon completion of certain automated systems, purchase at net asset
value will also be available to employees (and partners) of the same
employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to
purchases by each member of such a group will be determined by the table set
forth above under "Initial Sales Charge Alternative -- Class A Shares," and
will be based upon the aggregate sales of Class A shares of Smith Barney
Mutual Funds offered with a sales charge to, and share holdings of, all
members of the group. To be eligible for such purchase at net asset value,
all purchases must be pursuant to an employer- or partnership-sanctioned
plan meeting certain requirements. One such requirement is that the plan must
be open to specified partners or employees of the employer and its
subsidiaries, if any. Such plan may, but is not required to, provide for
payroll deductions. Smith Barney may also offer net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A
shares at the sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of Class A shares offered
with a sales charge that have been previously purchased and are still owned
by the group, plus the amount of the current purchase. A "qualified group"
is one which (a) has been in existence for more than six months, (b) has
a purpose other than acquiring Portfolio shares at a discount and (c)
satisfies uniform criteria which enable Smith Barney to realize
economies of scale in its costs of distributing shares. A qualified group
must have more than 10 members, must be available to arrange for group
meetings between representatives of the Portfolio and the members, and must
agree to include sales and other materials related to the Portfolio in
its publications and mailings to members at no cost to Smith Barney. In
order to purchase at net asset value, the purchaser must provide sufficient
information at the time of purchase to permit verification that the
purchase qualifies for purchase at net asset value. Approval of group
purchase at net asset value is subject to the discretion of Smith
Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $500,000 or more
provides an opportunity for an investor to purchase shares at net asset
value by aggregating the 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
21
<PAGE>109
Smith Barney Muni Funds - Limited TermPortfolio
================================================================================
Purchase of Shares (continued)
================================================================================
includes purchases of all Class A shares of the Portfolio and other funds of
the Smith Barney Mutual Funds offered with a sales charge over a 13 month
period based on the total amount of intended purchases plus the value
of all Class A shares previously purchased and still owned. An alternative
is to compute the 13 month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period
receives the 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. Please contact a Smith Barney Financial
Consultant or TSSG to obtain a Letter of Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for
investors to meet the minimum investment requirement for Class Y shares.
Such investors must make an initial minimum purchase of $1,000,000 in
Class Y shares of the Portfolio and agree to purchase a total of $5,000,000
of Class Y shares of the same Portfolio within six months from the date of
the Letter. If a total investment of $5,000,000 is not made within the
six-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 Portfolio's Class A shares, which
may include a CDSC of 1.00%. Please contact a Smith Barney Financial
Consultant or TSSG for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase
payment may be immediately invested in the Fund. A CSDC, however, may be
imposed on certain redemptions of these shares. "CDSC Shares" are: (a)
Class C shares; and (b) Class A shares which when combined with Class A
shares offered with a sales charge currently held by an investor equal or
exceed $500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset
value at the time of redemption. CDSC Shares that are redeemed will not
be subject to a CDSC to the extent that the value of such shares represents:
(a) capital appreciation of Portfolio assets; (b) reinvestment of
dividends or capital gain distributions; or (c) shares redeemed more than
12 months after their purchase. CDSC Shares are subject to a 1.00% CDSC if
redeemed within 12 months of purchase.
In determining the applicability of any CDSC, it will be assumed that a
22
<PAGE>110
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
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 that CDSC
Shares acquired through an exchange have been held will be calculated from
the date that the shares exchanged were initially acquired in one of the
other Smith Barney Mutual Funds, and Portfolio shares being redeemed
will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds.
For Federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class C
shares at $10 per share for a cost of $1,000. Subsequently, the
investor acquired 5 additional shares through dividend
reinvestment. During the tenth month after the purchase, the investor decided
to redeem $500 of his or her investment. Assuming at the time of the
redemption the net asset value had appreciated to $12 per share, the value
of the investor's shares would be $1,260 (105 shares at $12 per share). The
CDSC would not be applied to the amount which represents appreciation ($200)
and the value of the reinvested dividend shares ($60). Therefore, $240
of the $500 redemption proceeds ($500 minus $260) would be charged at a
rate of 1.00% (the applicable rate for Class C shares) for a total deferred
sales charge of $2.40.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to or less than
1.00% per month of the value of the shareholder's shares at the time the
withdrawal plan commences (see "Automatic Cash Withdrawal Plan")
(provided, however, that automatic cash withdrawals in amounts equal to or
less than 2.00% per month of the value of the shareholder's shares will be
permitted for withdrawal plans that were established prior to November 7,
1994); (c) redemptions of shares within twelve months following the death or
disability of the shareholder; (d) involuntary redemptions; and (e)
redemptions of shares in connection with a combination of the Portfolio with
any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other funds of the Smith
Barney Mutual Funds may, under certain circumstances, reinvest all or part
of the redemption proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the prior redemption.
23
<PAGE>111
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Purchase of Shares (continued)
================================================================================
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in the
case of all other shareholders) of the shareholder's status or
holdings, as the case may be.
================================================================================
Exchange Privilege
================================================================================
Except as otherwise noted below, shares of each Class may be exchanged
for shares of the same Class in the following funds of the Smith Barney
Mutual Funds, to the extent shares are offered for sale in the shareholder's
state of residence. Exchanges of Class A and Class C shares are subject to
minimum investment requirements and all shares are subject to other
requirements of the fund into which exchanges are made and a sales charge
differential may apply.
Fund Name
- --------------------------------------------------------------------------------
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income Return Account Portfolio
* Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
24
<PAGE>112
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Exchange Privilege (continued)
================================================================================
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Money Market Funds
** Smith Barney Exchange Reserve Fund
* Smith Barney Money Funds, Inc. -- Cash Portfolio
* Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
* Smith Barney Municipal Money Market Fund, Inc.
* Smith Barney Muni Funds -- California Money Market Portfolio
* Smith Barney Muni Funds -- New York Money Market Portfolio
[FN]
- ----------
* Available for exchange with Class A and Class Y shares of the Portfolio.
** Available for exchange with Class C shares of the Portfolio.
*** Available for exchange with Class A shares of the Portfolio.
25
<PAGE>113
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Exchange Privileges (continued)
================================================================================
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the maximum
charged by other Smith Barney Mutual Funds will be subject to the
appropriate "sales charge differential" upon the exchange of such shares
for Class A shares of a fund sold with a higher sales charge. The "sales
charge differential" is limited to a percentage rate no greater than the
excess of the sales charge rate applicable to purchases of shares of the
mutual fund being acquired in the exchange over the sales charge
rate(s) actually paid on the mutual fund shares relinquished in the
exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of
dividends and capital gain distributions, are treated as having paid the
same sales charges applicable to the shares on which the dividends or
distributions were paid; however, if no sales charge was imposed upon the
initial purchase of the shares, any shares obtained through automatic
reinvestment will be subject to a sales charge differential upon
exchange. Class A shares held in the Portfolio prior to November 7, 1994
that are subsequently exchanged for shares of other funds of the Smith
Barney Mutual Funds will not be subject to a sales charge differential.
Class C Exchanges. Upon an exchange, the new Class C shares will be
deemed to have been purchased on the same date as the Class C shares of the
Portfolio that have been exchanged.
Class Y Exchanges. Class Y shareholders of the Portfolio who wish to
exchange all or a portion of their Class Y shares for Class Y shares 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 Portfolio's performance and its shareholders. The
investment manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other
shareholders. In this event, the investment manager will notify Smith Barney
that 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 Portfolio or (b) remain invested in the Portfolio or exchange into
any of the funds in 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.
26
<PAGE>114
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Exchange Privileges (continued)
================================================================================
Exchanges will be processed at the net asset value next determined,
plus any applicable sales charge differential. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges
will be made upon receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is identical
to the registration of the shares of the fund exchanged, no signature
guarantee is required. A capital gain or loss for tax purposes will be
realized upon the exchange, depending upon the cost or other basis of
shares redeemed. Before exchanging shares, investors should read the current
prospectus describing the shares to be acquired. The Portfolio reserves the
right to modify or discontinue exchange privileges upon 60 days' prior
notice to shareholders.
================================================================================
Redemption of Shares
================================================================================
The Fund is required to redeem the shares of the Portfolio tendered
to it, as described below, at a redemption price equal to their net asset
value per share next determined after receipt of a written request in
proper form at no charge other than any applicable CDSC. Redemption
requests received after the close of regular trading on the NYSE are
priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a
failure to specify which Class, or if the investor owns fewer shares of the
Class than specified, the redemption request will be delayed until the
Fund's transfer agent receives further instructions from Smith Barney, or
if the shareholder's account is not with Smith Barney, from the shareholder
directly. The redemption proceeds will be remitted on or before the third
business day following receipt of proper tender, except on a day on which
the NYSE is closed or as permitted under the 1940 Act in
extraordinary circumstances. Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and
Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a
certified or official bank check, will be remitted upon clearance of the
check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than
those held by Smith Barney as custodian may be redeemed through an
investor's Financial Consultant, Introducing Broker or dealer in the selling
group or by
27
<PAGE>115
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Redemption of Shares (continued)
================================================================================
submitting a written request for redemption to:
Smith Barney Muni Funds/Limited Term Portfolio
Class A, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134 Boston,
Massachusetts 02205-9134
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 TSSG together with the
redemption request. Any signature appearing on a redemption request,
share certificate or stock power 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. TSSG may require additional
supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be
deemed properly received until TSSG receives all required documents in
proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Portfolio offers shareholders an automatic cash withdrawal plan,
under which shareholders who own shares with a value of at least $10,000
may elect to receive cash payments of at least $50 monthly or quarterly. The
withdrawal plan will be carried over on exchanges between funds or Classes
of the Portfolio. Any applicable CDSC will not be waived on amounts withdrawn
by a shareholder that exceed 1.00% per month of the value of the
shareholder's shares subject to the CDSC at the time the withdrawal
plan commences. (With respect to withdrawal plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts withdrawn
that do not exceed 2.00% per month of the value of the shareholder's shares
subject to the CDSC.) For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Smith Barney Financial
Consultant.
28
<PAGE>116
Smith Barney Muni Funds - Limited TermPortfolio
================================================================================
Minimum Account Size
================================================================================
The Fund reserves the right to involuntarily liquidate any
shareholder's account if the aggregate net asset value of the shares held in
the Portfolio account is less than $500. (If a shareholder has more than one
account in this Portfolio, each account must satisfy the minimum account
size.) The Fund, however, will not redeem shares based solely on market
reductions in net asset value. Before the Fund exercises such right,
shareholders will receive written notice and will be permitted 60 days to
bring the account up to the minimum to avoid involuntary liquidation.
================================================================================
Performance
================================================================================
From time to time the Fund may include the Portfolio's yield, tax
equivalent yield, total return and average annual total return in
advertisements. In addition, in other types of sales literature the Fund may
also include the Portfolio's distribution rate. These figures are computed
separately for Class A, Class C and Class Y shares of the Portfolio. These
figures are based on historical earnings and are not intended to indicate
future performance. The yield of a Portfolio Class refers to the net income
earned by an investment in the Class over a thirty-day period ending at month
end. This net income, which does not include any element of non-tax
exempt income if any, is then annualized, i.e., the amount of income
earned by the investment during that thirty-day period is assumed to be
earned each 30-day period for twelve periods and is expressed as a percentage
of the investment. The net income earned on the investment for six periods
is also assumed to be reinvested at the end of the sixth 30-day period.
The tax equivalent yield is calculated similarly to the yield, except that a
stated income tax rate is used to demonstrate the taxable yield necessary to
produce an after- tax yield equivalent to the tax-exempt yield of the Class.
The yield and tax equivalent yield quotations are calculated according to a
formula prescribed by the SEC to facilitate comparison with yields quoted
by other investment companies. The distribution rate is calculated by
annualizing the latest monthly distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as, and therefore can be significantly different from, the above
described yield. Total return is computed for a specified period of time
assuming deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and capital
gains distributions on the reinvestment dates at prices calculated as
stated in this Prospectus, then dividing the value of the investment at the
end of the period so calculated by the initial amount invested and
subtracting 100%. The standard
29
<PAGE>117
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Performance (continued)
================================================================================
average annual total return, as prescribed by the SEC, is derived from this
total return, which provides the ending redeemable value. Such standard
total return information may also be accompanied with nonstandard total
return information for differing periods computed in the same manner but
without annualizing the total return or taking sales charges into account.
The Fund may also include comparative performance information in
advertising or marketing the Portfolio's shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.
================================================================================
Management of the Fund
================================================================================
Trustees
Overall responsibility for management and supervision of the Fund
rests with the Fund's Trustees. The Trustees approve all significant
agreements between the Fund and the companies that furnish services to
the Fund and the Portfolio, including agreements with the Fund's
distributor, investment manager, custodian and transfer agent. The day-to-day
operations of the Portfolio are delegated to the Portfolio's investment
manager. The Statement of Additional Information contains background
information regarding each Trustee and executive officer of the Fund.
Manager
Prior to December 31, 1994, Mutual Management Corp. ("MMC") managed
the day-to-day operations of the Portfolio pursuant to a management
agreement entered into by the Fund on behalf of the Portfolio. Effective
December 31, 1994, the Trustees of the Fund approved the transfer of all of
the management agreements with MMC to Smith Barney Mutual Funds Management
Inc. ("SBMFM" or the "Manager"), an affiliate of MMC. Investment management
of the Portfolio under SBMFM is conducted by the same personnel who managed
the Portfolio under MMC. The reporting requirements for these
individuals has also remained unchanged. In addition, because the original
management agreement with MMC was simply transferred to SBMFM, the terms
of the agreement (including the fee) have remained the same.
SBMFM, which until November, 1994 operated under the name Smith,
Barney Advisers, Inc., was incorporated in 1968 under the laws of
Delaware. SBMFM is a subsidiary of Holdings, the parent company of Smith
Barney (the "Distributor").
30
<PAGE>118
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Management of the Fund (continued)
================================================================================
Holdings is a wholly-owned subsidiary of Travelers, which is a financial
services holding company engaged, through its subsidiaries, principally in
four business segments: Investment Services, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services. SBMFM,
Holdings and Smith Barney are each located at 388 Greenwich Street, New
York, New York 10013.
SBMFM provides the Portfolio with investment management services
and executive and other personnel, pays the remuneration of Fund
officers, provides the Fund with office space and equipment, furnishes the
Fund with bookkeeping, accounting, administrative services and services
relating to research, statistical work and supervision of the Portfolio.
For the services provided, the Management Agreement provides that the
Portfolio will pay SBMFM a daily fee based on the Portfolio's assets. For
the Fund's last fiscal year the management fee was 0.45% of the Limited Term
Portfolio's average net assets. For the last fiscal year total expenses were
0.72% of the average daily net assets for Class A shares (Total expenses for
Class A shares are based on actual Portfolio Operating expenses for the
fiscal year ended March 31, 1995. However, 12b-1 fees have been restated to
reflect the anticipated level of 12b-1 fees for the current fiscal
period.); and 0.89% of the average daily net assets for Class C shares.
SBMFM has agreed to waive its fee with respect to a Class to the extent that
it is necessary if in any fiscal year the aggregate expenses exclusive of
12b-1 fees, taxes, brokerage, interest and extraordinary expenses, such as
litigation costs, exceed 0.65% of such Class' average net assets for
that fiscal year. The expense limitations shall be in effect until they are
terminated by notice to shareholders and by supplement to the then current
prospectus.
PORTFOLIO MANAGEMENT
Peter M. Coffey, a Managing Director of Smith Barney, has served as Vice
President of the Fund and portfolio manager of the Portfolio since its
inception (November 28, 1988) and manages the day to day operations of the
Fund, including making all investment decisions. Mr. Coffey also serves as
the portfolio manager for the Fund's other non-money market
Portfolios.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31,
1995 is included in the Annual Report dated March 31, 1995. A copy of the
Annual Report may be obtained upon request and without charge from a
Smith Barney Financial Consultant or by writing or calling the Fund at the
address or phone number listed on page one of this Prospectus.
31
<PAGE>119
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Distributor
================================================================================
Smith Barney distributes shares of the Portfolio as principal
underwriter and as such conducts a continuous offering pursuant to a "best
efforts" arrangement requiring Smith Barney to take and pay for only such
securities as may be sold to the public. Pursuant to a plan of distribution
adopted by the Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"),
Smith Barney is paid a service fee with respect to Class A and Class C
shares of the Portfolio at the annual rate of 0.15% of the average daily net
assets attributable to these Classes. Smith Barney is also paid a
distribution fee with respect to Class C shares at the annual rate of 0.20%
of the average daily net assets attributable to these shares. The fees are
used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class C shares, to cover expenses
primarily intended to result in the sale of those shares. These expenses
include: advertising expenses; the cost of printing and mailing prospectuses
to potential investors; payments to and expenses of Smith Barney Financial
Consultants and other persons who provide support services in connection
with the distribution of shares; interest and/or carrying charges; and
indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares
of a Class include a commission or fee paid by the investor or Smith Barney at
the time of sale and, with respect to Class A and Class C shares, a continuing
fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may
receive different levels of compensation for selling the different Classes
of shares.
Payments under the Plan with respect to Class B and Class C shares are
not tied exclusively to the distribution and shareholder services
expenses actually incurred by Smith Barney and the payments may exceed
distribution expenses actually incurred. The Fund's Trustees will evaluate
the appropriateness of the Plan and its payment terms on a continuing basis
and in so doing will consider all relevant factors, including expenses
borne by Smith Barney, amounts received under the Plan and proceeds of the
CDSC.
================================================================================
Additional Information
================================================================================
The Fund, an open-end non-diversified, management investment company,
is organized as a "Massachusetts business trust" pursuant to a Declaration of
Trust dated August 14, 1985. Pursuant to the Declaration of Trust, the
Trustees have
32
<PAGE>120
Smith Barney Muni Funds - Limited Term Portfolio
================================================================================
Additional Information (continued)
================================================================================
authorized the issuance of twenty series of shares, each representing shares
in one of twenty separate Portfolios. The assets of the Portfolio are
segregated and separately managed. Class A, Class C and Class Y shares of the
Portfolio represent interests in the assets of the Portfolio and have
identical voting, dividend, liquidation and other rights on the same terms and
conditions, except that expenses, distribution/service fees borne by each
Class and such Class of shares has exclusive voting rights with respect
to provisions of the Portfolio's Rule 12b-1 distribution plan which pertain to
that Class. (It is the intention of the Fund not to hold annual meetings of
shareholders. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Declaration of
Trust, and shareholders are entitled to call a meeting upon a vote of 10% of
the Fund's outstanding shares for purposes of voting on removal of a Trustee
or Trustees.) Shares do not have cumulative voting rights or preemptive
rights and have only such conversion or exchange rights as the Trustees may
grant in their discretion. When issued for payment as described in this
Prospectus, the Fund's shares will be fully paid and transferable (subject
to the Portfolio's minimum account size). Shares are redeemable as set
forth under "Redemption of Shares" and are subject to involuntary redemption
as set forth under "Minimum Account Size."
PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as Custodian of the Portfolio's
investments.
TSSG, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
The Fund sends its shareholders a semi- annual report and an audited
annual report, which include listings of the investment securities
held by the Portfolio at the end of the period covered. 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. In
addition, the Fund also plans to consolidate the mailing of its Prospectus so
that a shareholder having multiple accounts will receive a single
Prospectus annually. Shareholders who do not want this consolidation to apply
to their account should contact their Smith Barney Financial Consultant or
the Fund's transfer agent.
33
<PAGE>121
Smith Barney
- ------------
A Member of Travelers Group [Logo]
Smith Barney
Muni Funds
Limited Term
Portfolio
388 Greenwich Street
New York, New York 10013
FD 2349 7/95
<PAGE>122
STATEMENT OF ADDITIONAL INFORMATION DATED NOVEMBER __, 1995
Acquisition Of The Assets Of
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
a separate investment portfolio of
SMITH BARNEY INVESTMENT TRUST
388 Greenwich Street
New York, New York 10013
(800) 224-7523
By And In Exchange For Shares Of
LIMITED TERM PORTFOLIO
a separate investment portfolio of
SMITH BARNEY MUNI FUNDS
388 Greenwich Street
New York, New York 10013
(800) 224-7523
This Statement of Additional Information, relating specifically to
the proposed transfer of all or substantially all of the assets of Smith
Barney Limited Maturity Municipals Fund (the "Acquired Fund"), a separate
investment portfolio of Smith Barney Investment Trust, to the Limited Term
Portfolio (the "Acquiring Fund"), a separate investment portfolio of Smith
Barney Muni Funds, in exchange for shares of the Acquiring Fund and the
assumption by Smith Barney Muni Funds on behalf of the Acquiring Fund of
scheduled liabilities of the Acquired Fund, consists of this cover page and
the following described documents, each of which accompanies this Statement of
Additional Information and is incorporated herein by reference.
1. Statement of Additional Information of Smith Barney Muni Funds dated
July 31, 1995.
2. Annual Report of Smith Barney Muni Funds -- Limited Term Portfolio
for the fiscal year ended March 31, 1995.
3. Semi-Annual Report of Smith Barney Muni Funds - Limited Term
Portfolio for the six-month period ended September 30, 1995.
4. Annual Report of Smith Barney Limited Maturity Municipals Fund for
the fiscal year ended November 30, 1994.
<PAGE>123
5. Semi-Annual Report of Smith Barney Limited Maturity Municipals Fund
for the six-month period ended May 31, 1995.
6. Pro Forma Financial Statements.
This Statement of Additional Information is not a prospectus. A
Prospectus/Proxy Statement, dated November __, 1995, relating to the above-
referenced matter may be obtained without charge by calling or writing either
the Acquiring Fund or the Acquired Fund at the telephone numbers or addresses
set forth above or by contacting any Smith Barney Financial Consultant or by
calling toll-free (800) 224-7523. This Statement of Additional Information
should be read in conjunction with the Prospectus/Proxy Statement dated
November __, 1995.
The date of this Statement of Additional Information is November __,
1995.
<PAGE>124
STATEMENT OF ADDITIONAL INFORMATION
OF
SMITH BARNEY MUNI FUNDS -- LIMITED TERM PORTFOLIO
DATED JULY 31, 1995
<PAGE>125
JULY 31, 1995
SMITH BARNEY MUNI FUNDS
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of Smith Barney Muni Funds (the "Fund") are offered currently
with a choice of thirteen Portfolios, the National Portfolio, the
Limited Term Portfolio, the California Portfolio, the California Limited Term
Portfolio, the Florida Portfolio, the Florida Limited Term Portfolio, the
Georgia Portfolio, the New York Portfolio, the New Jersey Portfolio, the
Ohio Portfolio, the Pennsylvania Portfolio, the California Money Market
Portfolio and the New York Money Market Portfolio (collectively referred
to as "Portfolios" and individually as "Portfolio"):
The National Portfolio and the Limited Term Portfolio each seeks as
high a level of income exempt from Federal income taxes as is
consistent with prudent investing.
The California Portfolio and the California Limited Term Portfolio each
seek as high a level of income exempt from Federal income taxes and
from California personal income taxes as is consistent with prudent
investing.
The Florida Portfolio and the Florida Limited Term Portfolio each
seek to pay its shareholders as high a level of income exempt from
Federal income taxes as is consistent with prudent investing.
The Georgia Portfolio seeks as high a level of income exempt from
Federal income taxes and from Georgia personal income taxes as is
consistent with prudent investing.
The New York Portfolio seeks as high a level of income exempt from
Federal income taxes and from New York State and New York City
personal income taxes as is consistent with prudent investing.
The New Jersey Portfolio seeks to pay its shareholders as high a
level of income exempt from both Federal income taxes and New
Jersey personal income taxes as is consistent with prudent investing.
The Ohio Portfolio seeks to pay its shareholders as high a level of
income exempt from both Federal income taxes and Ohio personal income
taxes as is consistent with prudent investing.
The Pennsylvania Portfolio seeks to pay its shareholders as high a
level of income exempt from both Federal income taxes and
Pennsylvania personal income taxes as is consistent with prudent
investing.
<PAGE>126
The California Money Market Portfolio seeks to provide income
exempt from Federal income taxes and from California personal
income taxes from a portfolio of high quality short-term municipal
obligations selected for liquidity and stability.
The New York Money Market Portfolio seeks to provide its
shareholders with income exempt from both Federal income taxes and
New York State and New York City personal income taxes from a
portfolio of high quality short- term New York municipal
obligations selected for liquidity and stability.
The National Portfolio, California Portfolio, Florida Portfolio, Georgia
Portfolio, New York Portfolio, New Jersey Portfolio, Ohio Portfolio and
Pennsylvania Portfolio each offer four classes of shares: Class A, Class B,
Class C and Class Y. The Limited Term Portfolio, California Limited Term
Portfolio and Florida Limited Term Portfolio each offer three classes of
shares: Class A, Class C and Class Y. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are
sold without an initial sales charge but with higher ongoing expenses
and a Contingent Deferred Sales Charge ("CDSC") payable upon certain
redemptions. Class Y shares are sold without an initial sales charge and
are available only to investors investing a minimum of $5,000,000. The
California Money Market Portfolio and the New York Money Market
Portfolio each offer two classes of shares: Class A and Class Y. Class A
shares of each of the California Money Market and New York Money Market
Portfolios are sold without an initial sales charge. These alternatives are
designed to provide investors with the flexibility of selecting an
investment best suited to his or her needs based on the amount of
purchase, the length of time the investor expects to hold the shares and
other circumstances.
This Statement of Additional Information ("SAI") is not a prospectus. It
is intended to provide more detailed information about the Fund as well as
matters already discussed in each Prospectus and therefore should be read
in conjunction with the appropriate Prospectus which may be obtained
from the Fund or a Smith Barney Financial Consultant.
<PAGE>127
TABLE OF CONTENTS
Page
Trustees and Officers 4
Additional Information Regarding Investment Policies 6
Additional Tax Information 10
Investment Restrictions 11
Performance Information 13
Valuation of Shares 16
The Management Agreement 17
Distribution 20
Custodian 20
Independent Auditors 20
The Fund 21
Voting Rights 22
Financial Statements 25
Appendix A 26
Appendix B 29
Appendix C 38
Appendix D 49
Appendix E 54
Appendix F 59
Appendix G 61
Appendix H 63
<PAGE>128
TRUSTEES AND OFFICERS
*JESSICA BIBLIOWICZ, Trustee and President
Executive Vice President of Smith Barney Inc. ("Smith Barney"), President of
forty investment companies associated with Smith Barney and Trustee of twelve
investment companies associated with Smith Barney; prior to January, 1994,
Trustee of Sales and Marketing of Prudential Mutual Funds; Prior to
September, 1991, Assistant Portfolio Manager for Shearson Lehman Brothers; 35.
RALPH D. CREASMAN, Trustee
Retired, 4 Moss Hammock Lane, The Landings, Skidaway Island, Savannah,
Georgia 31411. Trustee of ten ten investment companies associated with
Smith Barney. Inc.("Smith Barney" )(see below). Formerly, Chairman,
President and Chief Executive Officer of Lionel D. Edie & Co., Inc.
(investment counselors), Chairman of Edie International S.A. and President
and Trustee of Edie Ready Assets Trust, Fundamerica of Japan, Edie Special
Growth Fund and Edie Capital Fund; 73.
JOSEPH H. FLEISS, Trustee
Retired, 3849 Torrey Pines Blvd., Sarasota, Florida 34238. Trustee of
ten ten investment companies associated with Smith Barney. Formerly,
Senior Vice President of Citibank, Manager of Citibank's Bond
Investment Portfolio and Money Management Desk and a Trustee of Citicorp
Securities Co., Inc.Inc; 77.
DONALD R. FOLEY, Trustee
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Trustee of
ten ten investment companies associated with Smith Barney. Formerly, Vice
President of Edwin Bird Wilson, Incorporated (advertising); 72.
PAUL HARDIN, Trustee
Retired, 60134 Davie Street, Chapel Hill, N. C. 27514. Trustee of
twelve investment companies associated with Smith Barney; and a
Trustee of The Summit Bancorporation. Formerly, Chancellor of the
University of North Carolina at Chapel Hill; 63.
FRANCIS P.. MARTIN, Trustee
Practicing physician, 2000 North Village Avenue, Rockville Centre, New
York 11570. Trustee of ten investment companies associated with
Smith Barney. Formerly, President of the Nassau Physicians' Fund, Inc.;
70 70.
*HEATH B. MCLENDON, Chairman of the Board and Chief Executive Officer
Managing Trustee of Smith Barney; Trustee of forty-one investment companies
associated with Smith Barney; President of Smith Barney Mutual Fund Management
Inc. ("SBMFM" or the "Manager"); Chairman of Smith Barney Strategy Advisers
Inc.; prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers, Inc.; Vice Chairman of Shearson Asset Management; 61.
RODERICK C. RASMUSSEN, Trustee
Investment Counselor, 81 Mountain Road, Verona, New Jersey 07044.
Trustee of ten investment companies associated with Smith Barney.
Formerly, Vice President of Dresdner and Company Inc. (investment counselors);
68.
_______________
*Designates an "interested person" as defined in the Investment Company Act of
1940 whose business address is 388 Greenwich Street, New York, NY
10013388 Greenwich Street, New York, NY 10013. Such person is not
separately compensated as a Fund officer or Trustee.
<PAGE>129
JOHN P. TOOLAN, Trustee
Retired, 13 Chadwell Place, Morristown, New Jersey, 07960. Trustee of ten
investment companies associated with Smith Barney. Formerly, Trustee
and Chairman of Smith Barney Trust Company, Trustee of Smith Barney
Holdings Inc. and the Manager and Senior Executive Vice President, Trustee
and Member of the Executive Committee of Smith Barney; 64.
C. RICHARD YOUNGDAHL, Trustee
Retired, 339 River Drive, Tequesta, Florida 33469. Trustee of ten ten
investment companies associated with Smith Barney. Formerly Chairman of
the Board of Pensions of the Lutheran Church in America and Chairman of the
Board and Chief Executive Officer of Aubrey G. Lanston & Co. (dealers in
U.S. Government securities) and President of the Association of Primary
Dealers in U.S. Government Securities;79.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Trustee of Smith Barney; Senior Vice President and Treasurer of
forty-one investment companies associated with Smith Barney,
and Trustee and Senior Vice President of the Manager; 37.
*PETER M. COFFEY, Vice President and Investment Officer
Managing Director of Smith Barney and Portfolio Manager. Prior to
August, 1993, Managing Director and Portfolio Manager of Shearson Lehman
Brothers Inc. Managing Trustee of Smith Barney and Vice President of the
Manager and three investment companies associated with Smith Barney;
51.
*LAWRENCE MCDERMOTT, Vice President and Investment Officer
Managing Trustee of Smith Barney and Vice President of the Fund and eleven
investment companies associated with Smith Barney; 47.
*KAREN LIN MAHONEY-MALCOMSON, Vice President and Investment Officer
Vice President of Smith Barney and the Fund and ten investment companies
associated with Smith Barney; 37.
*THOMAS M. REYNOLDS, Controller
Trustee of Smith Barney and Controller of the Fund and eleven investment
companies associated with Smith Barney; 34.
*IRVING P. DAVID, Controller
Vice President of Smith Barney and Controller of the Fund and thirty-five
investment companies associated with Smith Barney. Formerly Assistant
Treasurer of First Investment Management Company; 34.
*CHRISTINA T. SYDOR, Secretary Managing Trustee of Smith Barney and
Secretary of forty-one investment companies associated with Smith
Barney; Secretary and General Counsel of the Manager; 44.
_______________________
* Designates an "interested person" as defined in the Investment Company
Act of 1940 whose business address is 388 Greenwich Street, New York, NY
10013 is 388 Greenwich Street, New York, NY 10013. Such person is not
separately compensated as a Fund officer or Trustee.
<PAGE>130
The following table shows the compensation paid by the Fund to each
director during the Fund's last fiscal year. None of the officers of the Fund
recieved any compensation from the Fund for such period. Officers and
interested directors of the Fund are compensated by Smith Barney.
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total
Pension or Compensation Number of
Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which Trustee
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Trustees Fund Complex
Jessica Bibliowicz(*) $ 0 $0 $ 0 12
Ralph D. Creasman 11,396.00 0 51,500.00 10
Joseph H. Fleiss 11,196.00 0 50,900.00 10
Donald R. Foley 11,396.00 0 51,500.00 10
Paul Hardin 6,698.00 0 27,800.00(**) 12(**)
Francis P. Martin 11,396.00 0 51,500.00 10
Heath B. McLendon(*) 0 0 0 41
Roderick C. Rasmussen 11,396.00 0 51,500.00 10
John P. Toolan 11,396.00 0 51,500.00 10
C. Richard Youngdahl 11,396.00 0 51,500.00 10
<FN>
(*) Designates an "interested Trustee."
(**) Reflects the compensation paid to Dr. Hardin and the number of funds
within the Fund Complex for which Dr. Hardin serves as a Trustee as of the
date of this Statement of Additional Information. For the fiscal year
ended December 31, 1994, Mr. Hardin served as a Trustee of 25 funds within
the Fund Complex and was paid $96,400.
</TABLE>
On July 1, 1995 Trustees and officers owned in the aggregate less
than 1% of the outstanding shares of the Fund.
ADDITIONAL INFORMATION REGARDING INVESTMENT POLICIES
In general, municipal obligations are debt obligations (bonds or notes)
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities the
interest on which is exempt from Federal income tax in the opinion of bond
counsel to the issuer. Municipal obligations are issued to obtain funds for
various public purposes that enhance the quality of life, including the
construction of a wide range of public facilities, such as airports,
bridges, highways, housing hospitals, mass transportation, schools,
streets, water and sewer works and gas and electric utilities. They may
also be issued to refund outstanding obligations, to obtain funds for
general operating expenses, or to obtain funds to loan to other public
institutions and facilities and in anticipation of the receipt of revenue
or the issuance of other obligations. In addition, the term
"municipal obligations" includes certain types of industrial development
bonds issued by public authorities to obtain funds to provide various
privately-operated facilities for business and manufacturing, housing,
sports, convention or trade show facilities, airport, mass transit, port
and parking facilities, air or water pollution control facilities, and
certain facilities for water supply, gas, electricity or sewerage or solid
waste disposal.
The two principal classifications of municipal obligations are
"general obligation" and "revenue." General obligations are
secured by a municipal issuer's pledge of its full faith, credit, and
taxing power for the
<PAGE>131
payment of principal and interest. Revenue obligations are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source. Although industrial development bonds
("IDBs") are issued by municipal authorities, they are generally secured
by the revenues derived from payments of the industrial user. The
payment of the principal and interest on IDBs is dependent solely on
the ability of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. Currently, the majority of each
Portfolio's municipal obligations are revenue bonds.
For purposes of diversification and concentration under the
Investment Company Act of 1940 (the "Act"), the identification of the
issuer of municipal obligations depends on the terms and conditions of
the obligation. If the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of the
government creating the subdivision and the obligation is backed only by
the assets and revenues of the subdivision, such subdivision is regarded as
the sole issuer. Similarly, in the case of an industrial development
revenue bond or a pollution control revenue bond, if the bond is backed
only by the assets and revenues of the nongovernmental user, the
nongovernmental user is regarded as the sole issuer. If in either case
the creating government or another entity guarantees an obligation, the
guaranty is regarded as a separate security and treated as an issue of such
guarantor.
Among the types of short-term instruments in which each Portfolio may invest
are floating or variable rate demand instruments, tax- exempt commercial
paper (generally having a maturity of less than nine months), and other types
of notes generally having maturities of less than three years, such as
Tax Anticipation Notes, Revenue Anticipation Notes, Tax and Revenue
Anticipation Notes and Bond Anticipation Notes. Demand instruments usually
have an indicated maturity of more than one year, but contain a demand
feature that enables the holder to redeem the investment on no more
than 30 days' notice; variable rate demand instruments provide for automatic
establishment of a new interest rate on set dates; floating rate
demand instruments provide for automatic adjustment of their interest rates
whenever some other specified interest rate changes (e.g., the prime
rate). Each Portfolio may purchase participation interest in variable rate
tax- exempt securities (such as Industrial Development Bonds)
owned by banks. Participations are frequently backed by an
irrevocable letter of credit or guarantee of a bank that the Manager has
determined meets the prescribed quality standards for the Portfolio.
Participation interests will be purchased only, if management believes
interest income on such interests will be tax- exempt when distributed as
dividends to shareholders.
Investments in participation interests in variable rate tax-exempt
securities (such as IDBs) purchased from banks give the purchaser an
undivided interest in the tax-exempt security in the proportion that the
Portfolio participation interest bears to the total principal amount of
the tax-exempt security with a demand repurchase feature.
Participation interest are frequently backed by an irrevocable letter of
credit or guarantee of a bank that the Manager, under the supervision
of the Trustees, has determined meets the prescribed quality
standards for the Portfolio . A Portfolio has the right to sell the
instrument back to the bank and draw on the letter of credit on demand on
seven days' notice or less, for all or any part of the Portfolio's
participation interest in the tax-exempt security, plus accrued interest.
Each Portfolio intends to exercise the demand under the letter of credit
only (1) upon a default under the terms of the documents of the
tax-exempt security, (2) as needed to provide liquidity in order to meet
redemptions, or (3) to maintain a high quality investment portfolio. Banks
will retain a service and letter of credit fee and a fee for issuing
repurchase comments in an amount equal to the excess of the interest paid
on the tax-exempt securities over the negotiated yield at which the
instruments were purchased by a Portfolio. The Manager will
monitor the pricing, quality and liquidity of the variable rate demand
instruments held by each Portfolio, including the IDBs
<PAGE>132
supported by bank letters of credit or guarantees, on the basis of
published financial information, reports of rating agencies and other bank
analytical services to which the Manager may subscribe.
The yields on municipal obligations are dependent on a variety of
factors, including general market conditions, supply and demand, general
conditions of the municipal market, size of a particular offering, the
maturity of the obligation and the rating of the issue. The rating of
Moody's Investment Service, Inc. and Standard & Poor's Corporation
represent their opinion as to the quality to the municipal obligations that
they undertake to rate. It should be emphasized, however, that such
ratings are general and are not absolute standards of quality.
Consequently, municipal obligations with the same maturity, coupon and rating
may have different yields when purchased in the open market, while municipal
obligations of the same maturity and coupon with different ratings may have
the same yield.
Municipal obligations purchased on a when- issued basis as well as the
securities held in each Portfolio are generally subject to similar changes
in market value based upon the public's perception of the
creditworthiness of the issuer and changes in the level of interest rates
(i.e., both experiencing appreciation when interest rates decline and
depreciation when interest rates rise). Therefore, to the extent a Portfolio
remains substantially fully invested at the same time that it has purchased
securities on a when-issued basis, there will be a greater possibility that
the market value of a Portfolio's assets will fluctuate.
Purchasing a tax-exempt security on a when- issued basis involves the
risk that the yields available in the market when the delivery takes
place may be higher than those obtained on the security so purchased. A
separate account of each Portfolio consisting of cash or liquid high-grade
debt securities equal to the amount of the when-issued commitments will
be established with the Custodian and marked-to-market daily, with
additional cash or liquid high-grade debt securities added when necessary.
When the time comes to pay for when-issued securities, the Portfolios will
meet their respective obligations from then available cash flow, sale of
securities held in the separate account, sale of other securities
or, although they would not normally expect to do so, from the sale of
the when-issued securities themselves (which may have a value greater or
lesser than the Portfolios' payment obligations). Sale of securities to
meet such obligations carries with it a greater potential for the
realization of capital gain, which is not exempt from Federal income
tax (see "Dividends, Distributions and Taxes" in the Prospectus).
Each Portfolio, other than the California Money Market Portfolio and the
New York Money Market Portfolio, may invest in municipal bond index
futures contracts or in listed contracts based on U.S. Government
securities. Such investments will be made solely for the purpose of
hedging against changes in the value of portfolio securities due to
anticipated changes in interest rates and market conditions, and not for
purposes of speculation. The acquisition or sale of a futures contract could
enable the Fund to protect a Portfolio's assets from
fluctuations in rates on tax-exempt securities without actually
buying or selling securities. The municipal bond index futures contract is
based on an index of long-term, tax-exempt municipal bonds. The "contract"
obligates the buyer or seller to take or make delivery, respectively, of an
amount of cash equal to the difference between the value of the index upon
liquidation of the "contract" and the price at which the index contract was
originally purchased or sold. In connection with the use of futures
contracts as a hedging device, there can be no assurance that there
will be a precise or even a positive correlation between price movement
in the futures contracts with that of the municipal bonds that are the
subject of the hedge, consequently, a Portfolio may realize a profit on a
futures contract that is less than the loss in the price of the municipal
bonds being hedged or may even incur a loss. A Portfolio also may not be
able to close a futures position in the event of adverse price movements
or in the event an active market does not exist for the hedging
contract on the exchange or board of trade on which the contract is traded.
The successful use of these investments is dependent on the ability of the
Manager to predict price or interest rate movements or the correlation of
futures and cash markets, or both.
<PAGE>133
Each Portfolio may invest in securities the disposition of which is subject
to legal or contractual restrictions. The sale of restricted
securities often requires more time and results in higher dealer discounts
or other selling expenses than does the sale of securities that are not
subject to restrictions on resale. Restricted securities often
sell at a price lower than similar securities that are not subject to
restrictions on resale.
Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates). In addition, a security may be sold and another purchased at
approximately the same time to take advantage of what the Manager believes
to be a temporary disparity in the normal yield relationship between
the two securities. The Fund believes that, in general, the secondary market
for tax-exempt securities in each of the Fund's Portfolios may be less liquid
than that for taxable fixed-income securities. Accordingly, the ability
of a Portfolio to make purchases and sales of securities in the foregoing
manner may be limited. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, but instead due to such factors as
changes in the overall demand for or supply of various types of
tax-exempt securities or changes in the investment objectives of
investors.
Portfolio turnover rate for a fiscal year is the ratio of the lesser of
purchases or sales (including maturities and calls) of portfolio securities to
the monthly average of the value of portfolio securities including long-
term U.S. Government securities but excluding securities with maturities at
acquisition of one year or less. The Fund effects portfolio transactions
with a view towards attaining the investment objective of each Portfolio
and is not limited to a predetermined rate of portfolio turnover. A high
portfolio turnover results in correspondingly greater transaction costs. The
Fund anticipates that each Portfolio's annual turnover rate generally
will not exceed 100%.
Though not obligated to do so, the Fund will normally provide upon request a
listing of portfolio holdings as of a recent date.
<PAGE>134
ADDITIONAL TAX INFORMATION Capital gain distributions, if any,
are taxable to shareholders, and are declared and paid at least annually. At
March 31, 1995 the unused capital loss carryovers of the Fund by
Portfolio were approximately as follows: National Portfolio, $5,911,171;
New York Portfolio, $1,310,119, Florida Portfolio, $313,998, New
Jersey, $999,309, Limited Term Portfolio, $5,131,067, Georgia Portfolio,
$36,179, Ohio Portfolio $28,813, Pennsylvania Portfolio, $114,695, California
Limited Term Portfolio, $188,158 and Florida Limited Term Portfolio,
$514,327. For Federal income tax purposes theses amounts are available
to be applied against future securities gains, if any, realized. The
carryovers expire as follows:
<TABLE>
<CAPTION>
March 31,
<S> <C> <C> <C> <C> <C> <C> <C>
PORTFOLIO 1997 1998 1999 2000 2001 2002 2003 (in thousands)
National -- -- -- -- -- -- $ 5911
California -- -- -- -- -- -- --
Florida -- -- -- -- -- -- 314
New Jersey -- -- -- -- -- -- 999
New York $427 $ 79 -- -- -- -- 804
Georgia -- -- -- -- -- -- 36
Ohio -- -- -- -- -- -- 29
Pennsylvania -- -- -- -- -- -- 115
Limited Term -- -- -- $ 450 $ 196 -- 4,485
California Limited Term -- -- -- -- -- -- 188
Florida Limited Term -- -- -- -- -- $ 2 512
</TABLE>
Generally, interest on municipal obligations is exempt from Federal income
tax. However, interest on municipal obligations that are considered to be
industrial development bonds (as defined in the Internal Revenue Code (the
"Code"), will not be exempt from Federal income tax to any
shareholder who is considered to be a "substantial user" of any facility
financed by the proceeds of suSh obligations (or a "related person" to
such "substantial user" as defined in the Code).
In addition, interest on municipal obligations may subject certain
investors' Social Security benefits to Federal income taxation. Section 86
of the Internal Revenue Code provides that the amount of Social Security
benefits includable in gross income for a taxable year is the lesser of (a)
one- half of the Social Security benefits or (b) one-half of the amount by
which the sum of "modified adjusted gross income" plus one- half of the
Social Security benefits exceeds a "base amount." The base amount is $25,000
for unmarried taxpayers, $32,000 for married taxpayers filling a joint return
and zero for married taxpayers not living apart who file separate returns.
Modified adjusted gross income is adjusted gross income determined without
regard to certain otherwise allowable deductions and exclusions from gross
income, plus tax-exempt interest on municipal obligations. To the
extent that Social Security benefits are included in gross income they
will be treated as any other item of gross income and therefore may be taxable.
Tax-exempt interest is included in modified adjusted gross income solely for
the purpose of determining what portion, if any, of Social Security
benefits will be included in gross income; no tax-exempt interest,
including that received from the Fund, will be subject to Federal income
tax for most investors.
<PAGE>135
Additionally, the Tax Reform Act of 1986 (the "Tax Reform Act") provides that
interest on certain municipal obligations (i.e. certain private activity
bonds) issued after August 7, 1986 will be treated as a preference item for
purposes of both the corporate and individual alternative minimum tax.
Under Treasury regulations, that portion of the Portfolio's exempt-interest
dividend which is to be treated as a preference item for shareholders
will be based on the proportionate share of the interest received by
the Portfolio from the specified private activity bonds. In addition, the Tax
Reform Act provides generally that tax preference items for corporations
for 1987-1989 will include one-half the amount by which adjusted net book
income (which would include tax- exempt interest) of the taxpayer exceeds
the alternative minimum taxable income of the taxpayer before any amount
is added to alternative minimum taxable income because of this preference.
A similar provision based on adjusted earnings and profits would apply
after 1989. Investors should consult their tax advisors before investing in
shares of the Fund.
From time to time, proceedings have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption
for interest on municipal obligations. It may be expected that similar
proposals may be introduced in the future. If such proposals were to be
enacted, the ability of the Fund to pay "exempt interest" dividends could be
adversely affected and the Fund would then need to reevaluate its
investment objectives and policies and consider changes in its
structure.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental
policies that cannot be changed without approval by the holders of a
majority of the outstanding voting securities of each Portfolio affected by
the matters as defined in the Investment Company Act of 1940 (see "Voting
Rights").
Without the approval of a majority of their outstanding voting securities,
the National Portfolio and the New York Portfolio each may not:
(1) Borrow money, except from banks for temporary purposes (such as
facilitating redemptions or for extraordinary or emergency purposes) in an
amount not to exceed 10% of the value of its total assets at the time the
borrowing is made (not including the amount borrowed) and no investment
will be made while borrowing exceeds 5% of total assets; (2) Mortgage or
pledge any of its assets, except to secure borrowings permitted under (1)
above; (3) Invest more than 25% of total assets taken at market value in
any one industry, except that Municipal Obligations and securities of the
U.S. Government, its agencies and instrumentalities and Municipal Obligations
of New York State with respect to the New York Portfolio are not considered an
industry for purposes of this limitation; (4) The National Portfolio may not
with respect to 75% of the value of its total assets, purchase
securities of any issuer if immediately thereafter more than 5% of
total assets at market value would be invested in the securities of any
issuer (except that this limitation does not apply to obligations issued or
guaranteed as to principal and interest either by the U.S. Government or its
agencies or instrumentalities or by New York State or its political
subdivisions with respect to the New York Portfolio); (5) Invest in
securities issued by other investment companies, except as permitted by
Section 12(d)(1) of the Investment Company Act of 1940 or in connection
with a merger, consolidation, acquisition or reorganization; (6) Purchase or
hold any real estate, except that a Portfolio may invest in securities
secured by real estate or interest therein or issued by persons (other than
real estate
<PAGE>136
investment trusts) who deal in real estate or interests therein; (7) Purchase
or hold the securities of any issuer, if to its knowledge, Trustees
or officers of the Fund individually owning beneficially more than .5% of
the securities of that issuer own in the aggregate more than 5% of
such securities; (8) write or purchase put, call straddle or spread
options; purchase securities on margin or sell "short"; (9) Underwrite
the securities of other issuers; (10) Purchase or sell commodities and
commodity contracts, except that each Portfolio may invest in or sell
municipal bond index future contracts; provided that immediately thereafter
not more than 33 1/3% of its net assets would be hedged or the amount of
margin deposits on the Portfolio's existing futures contracts would not
exceed 5% of the value of its total assets; or (ii) Make loans, except to the
extent the purchase of bonds or other evidences of indebtedness or the
entry into repurchase agreements or deposits with banks, including the
Fund's Custodian, may be considered loans (and the Fund has no present
intention of entering into repurchase agreements).
<PAGE>137
Without the approval of a majority of its outstanding voting securities,
the Limited Term Portfolio, the California Portfolio, the New Jersey
Portfolio, the Florida Portfolio, the California Limited Term Portfolio, the
Florida Limited Term Portfolio, the Georgia Portfolio, the Pennsylvania
Portfolio and the Ohio Portfolio each may not:
(1) Borrow money, except from banks for temporary purposes (such as
facilitating redemptions or for extraordinary or emergency purposes) in an
amount not to exceed 10% of the value of its total assets at the time the
borrowing is made (not including the amount borrowed) and no investments
will be made while borrowing exceed 5% of total assets; (2) Mortgage or
pledge any of its assets, except to secure borrowings permitted under (1)
above; (3) Invest more than 25% of total assets taken at market value in
any one industry; except that Municipal Obligations and securities of the
U.S. Government, its agencies and instrumentalities and Municipal Obligations
of California with respect to the California Portfolio and the California
Limited Term Portfolio, Municipal Obligations of New Jersey with respect to
the New Jersey Portfolio, Municipal Obligations of Georgia with respect to
the Georgia Portfolio, Municipal Obligations of Pennsylvania with respect
to the Pennsylvania Portfolio and Municipal Obligations of Florida with
respect to the Florida Portfolio and the Florida Limited Term Portfolio
are not considered an industry for purposes of this limitation; (4) Purchase
or hold any real estate, except that the Portfolio may invest in
securities secured by real estate or interests therein or issued by persons
(other than real estate investment trusts) which deal in real estate or
interests therein; (5) Write or purchase put, call, straddle or spread
options; purchase securities on margin or sell "short"; (6)
Underwrite the securities of other issuers: (7) Purchase or sell
commodities and commodity contracts, except that the Portfolio may invest
in or sell municipal bond index futures contracts, provided that
immediately thereafter not more than 33 1/3% of its net assets would be
hedged or the amount of margin deposits on the Portfolio's existing
futures contracts would not exceed 5% of the value of its total assets; or
(8) Make loans, except to the extent the purchase of bonds or other
evidences of indebtedness or the entry into repurchase agreements or deposits
with banks, including the Funds' Custodian, may be considered loans.
Without the approval of a majority of its outstanding voting securities,
the California Money Market Portfolio and the New York Money Market Portfolio
each may not:
(1) Borrow money, except from banks for temporary purposes (such as
facilitating redemptions or for extraordinary or emergency purposes) in an
amount not to exceed 10% of the value of its total assets at the time the
borrowing is made (not including the amount borrowed) and no investments
will be made while borrowings exceed 5% of total assets; (2) Mortgage or
pledge any of its assets, except to secure borrowings permitted under (1)
above; (3) Invest more than 25% of total assets taken at market value in
<PAGE>138
any one industry; except that Municipal Obligations and securities of the
U.S. Government, its agencies and instrumentalities and Municipal Obligations
of California with respect to the California Money Market Portfolio and
Municipal Obligations of New York with respect to the New York
Money Market Portfolio are not considered an industry for purposes of this
limitation; (4) Purchase or hold any real estate, except that the
Portfolio may invest in securities secured by real estate or interests therein
or issued by persons (other than real estate investment trusts) which
deal in real estate or interests therein; (5) Write or purchase put,
call, straddle or spread options; purchase securities on margin or
sell "short"; (6) Underwrite the securities of other issuers; (7)
Purchase or sell commodities and commodity contracts; or (8) Make loans,
except to the extent the purchase of bonds or other evidences of indebtedness
or the entry into repurchase agreements or deposits with banks, including
the Fund's Custodian, may be considered loans.
In order to comply with certain state statutes and policies, none of
the Portfolios will, as a matter of operating policy:
(1) Purchase oil, gas or other mineral leases, rights or royalty
contracts or exploration or development programs, except that each
Portfolio may invest in the securities of issuers which operate, invest
in, or sponsor such programs; (2) invest more than 5% of their assets in
unseasoned issuers, including their predecessors, which have been in
operation for less than three years.
The foregoing percentage restrictions apply at the time an investment
is made; a subsequent increase or decrease in percentage may result from
changes in values or net assets.
PERFORMANCE INFORMATION
From time to time, in advertisements and other types of sales
literature, each Portfolio may compare its performance to that of other
mutual funds with similar investment objectives, to appropriate indices
or rankings such as those compiled by Lipper Analytical Services, Inc.
or to other financial alternatives.
Each Portfolio, other than the California Money Market Portfolio and the
New York Money Market Portfolio, computes the average annual total return
during specified periods that would equate the initial amount invested to
the ending redeemable value of such investment by adding one to
the computed average annual total return, raising the sum to a power equal
to the number of years covered by the computation and multiplying the
result by one thousand dollars which represents the hypothetical
initial investment. The calculation assumes deduction of the maximum
sales charge from the initial amount invested and reinvestment of all
income dividends and capital gains distributions on the reinvestment dates
at prices calculated as stated in the Prospectus. The ending
redeemable value is determined by assuming a complete redemption at the
end of the period(s) covered by the average annual total return
computation. Such standard total return information may also be
accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total
return or taking sales charges into account.
<PAGE>139
Each Portfolio's average annual total return with respect to its Class A
Shares for the one-year period, five-year period, if any, and for the life
of the Portfolio ended March 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PORTFOLIO One Year Five Years Life Inception Date
National 2.10% 7.82% 7.60% 8/20/86
Limited Term 3.64% 6.62% 6.82% 11/28/88
New York 2.10% 7.86% 6.82% 1/16/87
California 2.22% 7.36% 6.33% 4/3/87
New Jersey 2.38% N/ 7.97% 10/11/90
Florida 2.53% N/A 6.93% 4/2/91
Georgia N/A N/A 2.04% 4/4/94
Ohio N/A N/A (0.13%) 6/13/94
Pennsylvania N/A N/A 4.47% 4/4/94
Florida Ltd. Term 5.05 N/A 4.05% 4/27/93
Cal. Ltd. Term 3.79 N/A 3.17% 4/27/93
</TABLE>
Each Portfolio's average annual total return with respect to its Class B
Shares for the one-year period, five-year period, if any, and for the life
of the Portfolio ended March 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PORTFOLIO One Year Five Years Life Inception Date
National N/A N/A 5.61% 11/7/94
New York N/A N/A 5.42% 11/11/94
California N/A N/A 4.68% 11/11/94
New Jersey N/A N/A 6.36% 11/16/94
Florida N/A N/A 6.27% 11/16/94
Georgia N/A N/A (1.56%) 6/15/94
Ohio N/A N/A (1.17%) 6/14/94
Pennsylvania N/A N/A (0.07%) 6/20/94
</TABLE>
<PAGE>140
Each Portfolio's average annual total return with respect to its Class C
Shares for a one- year period and the life of the Portfolio's Class C shares
through March 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PORTFOLIO One Year Five Years Life Inception Date
National 4.80% N/A 5.48% 1/5/93
Limited Term 4.51% N/A 4.92% 1/5/93
New York 4.66% N/A 5.25% 1/8/93
California 4.80% N/A 5.02% 1/5/93
New Jersey 4.91% N/A 5.10% 1/5/93
Florida 5.12% N/A 5.50% 1/5/93
Georgia N/A N/A 4.11% 4/14/94
Ohio N/A N/A 2.28% 6/14/94
Pennsylvania N/A N/A 7.14% 4/5/94
Florida Ltd. Term 5.84% N/A 4.70% 5/4/93
Cal. Ltd. Term 4.56% N/A 3.97% 5/18/93
</TABLE>
Each Portfolio's average annual total return with respect to its Class Y
Shares for the one-year period, five-year period, if any, and for the life
of the Portfolio ended March 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PORTFOLIO One Year Five Years Life Inception Date
National N/A N/A N/A
Limited Term N/A N/A N/A
New York N/A N/A N/A
California N/A N/A N/A
New Jersey N/A N/A N/A
Florida N/A N/A N/A
Georgia N/A N/A N/A
Ohio N/A N/A N/A
Pennsylvania N/A N/A N/A
Florida Ltd. Term N/A N/A N/A
Cal. Ltd. Term 5.87% N/A 3.22% 6/23/93
</TABLE>
<PAGE>141
Each Portfolio's yield, other than for the California Money Market Portfolio
and the New York Money Market Portfolio, is computed by dividing the net
investment income per share earned during a specified thirty day period
ending at month end by the maximum offering price per share on the last
day of such period and analyzing the result. For purposes of yield
calculation, interest income is determined based on a yield to maturity
percentage for each long-term debt obligation in the Portfolio; income or
short- term obligations is based on current payment rate. Yield information
may be accompanied with information on tax equivalent yield computed in
the same manner, with adjustment for assumed federal income tax rates. No
taxable instruments are presently held by the Fund.
Each Portfolio's distribution rate, other than for the California
Money Market Portfolio and the New York Money Market Portfolio, is
calculated by analyzing the latest income distribution and dividing the
result by the maximum offering price per share as of the end of the
period to which the distribution relates. The distribution rate is not
computed in the same manner as, and therefore can be significantly different
from, the above described yield which will be computed in accordance with
applicable regulations. A Portfolio may quote its distribution rate
together with the above described standard total return and yield
information in its supplemental sales literature. The use of such
distribution rates would be subject to an appropriate explanation of,
among other matters, how the components of the distribution rate differ
from the above described yield. California Money Market Portfolio's
yield with respect to its Class A shares for the seven-day period ended
March 31, 1995 was 3.39% (the effective yield was 3.45%) with an average
dollar-weighted portfolio maturity of 16.9 days; the New York Money
Market Portfolio's yield with respect to its Class A shares for the seven-day
period ended March 31, 1995 was 3.32% (the effective yield was 3.38%) with
an average dollar-weighted portfolio maturity of 40.2 days. From time to
time the California Money Market Portfolio and, the New York Money Market
Portfolio may advertise their yield, effective yield and tax equivalent
yield. These yield figures are based on historical earnings and are not
intended to indicate future performance. The yield of each Portfolio refers
to the net investment income generated by an investment in each Portfolio
over a specific seven-day period (which will be stated in the
advertisement). This net investment income is then annualized. The
effective yield is calculated similarly but, when annualized, the income
earned by an investment in each Portfolio is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of the assumed reinvestment. The tax equivalent
yield also is calculated similarly to the yield, except that a stated income
tax rate is used to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the tax-exempt yield of each Portfolio.
Performance information may be useful in evaluating a Portfolio and for
providing a basis for comparison with other financial alternatives. Since
the performance of each Portfolio changes in response to fluctuations in
market conditions, interest rates and Portfolio expenses, no performance
quotation should be considered a representation as to the Portfolio's
performance for any future period.
VALUATION OF SHARES
The Prospectus states that the net asset value of each Portfolio's
Classes of shares will be determined on any date that the New York Stock
Exchange ("NYSE") is open. The NYSE is closed on the following holidays: New
Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
<PAGE>142
The California Money Market Portfolio and the New York Money Market
Portfolio use the "amortized cost method" for valuing portfolio securities
pursuant to Rule 2a-7 under the Act (the "Rule"). The amortized cost method
of valuation of a Portfolio's securities (including any securities
held in the separate account maintained for "when-issued" securities --
See "Investment Objective and Management Policies" and "Portfolio
Management" in the Prospectus) involves valuing a security at its cost at
the time of purchase 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. The
market value of each Portfolio's securities will fluctuate on the basis of
the creditworthiness of the issuers of such securities and with changes in
interest rates generally. While the amortized cost method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price each
Portfolio would receive if it sold the instrument. During such periods
the yield to investors in each Portfolio may differ somewhat from that
obtained in a similar company that uses mark-to-market values for all its
portfolio securities. For example, if the use of amortized cost resulted in
a lower (higher) aggregate portfolio value on a particular day, a prospective
investor in each Portfolio would be able to obtain a somewhat higher
(lower) yield than would result from investment in such similar
company, and existing investors would receive less (more) investment income.
The purpose of this method of valuation is to attempt to maintain a
constant net asset value per share, and it is expected that the price of
each Portfolio's shares will remain at $1.00; however, shareholders should be
aware that despite procedures that will be followed to have a
stabilized price, including maintaining a maximum dollar-weighted average
portfolio maturity of 90 days, investing in securities that have or are
deemed to have remaining maturities of only 13 months or less and
investing in only United States dollar-denominated instruments determined
by the Fund's Trustees to be of high quality with minimal credit risks
and which are Eligible Securities (as defined below), there is no assurance
that at some future date there will not be a rapid change in
prevailing interest rates, a default by an issuer or some other event that
could cause each Portfolio's price per share to change from $1.00.
An Eligible Security is defined in the Rule to mean a security which:
(a) has a remaining maturity of 397 days or less; (b)(i) is rated in
the two highest short-term rating categories by any two "nationally-
recognized statistical rating organizations" ("NRSROs") that have issued a
short-term rating with respect to the security or class of debt obligations of
the issuer, or (ii) if only one NRSRO has issued a short-term rating with
respect to the security, then by that NRSRO; (c) was a long-term security
at the time of issuance whose issuer has outstanding a short-term debt
obligation which is comparable in priority and security and has a rating
as specified in clause (b) above; or (d) if no rating is assigned by any NRSRO
as provided in clauses (b) and (c) above, the unrated security is
determined by the Trustees to be of comparable quality to any such rated
security.
THE MANAGEMENT AGREEMENT
Manager
The Management Agreement for each of the Fund's Portfolios, other than
the California Money Market Portfolio and the New York Money Market
Portfolio, provides for a daily management fee at the annual rate of 0.45%
of the Portfolio's average net assets.
<PAGE>143
On April 27, 1994, the Trustees approved new management agreements
between the Fund, on behalf of each of the California Money Market Portfolio
and the New York Money Market Portfolio (collectively the "Money
Market Portfolios"). The new management agreements were subsequently approved
by shareholders at a meeting of held on September 2, 1994. The new
management agreements provide for the payment of an effective management fee
at an annual rate based on each Money Market Portfolio's average daily
net assets in accordance with the following schedule:
0.50% on the first $2.5 billion of net assets;
0.475% on the next $2.5 billion; and
0.45% on net assets in excess of $5 billion.
Based on the current asset levels of each Money Market Portfolio,
the effective management fee is 0.50%.
The new management agreements were proposed and approved in conjunction with
the proposed acquisition (the "Acquisition") by each of the Money Market
Portfolios of the assets of Smith Barney Shearson California Money Market Fund
and Smith Barney Shearson New York Money Market Fund, respectively. As a result
of the Acquisitions, it is expected that the level of assets of each Money
Market Portfolio will substantially increase. The new management fee would
result in the same effective management fee on each Portfolio's current
net assets and on the assets expected immediately after the
Acquisitions. However, the management fee payable would be reduced as
higher levels of assets are attained.
<PAGE>144
For the fiscal years ended March 31, 1993, 1994 and 1995, the management
fee for each Portfolio was as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Portfolio 1995 1994 1993
National $ 1,918,961 $ 1,985,609 $ 1,493,308
Limited Term 1,351,567 1,339,152 944,993
California 773,229 823,356 638,950
New York 373,385 334,878 233,445
New Jersey (a) 301,338 240,296 129,326
Florida (b) 484,744 505,761 311,509
California Money (c) 2,239,712 897,858 772,368
New York Money (d) 1,525,102 293,600 110,008
CA Ltd. Term (e) -- -- N/A
FL Ltd. Term (f) (g) 12,445 -- N/A
Georgia (h) -- N/A N/A
Ohio (i) -- N/A N/A
Pennsylvania (j) -- N/A N/A
<FN>
(a) The Manager waived its management fee with respect to the New Jersey
Portfolio's average daily net assets in excess of 0.30% of such Portfolio's
average daily net assets for 1993.
(b) The Manager waived its management fee in excess of 0.035% of the Florida
Portfolio's average daily net assets for the period April 1, 1992 through
January 1, 1993.
(c) The Manager waived its management fee in excess of 0.03% of the
California Money Market Portfolio's average daily net assets for the period
from April 1, 1994 through March 31, 1995.
(d) The Manager waived its management fee in excess of 0.36% of the New York
Money Market Portfolio's average daily net assets for the period from
September 17,1992 through March 31, 1993.
(e) The Manager waived its entire management fee with respect to the
California Limited Term Portfolio's average daily net assets for the period
from April 27, 1993 through March 31, 1994.
(f) The Manager waived its entire management fee with respect to the Florida
Limited Term Portfolio's average daily net assets for the period from April
27, 1993 through March 31, 1994.
(g) The Manager waived its management fee in excess of .069% of the Florida
Limited Term Portfolio's average daily net assets for the period from April
1, 1994 through March 31, 1995.
(h) The Manager waived its entire management fee with respect to the Georgia
Portfolio's average daily net assets for the period from April 4, 1994 through
March 31, 1995.
(i) The Manager waived its entire management fee with respect to the Ohio
Portfolio's average daily net assets for the period from June 13, 1994 through
March 31, 1995.
<PAGE>145
(j) The Manager waived its entire management fee with respect to the
Pennsylvania Portfolio's average daily net assets for the period from April
4, 1994 through March 31, 1995.
</TABLE>
The Management Agreements further provide that all other expenses not
specifically assumed by the Manager under the Management Agreement on
behalf of each portfolio are borne by the Fund. Expenses payable by the
Fund include, but are not limited to, all charges of custodians
(including sums as custodian and sums for keeping books and for rendering
other services to the Fund) and shareholder servicing agents, expenses
of preparing, printing and distributing all prospectuses, proxy
material, reports and notices to shareholders, all expenses of
shareholders' and Trustees' meeting, filing fees and expenses relating
to the registration and qualification of the Fund's shares and the Fund
under Federal or state securities laws and maintaining such
registrations and qualifications (including the printing of the Fund's
registration statements), fees of auditors and legal counsel, costs
of performing portfolio valuations, out-of-pocket expenses of
Trustees and fees of Trustees who are not "interested persons" as defined
in the Act, interest, taxes and governmental fees, a fees and commissions of
every kind, expenses, of issue, repurchase or redemption of shares,
insurance expense, association membership dues, all other costs incident
to the Fund's existence and extraordinary expenses such as litigation and
indemnification expenses. Direct expenses of each Portfolio of the
Fund, including but not limited to the management fee are charged to
that Portfolio, and general trust expenses are allocated among the
Portfolios on the basis of relative net assets. The Manager has
voluntarily agreed to waive its fee with respect to each Portfolio to the
extent it is necessary if in any fiscal year the aggregate expenses of the
Portfolio, exclusive of taxes, brokerage, interest, payments of
distribution fees and extraordinary expenses such as litigation costs,
exceed the most restrictive expense limitation imposed by any state in
which a Portfolio sells shares, if any.
DISTRIBUTOR
The Fund, on behalf of each Portfolio, has adopted a plan of distribution
pursuant to Rule 12b-1 (the "Plan") under the 1940 Act under which a
service fee is paid by each class of shares (other than Class Y shares ) of
each Portfolio to Smith Barney in connection with shareholder service
expenses. The service fee is equal to 0.15% of the average daily net
assets of each class (the service fee payable by the Class A shares of the
Money Market Portfolios is 0.10%). With respect to Class B and Class C shares
of each Portfolio, Smith Barney is also paid a distribution fee,
pursuant to a plan of distribution adopted by each Portfolio. See
"Distributor" in each applicable Prospectus.
CUSTODIAN
All portfolio securities and cash owned by the Fund will be held in the
custody of PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, have been
selected as independent auditors for the Fund for its fiscal year ending
March 31, 1996 to report annually on their audit of the financial
statements of the Fund and to perform required reviews of certain filings
with the Commission.
<PAGE>146
THE FUND
The interest of a shareholder is in the assets and earnings of the
Portfolio in which he or she holds shares. The Trustees have authorized the
issuance of twenty series of shares, each representing shares in one of
twenty separate Portfolios. Pursuant to such authority, the Trustees may
also authorize the creation of additional series of shares and additional
classes of share within any series. The investment objectives, policies and
restrictions applicable to additional Portfolios would be established
by the Trustees at the time such Portfolios were established and may
differ from those set forth in the Prospectuses and this the
Statement of Additional Information. In the event of liquidation or
dissolution of a Portfolio or of the Fund, shares of a Portfolio are
entitled to receive the assets belonging to that Portfolio and a
proportionate distribution, based on the relative net assets of the
respective Portfolios, of any general assets not belonging to any
particular Portfolio that are available for distribution.
The Declaration of Trust may be amended only by a "majority shareholder
vote" as defined therein, except for certain amendments that may be made by
the Trustees. The Declaration of Trust and the By-Laws of the Fund are
designed to make the Fund similar in most respects to a
Massachusetts business corporation. The principal distinction between
the two forms relates to shareholder liability described below.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the trust, which is not the case with a corporation. The Declaration of
Trust of the Fund provides that shareholders shall not be subject to
any personal liability for the acts or obligations of the Fund and that
every written obligation, contract, instrument or undertaking made by the
Fund shall contain a provision to the effect that the shareholders
are not personally liable thereunder.
Special counsel for the Fund are of the opinion that no personal
liability will attach to the shareholders under any undertaking
containing such provision when adequate notice of such provision is given,
except possibly in a few jurisdictions. With respect to all types of claims in
the latter jurisdictions and with respect to tort claims, contract
claims where the provision referred to is omitted from the undertaking,
claims for taxes and certain statutory liabilities in other
jurisdictions, a shareholder may be held personally liable to the extent
that claims are not satisfied by the Fund; however, upon payment of any such
liability the shareholder will be entitled to reimbursement from the general
assets of the Fund. The Trustees intend to conduct the operations of the
Fund, with the advice of counsel, in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the
Fund.
The Declaration of Trust further provides that no Trustee, officer or
employee of the Fund is liable to the Fund or to a shareholder,
except as such liability may arise from his or its own bad faith, willful
misfeasance, gross negligence, or reckless disregard of his or its duties,
nor is any Trustee, officer or employee personally liable to any
third persons in connection with the affairs of the Fund. It also
provides that all third persons shall look solely to the Fund property or
the property of the appropriate Portfolio of the Fund for satisfaction of
claims arising in connection with the affairs of the Fund or a particular
Portfolio, respectively. With the exceptions stated, the Declaration of
Trust provides that a Trustee, officer or employee is entitled to be
indemnified against all liability in connection with the affairs of the
Fund.
Other distinctions between a corporation and a Massachusetts business trust
include the fact that business trusts are not required to issue share
certificates or hold annual meetings of shareholders.
<PAGE>147
The Fund shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination of the
trust or any of the series of the trust by action of the shareholders or
by action of the Trustees upon notice to the shareholders.
VOTING RIGHTS The Trustees themself have the power to alter
the number and the terms of office of the Trustees, and they may at any
time lengthen their own terms or make their terms of unlimited
duration (subject to certain removal procedures) and appoint their own
successors, provided that in accordance with the Act always at least a
majority, but in most instances, at least two-thirds of the Trustees
have been elected by the shareholders of the Fund. Shares do not
have cumulative voting rights and therefore the holders of more than 50%
of the outstanding shares of the Fund may elect all of the Trustees
irrespective of the votes of other shareholders. Class A, Class B, Class C
and Class Y shares of a Portfolio of the Fund, if any, represent interests in
the assets of that Portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions, except that
each class of shares has exclusive voting rights with respect to provisions
of the Fund's Rule 12b-1 distribution plan which pertain to a particular
class . For example, a change in investment policy for a Portfolio would
be voted upon only by shareholders of the Portfolio involved.
Additionally, approval of each Portfolio's management agreement is a matter
to be determined separately by that Portfolio. Approval of a proposal by
the shareholders of one Portfolio is effective as to that Portfolio whether or
not enough votes are received from the shareholders of the other
Portfolios to approve the proposal as to those Portfolios. As of June 30,
1995: William C. Lochmoeller TTEE, FBO The Lochmoeller Family Trust
U/A/D 07/29/80, 1270 Mesa Rd., San Marino, CA 91108, owned 11,576.461
(17.269%) of the outstanding Class B shares of the California Portfolio;
Joan Barnett, 3917 Alta Mesa Drive, Studio City, CA 91604, owned 9,537.048
(14.22%) of the outstanding Class B shares of the California Portfolio;
Patricia S. Gonzalez, 204 Upland Court, Redwood City , CA 94062, owned
8,337.641 (12.43%) of the outstanding Class B shares of the California
Portfolio; Janet C. Higgins, Successor TTEE, FBO Donald R. Higgins &
Janet C. Higgins Revocable Trust A, U/A/D 6/10/85, 3119 Claridge Way,
Sacramento, CA 95821, owned 8245.169 (12.30%) of the outstanding Class B
shares of the California Portfolio; Steven H. Pettit TTEE, FBO The Tina &
Tom Pettit Irrevocable Trust DTD 04-13- 95, 4839 Meadow Ridge Road, Santa
Ysabel, CA 92070, owned 6,162.150 (9.19%) of the outstanding Class B
shares of the California Portfolio; Vivian Gilbert Strell Laurie Gilbert
and Samuel Gilbert JTWROS, 7008 Lipmann Street, San Diego, CA 92212,
owned 3,849.714 (5.74%) of the outstanding Class B shares of the California
Portfolio; Mutual Management Corp., C/O Smith Barney, Inc., Attn: Thomas
Reynolds, 388 Greenwich Street, New York, NY 10013, owned 149,766.909
(20.47%) of the outstanding Class A shares of the California Limited
Portfolio; Alan D. Levy Abby Jane Levy JTWROS, 910 N. Roxbury, Beverly
Hills, CA 90210, owned 74,963.00 (3.33%) of the outstanding Class A shares
of the California Limited Portfolio; Jeff Herman & Kara Ann Herman JTWROS,
12021 Doral Street, Northridge, CA 91326, owned 16,875.514 (6.83%) of
the outstanding Class C shares of the California Limited Portfolio; Robert
L. Smith & Lucille L. Smith TRS, UA DTD 2/18/76, FBO Smith Family Trust,
420 Pebble Beach Place, Fullerton, CA 92635, owned 16,849.115 (6.82%) of the
outstanding Class C shares of the California Limited Portfolio; Aloke Bosu,
12070 Telegraph Road, Suite #340, Santa Fe Springs, CA 90670, owned
15,934.412 (6.45%) of the outstanding Class C shares of the California
Limited Portfolio; Camilla Schoch Gerald Schoch TTEE, U/A/D 07/06/90,
FBO Melbourne J Schoch, 41B Niniko Pl, Honolulu, HI 96817, owned 15,815.459
(6.40%) of the outstanding Class C shares of the California Limited
Portfolio; Anthony S. Wong & Mandy Tang Wong TTEEs for the AMP Wong
Family Trust, U/A/D 12/08/89, 1071 Piedmont, Sacramento, CA 95822;
The E.G. Rosenblatt Living TR, E.G. Rosenblatt TTEE, 2295 South Ocean
Blvd., Palm Beach, FL 33480, owned 624,871.770 (7.61%) of the outstanding
Class A shares of the Florida Portfolio; Norman S Jaffe & Ann L Jaffe TTEES,
Norman S
<PAGE>148
Jaffe & Ann L Jaffe Revocable Trust, U/A/D 6/10/90, 5700 North Bay
Road, Miami Beach, FL 33140, owned 16,455.156 (7.72%) of the outstanding
Class B shares of the Florida Portfolio; Blanche Kaplan, 6039 Collins
Avenue, Apt. 1056, Miami Beach, FL 33140, David S. Light TTEE, FBO David S.
Light U/A/D 11/12/90, The David S. Light REV TR, 9406 W Broadview Drive,
Bay Harbor Isle, FL 33154, owned 13,233.408 (6.21%) of the outstanding
Class B shares of the Florida Portfolio; Samuel R. Gardner and Sharon E.
Gardner as Trustees Under a Joint Revocable Trust Agreement DTD 12/03/92,
235 Ocean Way, Vero Beach, FL 32963, owned 11,140.903 (5.23%) of
the outstanding Class B shares of the Florida Portfolio; Benjamin S.
Loewenstein and Eleanor S. Loewenstein TTEES UDT DTD 2/3/84, 198 Northwest
67th Street #306, Boca Raton, FL 33487, owned 10,043.103 (6.14%) of the
outstanding Class C shares of the Florida Portfolio; Sari Galan, 49-14
Skyline Blvd., Cape Coral, FL 33432, owned 9,960.516 (6.10%) of the
outstanding Class C shares of the Florida Portfolio; Phyllis L O9Neill, 341
Alexander Palm Road, Boca Raton, FL 33432, 9,604.000 (5.87%) of the
outstanding Class C shares of the Florida Portfolio; Susan H. Dupuis
Trustee, Susan H. Dupuis LIV. REV. TR. DTD 9/26/89, 4100 Bay Point Road,
Miami, FL 33137, owned 151,343.096 (7.64%) of the outstanding Class A
shares of the Florida Limited Term Portfolio; Alico Inc., ATTN: Craig
Simmons, P.O. Box 338, Labelle, FL 33935, owned 46,013.436 (10.11%) of
the outstanding Class C shares of the Florida Limited Term Portfolio;
Rita Green, Person Rep Estate of Samuel Auerbach, 11 Islan Avenue,
Apartment #1112. Miami Beach, FL 33139, owned 34,243.051 (7.53%) of
the outstanding Class C shares of the Florida Limited Term Portfolio;
Slyvia Pawliger TTEE FBO, Sylvia Pawliger Living TR DTD 11/14/94, 5440 SW
85th Street, Miami, FL 33143, owned 32,237.785 (7.09%), of the outstanding
Class C shares of the Florida Limited Term Portfolio; Dominick
Amatulli TTEE, FBO Dominick Amatulli U/A/D 01/25/93, 120 Shore Drive,
Rivera Beach, FL 33404, owned 32,194.048 (7.08%) of the outstanding
Class C shares of the Florida Limited Term Portfolio; Gabriel H. Pou and
Guillermina F. Pou, owned 1265 Mariola Ct., Coral Gables, FL 33134, owned
23,249.793 (5.11%) of the outstanding Class C shares of the Florida Limited
Term Portfolio; Mutual Management Corp., C/O Smith Barney, Inc., ATTN:
Thomas Reynolds, 388 Greenwich Street, New York, NY 10013, owned 62,599.636
(10.62%) of the outstanding Class A shares of the Georgia Portfolio; Jeanne
A. Sellers, 1 Peachtree Battle #7, Atlanta, GA 30305, owned 43,272.325
(7.34%) of the outstanding Class A shares of the Georgia Portfolio; John
H. Bennett Sr., 4846 Salaccoa Road, Waleska, GA 30183, owned 17,449.361
(7.08%) of the outstanding Class B shares of the Georgia Portfolio; Anna M.
Fowlkes, 3750 Peachtree Road N.E. Apt. #712, Atlanta, GA 30319, owned
12,763.285 (5.18%) of the outstanding Class B shares of the Georgia
Portfolio; Robert B. Quattlebaum, 2201 Azalea Drive, Valdosta, GA 31602,
owned 12,727.017 (5.17%) of the outstanding Class B shares of the Georgia
Portfolio; Jeanette L Griffis, Rt.1 Box 266, Fargo, GA 31631, owned
12,514.371 (9.12%) of the outstanding Class C shares of the Georgia
Portfolio; Larry S. Leake, 4084 Admiral Drive, Atlanta, GA 31631,
owned 12,277.731 (8.95%) of the outstanding Class C shares of the
Georgia Portfolio; Thomas A. Collentine MD and Judith W. Collentine JTWROS,
1841 Lakehurst Court, Smyrna, GA 30080, owned 9,035.359 shares of the
outstanding Class C shares of the Georgia Portfolio; Ben W. Andrew Hope P.
Andrew JTWROS, 3110 Nottaway Ct. NE, Atlanta, GA 30341, owned 7,692.617
(5.61%) of the outstanding Class C shares of the Georgia Portfolio;
Kurt F. Wilkening, 243 Robin Drive, Sarasota, FL 34236, owned 30,965.592
(100%) of the outstanding Class Y shares of the Limited Term Portfolio;
James R. Scheele P.O. Box 2477, Williston, ND 58802, owned 181,280.770
(32.67%) of the outstanding Class B shares of the National Portfolio; Joseph
Mayson, 6615 Glenridge Drive, Atlanta, GA 30328, owned 29,995.027
(5.41%) of the outstanding Class B shares of the National Portfolio;
Raymond P. Kane, 1 North Court, Port Washington, NY 11050, owned 28,835.323
(5.20%) shares of the outstanding Class B shares of the National
Portfolio; Mr. Abe Simon, 191 Cokesbury Road, PO Box 404, Lebanon, NJ
08833, owned 7,539.079 (5.93%) of the outstanding Class B shares of the New
Jersey Portfolio; Carleton N. Rowe Margaret T. Rowe JTWROS, 206 Lenape Trail,
Wenonah, NJ 08090, owned 19,339.416 (7.53%) of the outstanding Class C
shares of the New Jersey Portfolio; Merel Julia and Martin Leaf, TTEES UAD
<PAGE>149
2/3/89 Raul Julia Insurance Trust, C/O Faden & Co., 605 3rd Ave. 11th
flr., New York, NY 10158, owned 20,599.007 (5.54%) of the outstanding Class
B shares of the New York Portfolio; SBS Ohio Muni C/O Dahlia McQueen,
Treasury Admin, 388 Greenwich Street 39th Flr., New York, NY 10013,
owned 62,761.584 (26.04%) of the outstanding Class A shares of the Ohio
Portfolio; John B. Roderer, 7540 Peters Pk, Dayton, OH 45414, owned
10,669.983 (5.11%) of the outstanding Class B shares of the Ohio Portfolio;
Plaford E. Meredith, 5063 Waterloo Rd., Atwater, OH 44201, owned 8,318.847
(14.33%) of the outstanding Class C shares of the Ohio Portfolio;
James A Wilkirson and Carolyn G. Wilkirson JTWROS, 2400 Wimbledon Park
Blvd., Toledo, OH 43617, owned 5,185.043 (8.93%) of the outstanding Class C
shares of the Ohio Portfolio; Sandhya R. Nuthakki, Municipal Bond
Account, 4625 Schrubb Dr., Kettering, OH 45429, owned 4,425.086 (7.62%)
of the outstanding Class C shares of the Ohio Portfolio; Nancy L.
Schardt, 1648 West Alex- Bell Rd, Dayton, OH 45459, owned 3,582.396 (6.17%)
of the outstanding Class C shares of the Ohio Portfolio; James J. Broussard,
530 Derwyn Rd., Drexel Hill, PA 19026, owned 102,939.291 (14.69%) of the
outstanding Class A shares of the Pennsylvania Portfolio; Murray L.
Katz and Harriet L. Katz JTWROS, 1130 Countryside Drive, Harrisburg, PA
17110, owned 86,904.114 (12.41%) of the outstanding Class A shares
of the Pennsylvania Portfolio; Carol L Shields, Idlewild Farm, 617
Williamson Road, Bryn Mawr, PA 19010, owned 50,793.026 (7.25%) of the
outstanding Class A shares of the Pennsylvania Portfolio; Nand Todi and
Shashi Todi TTEES Todi Living Trust U/A/D 12/10/93, FBO Nand K. Todi &
Shashi P. Todi, 424 Gwynedd Valley Drive, Gwynedd Valley, PA 19437,
owned 43,463.633 (6.20%) of the outstanding Class A shares of
the Pennsylvania Portfolio.
<PAGE>150
FINANCIAL STATEMENTS
The following information is hereby incorporated by reference to the
Fund's March 31, 1995 Annual Reports to Shareholders:
Page(s) in:
<TABLE>
<CAPTION>
<S> <C> <C>
Annual Report
Annual Report of Limited
of National Term
Portfolio Portfolio
Schedules of Investments 7 - 23 7 - 20
Statements of Assets and Liabilities 26 22
Statements of Operations 27 23
Statements of Changes in Net Assets 28 24
Notes to Financial Statements 29-32 25 - 27
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 33-34 28 - 29
Independent Auditors' Report 35 30
Page(s) in:
Annual Report
Annual Report of California,
of Florida & CA Limited Term,
Florida Limited Term CA Money Market
Portfolios Portfolios
Schedules of Investments 10 - 19 12 - 30
Statements of Assets and Liabilities 21 33
Statements of Operations 22 34
Statements of Changes in Net Assets 23 35 - 36
Notes to Financial Statements 24 - 27 37 - 42
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 28-31 43 - 46
Independent Auditor's Report 32 47 - 48
Page(s) in:
Annual Report
of NY &
Annual Report New York
of New Jersey Money Market
Portfolio Portfolios
Schedules of Investments 7 - 11 8 - 18
Statements of Assets and Liabilities 14 21
Statements of Operations 15 22
Statements of Changes in Net Assets 16 23
Notes to Financial Statements 17 - 20 24 - 27
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 21 - 22 28 - 30
Independent Auditors' Report 23 31
Page(s) in:
Annual Report
of Ohio, Georgia
& Pennsylvania
Portfolios
Schedules of Investments 11-18
Statements of Assets and Liabilities 21
Statements of Operations 22
Statements of Changes in Net Assets 23
Notes to Financial Statements 24 - 28
Financial Highlights (for a share
of each series of beneficial
interest outstanding throughout
each year) 29 - 31
Independent Auditor's Report 32
</TABLE>
<PAGE>151
APPENDIX A
RATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER
Description of Four Highest Municipal Bond Ratings
Moody's Investors Service, Inc. ("Moody's"):
Aaa - Bonds that are rated 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 some time 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.
Standard & Poor's Corporation ("S&P"):
AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
<PAGE>152
Description of State and Local Government Municipal Note Ratings
Notes are assigned distinct rating symbols in recognition of the differences
between short- term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over
the short run.
Moody's Investors Service, Inc.:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG). A short-term rating may also be
assigned on an issue having a demand feature -- a variable rate demand
obligation. Such ratings will be designated as VMIG. Short-term ratings
on issues with demand features are differentiated by the use of
the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on
external liquidity. Additionally, investors should be alert to the fact that
the source of payment may be limited to the external liquidity with no or
limited legal recourse to the issuer in the event the demand is not met.
Symbols used are as follows:
MIG/VMIG 1 - Loans bearing this designation are of the best quality,
enjoying strong protection from established cash flows of funds,
superior liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
Standard & Poor's Corporation:
SP-1 - Very strong or strong capacity to pay principal interest. Those
issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
Description of Highest Commercial Paper Ratings
Moody's Investors Service, Inc.:
Prime-1 - Issuers (or related supporting institutions) rated Prime-1 have
a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and well- established
access to a range of financial markets and assured sources of alternate
liquidity.
<PAGE>153
Standard & Poor's Corporation:
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
APPENDIX B
The following information is a summary of special factors affecting
California Municipal Obligations. It does not purport to be a complete
description and is based on information from statements relating to
securities offerings of California issuers.
Additional Discussion of Special Factors Relating to California
Municipal Obligations
California's economy is the largest among the 50 states. The State's
January 1, 1992 population of 31 million represented approximately 12.0%
of the total United States population. Total employment was about 14
million, the majority of which was in the service, trade and
manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced the
worst economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among
others, have all been severely affected. Job losses have been the worst of
any post-war recession and have continued through the end of 1993.
Employment levels are expected to stabilize before net employment starts
to increase and pre-recession job levels are not expected to be reached for
several more years. Unemployment is expected to remain above 9% through
1994.
The recession has seriously affected State tax revenues, which
basically mirror economic conditions. It has also caused increased
expenditures for health and welfare programs. The State is also facing
a structural imbalance in its budget with the largest programs supported by
the General Fund--K-14 education (kindergarten through community
college), health, welfare and corrections--growing at rates significantly
higher than the growth rates for the principal revenue sources of
the General Fund. As a result, the State entered a period of chronic
budget imbalance, with expenditures exceeding revenues for four of the
last five fiscal years. Revenues declined in 1990-91 over 1989-90, the
first time since the 1930s. By June 30, 1993, the State's General Fund
had an accumulated deficit, on a budget basis, of approximately $2.8
billion. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for
specific purposes.) The 1993-94 Budget Act incorporated a Deficit
Reduction Plan to repay this deficit over two years. The original budget
for 1993-94 reflected revenues which exceeded expenditures by a
approximately $2.8 billion. As a result of continuing recession, the
excess of revenues over expenditures for the fiscal year is now expected to be
only about $500 million. Thus, the accumulated budget deficit at June 30,
1994 is now estimated by the Department of Finance to be approximately $2
billion, and the deficit will not be retired by June 30, 1995 as
planned. The accumulated budget deficits over the past several years,
together with expenditures for school funding which have not been reflected in
the budget, and the reduction of available internal borrowable funds, have
combined to significantly depleted the State's cash resources to pay
as ongoing expenses. In order to meet its cash needs, the State has had to
rely for several years on a series of external borrowings, including
borrowings past the end of a fiscal year.
The State's tax revenue clearly reflects sharp declines in employment,
income and retail sales on a scale not seen in over 50 years. The May 1994
revision to the 1994-95 Governor's Budget (the "May Revision"), released
May 20, 1994, assumes that the State will start recovery from
recessionary conditions in 1994, with a modest upturn beginning in 1994
and continuing into 1995, a year
<PAGE>154
later than predicted in the May 1993 Department of Finance economic
projection. Pre-recession job levels are not expected to be reached until
1997.
However, there is growing evidence that California is showing signs of
an economic turnaround, and the May Revision is revised upward from the
Governor's January Budget forecast. Since the Governor's January Budget
forecast, 1993 non-farm employment has been revised upward by 31,000 jobs.
Employment in the early months of 1994 has shown encouraging signs
of growth, several months sooner than was contemplated in the January Budget
forecast. Between December 1993 and April 1994, payrolls are up by 50,000
jobs.
On January 17, 1994 the Northridge earthquake, measuring an
estimated 6.8 on the Richter Scale, struck Los Angeles. Significant
property damage to private and public facilities occurred in a four-county
area including northern Los Angeles County, Ventura County, and parts of
Orange and San Bernadino Counties, which were declared as State and
federal disaster areas by January 18. Current estimates of total
property damage (private and public) are in the range of $20 billion or
more, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in
the areas, including large manufacturing and commercial buildings and all
modern high-rise offices, survived the earthquake with minimal or no
damage, validating the cumulative effect of strict building codes and
thorough preparation for such emergency by the State and local agencies.
Damage to State-owned facilities included transportation
corridors and facilities such as Interstate Highways 5 and 10 and State
Highways 14, 118 and 210. Most of the major highways (Interstates 5 and 10)
have now been reopened. The campus at California State University
Northridge (very near the epicenter) suffered an estimated $350 million
damage, resulting in the temporary closure of the campus. lt reopened
using borrowed facilities elsewhere and many temporary structures. There was
also some damage to the University of California at Los Angeles and to the
Van Nuys State Office Building (now open after a temporary closure).
Overall, except for the temporary road and bridge closures, and
CSU-Northridge, the earthquake did not and is not expected to significantly
affect State government operations.
The State in conjunction with the federal government is committed
to providing assistance to local governments, individuals and businesses
suffering damage as a result of the earthquake, as well as to provide for the
repair and replacement of State owned facilities. The federal
government has provided substantial earthquake assistance. The President
immediately allocated some available disaster funds, and Congress has
approved additional funds for a total of $9.5 billion of federal funds for
earthquake relief, including assistance to homeowners and small businesses,
and costs for repair of damaged public facilities. lt is now estimated
that the overall effect of the earthquake on the regional and State
economy will not be serious. The earthquake may have dampened economic
activity briefly during late January and February, but the rebuilding efforts
are now adding a small measure of stimulus.
Sectors which are now contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services and management consulting. Electronics is
showing modest growth and the rate of decline in aerospace manufacturing is
slowly diminishing. These trends are expected to continue, and by next year,
most of the restructuring in the finance and utilities industries
should be nearly completed. As a result of these factors, average 1994
non-farm employment is now forecast to maintain
<PAGE>155
1993 levels compared to a projected 0.6% decline in the Governor's January
Budget forecast. 1995 employment is expected to be up 1.6% compared to 0.7%
in the January Budget forecast.
The Northridge earthquake resulted in a downward revision of this
year's personal income growth from 4% in the Governor's January Budget
forecast to 3.6%. However, this decline is more than explained by the $5.5
billion charge against rental and proprietor's income---equal to 0.8% of
total income reflecting uninsured damage from the quake. Next year,
without the quake's effects, income is projected to grow 6.1% compared
to 5% projected in the January Budget forecast. Without the quake's
effects, income was little changed in the May Revision compared to the January
Budget forecast.
The housing forecast remains essentially unchanged from the January
Budget forecast. Although existing sales have strengthened and subdivision
surveys indicated increased new home sales, building permits are up only
slightly from recession lows. Gains are expected in the months ahead,
but higher mortgage interest rates will dampen the upturn.
Essentially, the Northridge earthquake adds a few thousand housing units
to the forecast, but this effect is offset by higher interest rates.
Interest rates represent one of several downside risks to the forecast.
The rise in interest rates has occurred more rapidly than contemplated in the
Governor's January Budget forecast. In addition to affecting housing, higher
rates may also dampen consumer spending, given the high percentage
of California homeowners with adjustable-rate mortgages. The May Revision
forecast includes a further rise in the Federal Funds rate to nearly 5% by
the beginning of 1995. Should rates rise more steeply, housing and consumer
spending would be adversely affected.
The unemployment upturn is still tenuous. The Employment
Development Department revised down February's employment gain and March
was revised to a small decline. Unemployment rates in California have
been volatile since January, ranging from 10.1% to a low of 8.6%, with
July's figure at 9%. The small sample size coupled with changes made to the
survey instrument in January contributed to this volatility.
1993-94 Budget
The Governor's Budget, introduced on January 8, 1993, proposed
General Fund expenditures of $37.3 billion, with projected revenues of
$39.9 billion. To balance the budget in the face of declining revenues, the
Governor proposed a series of revenue shifts from local government, reliance
on increased federal aid, and reductions in State spending.
The May Revision of the Governor's budget, released on May
20,1993, projected the State would have an accumulated deficit of about
$2.75 billion by June 30,1993, essentially unchanged from the prior
year. The Governor proposed to eliminate this deficit over an
18-month period. Unlike previous years, the Governor's Budget and May
Revision did not calculate a "gap" to be closed, but rather set forth
revenue and expenditure forecasts and proposals designed to produce a
balanced budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993,
along with implementing legislation. The Governor vetoed about $71 million in
spending. With enactment of the Budget Act, the State carried out its regular
cash flow borrowing program for the fiscal year with the issuance of $ billion
of revenue anticipation notes maturing June 28, 1994.
<PAGE>156
The 1993-94 Budget Act was predicated on revenue and transfer estimates
of $40.6 billion, $400 million below 1992-93 (and the second consecutive
year of actual decline). The principal reasons for declining revenue were
the continued weak economy and the expiration (or repeal) of three fiscal
steps taken in 1991 a half cent temporary sales tax, a deferral -of
operating loss carryforwards, and repeal by initiative of a sales tax on
candy and snack foods.
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9
billion, an increase of 2.9% over 1992-93. The 1993-94 Budget Act included
General Fund expenditures of $38.5 billion (a 6.3% reduction from
projected 1992-93 expenditures of $41.1 billion), in order to keep a
balanced budget within the available revenues. The Budget also included
Special Fund expenditures of $12.1 billion, a 4.2% increase. The Budget Act
reflected the following major adjustments:
1. Changes in local government financing to shift about $2.6
billion in property taxes from cities, counties, special districts and
redevelopment agencies to school and community college districts. The
property tax losses for cities and counties were offset in part by
additional sales tax revenues and relief from some state mandated programs.
Litigation by local governments challenging this shift has so far
been unsuccessful. In November 1993 the voters approved the permanent
extension of the 0.5% sales tax for local public safety purposes.
2. The Budget projected K-12 Proposition 98 funding on a cash
basis at the same per-pupil level as 1992-93 by-providing schools a $609
million loan payable from future years' Proposition 98 funds.
3. The Budget assumed receipt of $692 million in aid to the
State from the federal government to offset health and welfare costs
associated with foreign immigrants living in the State. About $411
million of this amount was one-time funding. Congress ultimately
appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs.
5. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of payment to
the Public Employees Retirement Fund ($339 million) and a change in
accounting for debt service from accrual to cash basis, saving $107 million.
Administration reports during the course of the 1993-94 fiscal year
have indicated that, although economic recovery appears to have started in
the second half of the fiscal year, recessionary conditions continued
longer than had been anticipated when the 1993-94 Budget Act was
adopted. Overall, revenues for the 1993-94 fiscal year were about $800
million lower than original projections, and expenditures were about $780
million higher, primarily because of higher health and welfare caseloads,
lower property taxes, which require greater State support for K-14
education to make up the shortfall, and lower than anticipated federal
government payments for immigration-related costs. The most recent reports,
however, in May and June 1994, indicated that revenues in the second half of
the 1993-94 fiscal year have been very close to the projections made in
the Governor's Budget of January 10, 1994, which is consistent with a slow
turnaround in the economy.
<PAGE>157
During the 1993-94 fiscal year, the State implemented the Deficit
Reduction Plan, which was a part of the 1993-94 Budget Act, by issuing
$1.2 billion of revenue anticipation warrants in February 1994,
maturing December 21, 1994. This borrowing reduced the cash deficit at the
end of the 1993-94 fiscal year. Nevertheless, because of the $1.5 billion
variance from the original Budget Act assumption, the General Fund ended the
fiscal year at June 30, 1994 carrying forward an accumulated
deficit of approximately $2 billion. Because of the revenue shortfall
and the State's reduced internal borrowing cash resources, in
addition to the $1-2 billion of revenue anticipation warrants issued as
part of the Deficit Reduction Plan, the State issued an additional $2
billion of revenue anticipation warrants, maturing July 26,1994. which were
needed to fund the State's obligations and expenses through the end of
the 1993-94 fiscal year.
1994-95 Budget
The 1994-95 fiscal year represents the fourth consecutive year the
Governor and Legislature were faced with a very difficult budget environment
to produce a balanced budget. Many program cuts and budgetary
adjustments have already been made in the last three years. The Governor's
May Revision to his Budget proposal recognized that the accumulated deficit
could not be repaid in one year, and proposed a two-year solution. The
May Revision sets forth revenue and expenditure forecasts and
revenue and expenditure proposals which result in operating surpluses
for the budget for both 1994-95 and 1995-96, and lead to the
elimination of the accumulated deficit, estimated at about $2 billion
at June 30, 1994 by June 30, 1996.
The 1994-95 Budget Act, signed by the Governor on July 8, 1994,
projects revenues and transfers of $41.9 billion, about $2.1 billion higher
than revenues in 1993-94. This reflects the Administration's forecast of an
improved economy. Also included in this figure is the projected receipt
of about $360 million from the Federal Government to reimburse the
State for the cost of incarcerating undocumented immigrants. The
State will not know how much the Federal Government will actually provide
until the Federal fiscal year 1995 Budget is completed, which is expected to
be by October 1994. The Legislature took no action on a proposal in the
Governor s January Budget to undertake expansion of the transfer of certain
programs to counties, which would also have transferred to counties
0.5% of the State current sales tax. The Budget Act projects Special
Fund revenues of $12.1 billion, a decrease of 2.4% from 1993-94
estimated levels.
The 1994-95 Budget Act projects General Fund expenditures of $40.9
billion, an increase of $1.6 billion over 1993-94. The Budget Act also
projects Special Fund expenditures of $13.7 billion, a 5.4% increase
over 1993-94 estimated expenditures. The principal features of the Budget Act
were the following:
1. Receipt of additional federal aid in 1994-95 of about $400
million for costs of refugee assistance and medical care for undocumented
aliens, thereby offsetting a similar General Fund cost. The State will not know
how much of these funds it will receive until the Federal fiscal year 1994
Budget is passed.
2. Reductions of approximately $l.l billion in health and
welfare programs.
3. A General Fund increase of approximately $38 million in
support for the University of California and $65 million for the California
State University. It is anticipated that student fees for the U.C. and
the C.S.U will increase up to 10%.
<PAGE>158
4. Proposition 98 funding for K-14 schools is increased by
$526 million from the 1993-94 levels, representing an increase for
enrollment growth and inflation. Consistent with previous budget agreements,
Proposition 98 funding provides approximately $4,217 per student for K-12
schools, equal to the level in the past three years.
5. Legislation enacted with the Budget Act clarifies laws passed
in 1992 and 1993 requiring counties and other local agencies to
transfer funds to local school districts, thereby reducing State aid. Some
counties had implemented programs providing less moneys to schools if
there were redevelopment agencies projects. The legislation bans
this method of transfers.
6. The Budget Act provides funding for anticipated growth in
the State's prison inmate population, including provisions for
implementing recent legislation (the so-called "Three Strikes" law)
which requires mandatory life sentences for certain third-time felony
offenders.
7. Additional miscellaneous cuts ($500 million) and fund
transfers ($255 million) totaling in the aggregate approximately
$755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation
enacted for the 1993-94 Budget, the renters' tax credit was suspended for
1993 and 1994. A ballot proposition to permanently restore the
renters' credit after this year failed at the June 1994 election. The
Legislature enacted a further one-year suspension of the renters' tax
credit, saving about $390 million in the 1995-96 fiscal year. The 1994-95
Budget assumes that the State will use a cash flow borrowing program in
1994-95 which combines one-year notes and warrants. Issuance of the warrants
allows the State to defer repayment of approximately $1 billion of
its accumulated budget deficit into the 1995-96 fiscal year.
THE FOREGOING DISCUSSION OF THE 1993-94 AND 1994-1995 FISCAL YEAR BUDGETS
IS BASED IN LARGE PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL
STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT DOCUMENT,
THE STATE INDICATED THAT ITS DISCUSSION OF THE 1994-95 FISCAL YEAR
BUDGET WAS BASED ON ESTIMATES AND PROJECTIONS OF REVENUES AND
EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST NOT BE CONSTRUED AS
STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE ESTIMATES AND
PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE AFFECTED
BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE
AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE
ESTIMATES WILL BE ACHIEVED.
The State is subject to an annual appropriations limit imposed by
Article XIII B of the State Constitution (the "Appropriations
Limit"), and is prohibited from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. Article XIIIB, originally
adopted in 1979, was modified substantially by Propositions 98 and
111 in 1988 and 1990, respectively. "Appropriations subject to
limitation" are authorizations to spend "proceeds of taxes", which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such
proceeds exceed the reasonable cost of providing the regulation, product
or service. The Appropriations Limit is based on the limit for the prior
year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period above the combined Appropriation
Limits for those two years is divided equally between transfers to K-14
districts and refunds to taxpayers.
<PAGE>159
Exempted from the Appropriations Limit are debt service costs of
certain bonds, court or federally mandated costs, and, pursuant to
Proposition 111, qualified capital outlay projects and appropriations or
revenues derived from any increase in gasoline taxes and motor vehicle
weight fees above January 1, 1990 levels. Some recent initiatives were
structured to create new tax revenues dedicated to specific uses and
expressly exempted from the Article XIIIB limits. The Appropriations
Limit may also be exceeded in cases of emergency arising from civil
disturbance or natural disaster declared by the Governor and approved by two-
thirds of the Legislature. If not so declared and approved, the
Appropriations Limit for the next three years must be reduced by the
amount of the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of
returned to the taxpayers. Determination of the minimum level of
funding is based on several tests set forth in Proposition 98. During
fiscal year 1991-92 revenues were smaller than expected, thus reducing
the payment owed to schools in 1991-92 under alternate "test" provisions.
In response to the changing revenue situation, and to fully fund the
Proposition 98 guarantee in the 1991-92 and 1992-93 fiscal years without
exceeding it, the Legislature enacted legislation to reduce 1991-92
appropriations. The amount budgeted to schools but which exceeded the
reduced appropriation was treated as a non- Proposition 98
short-term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion of
the amount budgeted to K-14 schools was designated to "repay" the prior
year loan, thereby reducing cash outlays in 1992-93 by that amount. To
maintain per-average daily attendance ("ADA") funding, the 1992-93 Budget
included loans of $732 million to K-12 schools and $241 million to
community colleges, to be repaid from future Proposition 98
entitlements. The 1993-94 Budget also provided new loans of $609
million to K-12 schools and $178 million to community colleges to maintain
ADA funding. These loans have been combined with the 1992- 93 fiscal year
loans into one loan of $1.760 billion, to be repaid from future years'
Proposition 98 entitlements, and conditioned upon maintaining current funding
levels per pupil at K-12 schools. A Sacramento County Superior Court in
California Teachers' Association, et al. v. Gould, et al., has ruled that
the 1992-93 loans to K-12 schools and community colleges violate
Proposition 98. The impact of the court's ruling on the State budget and
funding for schools is unclear and will remain unclear until the Court's
written ruling, which is currently being prepared, is issued.
The 1994-95 Budget Act has appropriated $14.4 billion of Proposition 98
funds for K- 14 schools, exceeding the minimum Proposition 98 guaranty by $8
million to maintain K-12 funds per pupil at $4,217. Based upon State
revenues, growth rates and inflation factors, the 1994-95 Budget Act
appropriations an additional $286 million within Proposition 908 for the
1993-94 fiscal year to reflect a need in appropriations for school district
and county officers of education, as well as an anticipated deficiency
in special education funding.
Because of the complexities of Article XIIIB, the ambiguities and
possible inconsistencies in its terms, the applicability of
its exceptions and exemptions and the impossibility of
predicting future appropriations, the Sponsor cannot predict the impact of
this or related legislation on the Bonds in the California Trust
Portfolio. Other Constitutional amendments affecting state and local
taxes and appropriations have been proposed from time to time. If any
such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate revenues
as mandated by such initiatives. Propositions such as Proposition 98 and
others that may be adopted in the future, may place increasing pressure on
the State's budget over future years, potentially reducing resources
available for other State programs, especially to the extent the
<PAGE>160
Article XIIIB spending limit would restrain the State's ability to fund
such other programs by raising taxes.
As of July 1, 1994, the State had over $18.34 billion aggregate
amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately
$5.16 billion remained unissued as of July 1, 1994. The State also builds
and acquires capital facilities through the use of lease purchase borrowing.
As of June 30, 1994, the State had approximately $5.09 billion of
outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $21.87 billion aggregate principal
amount of revenue bonds and notes outstanding as of March 31, 1993.
Revenue bonds represent both obligations payable from State revenue-producing
enterprises and projects, which are not payable from the General Fund,
and conduit obligations payable only from revenues paid by private users of
facilities financed by such revenue bonds. Such enterprises and
projects include transportation projects, various public works and exposition
projects, education facilities (including the California State University
and University of California systems), housing health facilities and
pollution control facilities.
The State is a party to numerous legal proceedings, many of which
normally occur in governmental operations. In addition, the State is
involved in certain other legal proceedings that, if decided against
the State, might require the State to make significant future
expenditures or impair future revenue sources. Examples of such cases
include challenges to the State's method of taxation of certain
businesses, challenges to certain vehicle license fees, and challenges to
the State's use of Public Employee Retirement System funds to offset future
State and local pension contributions. Other cases which could significantly
impact revenue or expenditures involve reimbursement to school districts for
voluntary school desegregation and state mandated costs, challenges to
Medi-Cal eligibility, recovery for flood damages, and liability for toxic
waste cleanup. Because of the prospective nature of these proceedings,
it is not presently possible to predict the outcome of such litigation or
estimate the potential impact on the ability of the State to pay debt
service on its obligations.
On June 20, 1994, the United States Supreme Court, in two
companion cases, upheld the validity of California's prior method of
taxing multinational corporations under a "unitary" method of accounting for
their worldwide earnings, thus avoiding tax refunds of approximately $1.55
billion by the State, and enabling the State to collect $620 million
in previous assessments. Barclays Bank PLC v. Franchise Tax Board
concerning foreign corporations, and Colgate- Palmolive v. Franchise Tax
Board concerned domestic corporations.
Ratings
On July 15, 1994, Standard Poor's Corporation ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"),and Fitch Investors
Service, Inc. ("Fitch") all downgraded their ratings of California's
general obligation bonds. These bonds are usually sold in 20- to 30-year
increments and used to finance the construction of schools, prisons,
water systems and other projects. The ratings were reduced by
Standard & Poor's from "A+" to "A", by Moody's from "Aa" to "A1", and
by Fitch from "AA" to "A". Since 1991, when it had a "AAA" rating, the
State's rating has been downgraded three times by all three ratings
agencies. All three agencies cite the 1994- 95 Budget Act's
dependence on a "questionable" federal bailout to pay for the cost of
illegal immigrants, the Propositions 98 guaranty of a minimum portion of
State revenues for kindergarten through community college, and the
persistent deficit requiring more
<PAGE>161
borrowing as reasons for the reduced rating. Another concern was the
State's reliance on a standby mechanism which could trigger across-the-board
reductions in all State programs, and which could disrupt State operations,
particularly in fiscal year 1995-96. However, a Standard & Poor's
spokesman stated that, although the lowered ratings means California is
a riskier borrower, Standard & Poor's anticipates that the State will pay
off its debts and not default. There can be no assurance that such
ratings will continue for any given period of time or that they will not in
the future be further revised.
As a result of Orange County's Chapter 9 bankruptcy filing on December
6, 1994, Moody's has suspended the County's bond ratings, and Standard
& Poor's has cut its rating of all Orange County debt from "AA-" to "CCC",
a level below investment grade and an indication of high risk and
uncertainty. Fitch does not rate Orange County bonds. It is anticipated that
as Orange County's credit and bond ratings fall, it will have
difficulty in getting loans or selling its bonds to raise money.
Additionally, the County's bankruptcy filing could affect about 180
municipalities, school districts and other municipal entities which
entrusted billions of dollars to Orange County to invest. Standard &
Poor's has informed such entities that they have been placed on
negative credit watch, the usual step prior to a downgrade of credit rating.
<PAGE>162
APPENDIX C
The following information is a summary of special factors affecting New
York Municipal Obligations. It does not purport to be a complete
description and is based on information from statements relating
to securities offerings of New York issuers. Additional Discussion of
Special Factors Relating to New York Municipal Obligations
The State's current fiscal year commenced on April 1, 1994, and
ends in March 31, 1995, and is referred to herein as the State's 1994-95
fiscal year. The State's budget for the 1994-95 fiscal year was
enacted by the Legislature on June 7, 1994, more than two months after the
start of the fiscal year. Prior to adoption of the budget, the
Legislature enacted appropriations for disbursements considered to be
necessary for State operations and other purposes, including all
necessary appropriations for debt service. The State Financial Plan for the
1994-95 fiscal year was formulated on June 16, 1994 and is based on the
State's budget as enacted by the Legislature and signed into law by
the Governor.
The economic and financial condition of the State may be affected
by various financial, social, economic and political factors. Those
factors can be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and its
agencies and instrumentalities, but also by entities, such as the Federal
government, that are not under the control of the State.
The State Financial Plan is based upon forecasts of national and
State economic activity. Economic forecasts have frequently failed to
predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the
national and State economies, including consumer attitudes toward
spending, Federal financial and monetary policies, the availability
of credit, and the condition of the world economy, which could have an
adverse effect on the State. There can be no assurance that the State economy
will not experience results in the current fiscal year that are worse than
predicted, with corresponding material and adverse effects on the
State's projections of receipts and disbursements.
The State Division of the Budget ("DOB") believes that its projections of
receipts and disbursements relating to the current State Financial Plan, and
the assumptions on which they are based, are reasonable. Actual
results, however, could differ materially and adversely from the projections
set forth below, and those projections may be changed materially and
adversely from time to time.
As noted above, the financial condition of the State is affected by
several factors, including the strength of the State and regional
economy and actions of the Federal government, as well as State
actions affecting the level of receipts and disbursements. Owing
to these and other factors, the State may, in future years, face substantial
potential budget gaps resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the future
costs of maintaining State programs at current levels. Any such
recurring imbalance would be exacerbated if the State were to use a
significant amount of nonrecurring resources to balance the budget in a
particular fiscal year. To address a potential imbalance for a given fiscal
year, the State would be required to take actions to increase receipts
and/or reduce disbursements as it enacts the budget for that year, and under
the State Constitution the Governor is required to propose a balanced
budget each year. To correct recurring budgetary imbalances, the State
would need to take significant actions to align recurring receipts and
disbursements in future fiscal years. There can be no assurance, however,
that the State's actions will be sufficient to preserve budgetary balance
in a given fiscal year or to align recurring receipts and disbursements
in future fiscal years.
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The 1994-95 State Financial Plan contains actions that provide
nonrecurring resources or savings, as well as actions that impose nonrecurring
losses of receipts or costs. It is believed that the net positive effect
of nonrecurring actions represents considerably less than one-half of
one percent of the State's General Fund, an amount significantly lower
than the amount included in the State Financial Plans in recent years;
it is believed that those actions do not materially affect the
financial condition of the State. In addition to those nonrecurring
actions, the 1994-95 State Financial Plan reflects the use of $1.026 billion
in the positive cash margin carried over from the prior fiscal year,
resources that are not expected to be available in the State's 1995-96
fiscal year.
The General Fund is the general operating fund of the State and
is used to account for all financial transactions, except those
required to be accounted for in another fund. It is the State's largest fund
and receives almost all State taxes and other resources not dedicated to
particular purposes. In the State's 1994-95 fiscal year, the General Fund
is expected to account for approximately 52 percent of total
governmental-fund receipts and 51 percent of total governmental-fund
disbursements. General Fund moneys are also transferred to other funds,
primarily to support certain capital projects and debt service payments in
other fund types.
New York State's financial operations have improved during recent
fiscal years. During the period 1989-90 through 1991-92, the State
incurred General Fund operating deficits that were closed with receipts from
the issuance of tax and revenue anticipation notes ("TRANs"). First,
the national recession, and then the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in
receipts and three budget deficits. For its 1992-93 and 1993-94 fiscal
years, the State recorded balanced budgets on a cash basis, with
substantial fund balances in each year as described below.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion
in the tax refund reserve account, $265 million in its Contingency Reserve
Fund ("CRF") and $134 million in its Tax Stabilization Reserve Fund.
These fund balances were primarily the result of an improving national
economy, State employment growth, tax collections that exceeded earlier
projections and disbursements that were below expectations. Deposits
to the personal income tax refund reserve have the effect of reducing
reported personal income tax receipts in the fiscal year when made and
withdrawals from such reserve increase receipts in the fiscal year when
made. The balance in the tax refund service account will be used to pay
taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account,
$1.026 billion was available for budgetary planning purposes in the 1994-95
fiscal year. The remaining $114 million will be redeposited in the tax
refund reserve account at the end of the State's 1994-95 fiscal year to
continue the process of restructuring the State's cash flow as part
of the Local Government Assistance Corporation ("LGAC") program. The
balance in the CRF will be used to meet the cost of litigation facing the
State. The Tax Stabilization Reserve Fund may be used only in the event of
an unanticipated General Fund cash-basis deficit during the 1994-95 fiscal
year.
Before the deposit of $1.140 billion in the tax refund service account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for that year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the
bank tax, the corporation franchise tax and the estate tax accounted for
most of this variance, and more than offset
<PAGE>164
weaker-than- projected collections from the sales and use tax and
miscellaneous receipts. Collections from individual taxes were affected
by various factors including changes in Federal business laws, sustained
profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco products following price cuts.
Disbursements and transfers from the General Fund were $303 million
below the level projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings,
which in the April 1993 State Financial Plan were planned to be
deferred into the 1994-95 fiscal year. Compared to the estimates included in
the State Financial Plan formulated in April 1993, lower
disbursements resulted from lower spending for Medicaid, capital
projects, and debt service (due to refundings) and $114 million used to
restructure the State's cash flow as part of the LGAC program. Disbursements
were higher-than-expected for general support for public schools, the State
share of income maintenance, overtime for prison guards, and highway snow
and ice removal.
In certain prior fiscal years, the State has failed to enact a budget
prior to the beginning of the State's fiscal year. A delay in the
adoption of the State's budget beyond the statutory April 1 deadline and the
resultant delay in the State's Spring borrowing has in certain prior
years delayed the projected receipt by the City of State aid, and there can
be no assurance that State budgets in the future fiscal years will be
adopted by the April 1 statutory deadline.
The State has noted that its forecasts of tax receipts have been subject
to variance in recent fiscal years. As a result of these uncertainties and
other factors, actual results could differ materially and adversely from the
State's current projections and the State's projections could be materially
and adversely changed from time to time. There can be no assurance that the
State will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain State
programs at current levels. To address any potential budgetary imbalance,
the State may need to take significant actions to align recurring receipts
and disbursements in future fiscal years.
Ratings on general obligation bonds of the State of New York were
lowered by Standard & Poor's Corporation and Moody's Investors Service
during 1990 from AA- to A and Aa to A, respectively. On January 6, 1992,
Moody's Investors Service lowered its rating on certain appropriations-backed
debt of New York State to Baa1 from A. The agency cited the failure of
Governor Mario M. Cuomo and New York State lawmakers to close New York's
current year budget gap. Moody's Investors Services also placed the
general obligation, State guaranteed and New York local Municipal
Assistance Corporation Bonds under review for possible downgrade in coming
months. In addition, on January 13, 1992, Standard & Poor's Corporation
lowered its rating on general obligation debt and guaranteed debt to
A- from A. Standard & Poor's Corporation also downgraded its rating on
variously rated debt, State moral obligations, contractual obligations,
lease purchase obligations and other State guarantees. Additional
reductions in ratings could result in a loss to Unit holders.
As of March 31, 1994, the State had approximately $5.370 billion
in general obligation bonds, excluding refunding bonds and $294 million in
bond anticipation notes outstanding. On May 24, 1993, the State issued
$850 million in tax and revenue anticipation notes, all of which matured
on December 31, 1993. Principal and interest due on general obligation
bonds and interest due on bond anticipation notes and on tax and revenue
anticipation notes were $782.5 million for the 1993-94 fiscal year, and
are estimated to be $786.3 million for the 1994- 95 fiscal year. These
figures do not include interest on refunding bonds issued in July 1992, to
the extent that such interest is to be paid from escrowed funds.
<PAGE>165
State Authorities
The fiscal stability of the State is related to the fiscal
stability of its authorities, which generally have
responsibility for financing, constructing, and operating
revenue-producing benefit facilities. Certain authorities of the
State, including the State Housing Finance Agency ("HFA"), the Urban
Development Corporation ("UDC") and the Metropolitan Transportation
Authority ("MTA") have faced and continue to experience substantial
financial difficulties which could adversely affect the ability of such
authorities to make payments of interest on, and principal amounts of,
their respective bonds. Should any of its authorities default on their
respective obligations, the State's access to public credit markets could be
impaired. The difficulties have in certain instances caused the State
(under its so-called "moral obligation") to appropriate funds on behalf
of the authorities. Moreover, it is expected that the problems faced by these
authorities will continue and will require increasing amounts of State
assistance in future years. Failure of the State to appropriate necessary
amounts or to take other action to permit those authorities having
financial difficulties to meet their obligations (including HFA, UDC and
MTA) could result in a default by one or more of the authorities. Such
default, if it were to occur, would be likely to have a significant adverse
effect on investor confidence in, and therefore the market price of,
obligations of the defaulting authority. In addition, any default
in payment of any general obligation of any authority whose bonds contain a
moral obligation provision could constitute a failure of certain
conditions that must be satisfied in connection with Federal
guarantees of City and MAC obligations and could thus jeopardize the
City's long-term financing plans.
The fiscal stability of the State is related to the fiscal
stability of its authorities, which generally have
responsibility for financing, constructing and operating
revenue-producing public benefit facilities. The authorities are not
subject to the constitutional restrictions on the incurrence of debt which
apply to the State itself and may issue bonds and notes within the
amounts of, and as otherwise restricted by, their legislative
authorization. As of September 30, 1992, there were 18 authorities
that had outstanding debt of $100 million or more. The aggregate outstanding
debt, including bonds, of these 18 authorities was 63.5 billion as of
September 30, 1993. As of March 31, 1994, aggregate public authority debt
outstanding as State supported debt was $21.1 billion as State-related debt
was $29.4 billion.
The authorities are generally supported by revenues generated by
the projects financed or operated, such as fares, user fees on bridges,
highway tolls and rentals for dormitory rooms and housing. In recent years,
however, the State has provided financial assistance through
appropriations, in some cases of a recurring nature, to certain of the
18 authorities for operating and other expenses and, in fulfillment of its
commitments on moral obligation indebtedness or otherwise for debt
service. This assistance is expected to continue to be required in
future years.
The MTA oversees the operation of New York City's subway and bus
lines by its affiliates, the New York City Transit Authority and the
Manhattan and Bronx Surface Transit operating (collectively, the "Transit
Authority" or the "TA"). Through MTA's subsidiaries, the Long
Island Railroad Company, the Metro-North Commuter Railroad Company and
the Metropolitan Suburban Bus Authority, the MTA operates certain commuter
rail and bus lines in the New York metropolitan area. In addition,
the Staten Island Rapid Transit Operating Authority, an MTA subsidiary,
operates a rapid transit line on Staten Island. Through its affiliated
agency, the Triborough Bridge and Tunnel Authority (the "TBTA"), the
MTA operates certain intrastate toll bridges and tunnels. Because fare
revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended and will continue to depend for operating
support upon a system of Federal, State, local government and TBTA support,
<PAGE>166
including loans, grants and operating subsidies. Over the past several
years, the State has enacted several taxes, including a surcharge on the
profits of banks, insurance corporations and general business corporations
doing business in the 12-county region served by the MTA (the
"Metropolitan Transportation Region") and a special one-quarter of 1%
regional sales and use tax, that provide additional revenues for mass transit
purposes including assistance to the MTA, the surcharge, which expires in
November 1995, yielded $507 million in calendar year 1992, of which
the MTA was entitled to receive approximately 90 percent, or approximately
$456 million. For the 1994- 95 State fiscal year, total State assistance to
the MTA is estimated at approximately $1.3 billion.
In 1993, State legislation authorized the refunding of a five-year
$9.56 billion MTA capital plan for the five-year period, 1992 through
1996 (the "1992-96 Capital Program"). The MTA has received approval of the
1992-96 Capital Program based on this legislation from the 1992-96 Capital
Program Review Board, as State law requires. This is the third five-year
plan since the Legislature authorized procedures for the adoption,
approval and amendment of a five- year plan in 1981 for a capital
program designed to upgrade the performance of the MTA's transportation
systems and to supplement, replace and rehabilitate facilities
and equipment. The MTA, the TBTA and the TA are collectively authorized
to issue an aggregate of $3.1 billion of bonds (net of certain statutory
exclusions) to finance a portion of the 1992-96 Capital Program. The
1992-96 Capital Program is expected to be financed in significant part
through the dedication of State petroleum business taxes.
There can be no assurance that all the necessary governmental actions
for the Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1992-96 Capital
Program, or parts thereof, will not be delayed or reduced. Furthermore,
the power of the MTA to issue certain bonds expected to be supported by
the appropriation of State petroleum business taxes is currently the
subject of a court challenge. If the Capital Program is delayed or reduced,
ridership and fare revenues may decline, which could, among other things,
impair the MTA's ability to meet its operating expenses without additional
State assistance.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities
to obtain financing in the public credit markets and the market price of
the State's outstanding bonds and notes may be adversely affected. The
Housing Finance Agency ("HFA") and the Urban Development Corporation
("UDC") have in the past required substantial amounts of assistance
from the State to meet debt service costs or to pay operating expenses.
Further assistance, possibly in increasing amounts, may be required for
these, or other, Authorities in the future. In addition, certain
statutory arrangements provide for State local assistance payments
otherwise payable to localities whose local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could
seek additional State funds.
New York City and Other Localities
The City, with a population of approximately 7.3 million,
is an international center of business and culture. Its
non-manufacturing economy is broadly based, with the banking and securities,
life insurance, communications, publishing, fashion design, retailing
and construction industries accounting for a significant portion of
the City's total employment earnings. Additionally, the City is the
nation's leading tourist destination. The City's manufacturing activity
is conducted primarily in apparel and publishing.
<PAGE>167
The national economic recession which began in July 1990 has adversely
impacted the City harder than almost any other political jurisdiction in the
nation. As a result, the City, with approximately 3 percent of
national employment, has lost approximately 20 percent of all U.S. jobs
during the recent economic downturn and, consequently, has suffered
erosion of its local tax base. In total, the City private sector employment
has plummeted by approximately 360,000 jobs since 1987. But, after nearly
five years of decline, the City appears to be on the verge of a
broad-based recovery which will lift many sectors of the local economy.
Most of the nascent local recovery can be attributed to the continued
improvement in the U.S. economy, but a great deal of the strength
expected in the City economy will be due to local factors, such as
the heavy concentration of the securities and banking industries in the
City. The current forecast calls for modest employment growth of about
20,000 a year (0.6 percent) on average through 1998 with some slowing
but still positive growth in employment in 1995-96 as U.S. growth slows
(local job gains slow from 25,000 to around 10,000 per year).
During the most recent economic downturn, the City has faced
recurring extraordinary budget gaps that have been addressed by
undertaking one-time, one-shot budgetary initiatives to close then projected
gaps in order to achieve a balanced budget as required by the laws of the
State. For example, in order to achieve a balanced budget for the
1992 fiscal year, the City increased taxes and reduced services during the
1991 fiscal year to close a then projected gap of $3.3 billion in the
1992 fiscal year which resulted from, among other things, lower than expected
tax revenue of approximately $1.4 billion, reduced State aid for the City
of approximately $564 million and greater than projected increases in
legally mandated expenditures of approximately $400 million,
including public assistance and Medicare expenditures. The gap-closing
measures for fiscal year 1992 included receipt of $605 million from tax
increases, approximately $1.5 billion of proposed service reductions
and proposed productivity savings of $545 million.
Notwithstanding its recurring projected budget gaps, for fiscal years
1981 through 1993 the City achieved balanced operating results (the City's
General Fund revenues and transfers reduced by expenditures and
transfers), as reported in accordance with Generally Accepted Accounting
Principles ("GAAP"), and the City's 1994 fiscal year results are
projected to be balanced in accordance with GAAP.
The City's ability to maintain balanced budgets in the future is subject
to numerous contingencies; therefore, even though the City has managed to
close substantial budget gaps in recent years in order to maintain balanced
operating results, there can be no assurance that the City will continue
to maintain a balanced budget as required by State law without additional
tax or other revenue increases or reduction in City services, which
could adversely affect the City's economic base.
Pursuant to the laws of the State, the City prepares an annual
four-year financial plan, which is reviewed and revised on a quarterly
basis and which includes the City's capital, revenue and expense
projections. The City is required to submit its financial plans to review
bodies, including the New York State Financial Control Board ("Control
Board"). If the City were to experience certain adverse financial
circumstances, including the occurrence or the substantial likelihood and
imminence of the occurrence of an annual operating deficit of more than $100
million or the loss of access to the public credit markets to satisfy the
City's capital and seasonal financing requirements, the Control Board
would be required by State law to exercise powers, among others, of prior
approval of City financial plans, proposed borrowings and certain contracts.
1995-1998 Financial Plan. On July 8, 1994, the City submitted to the
Control Board the Financial Plan for the 1995-1998 fiscal years (the
"1995-1998 Financial Plan or "Financial Plan"), which relates to
<PAGE>168
the City, the Board of Education ("BOE") and the City University of New
York ("CUNY"). The Financial Plan is based on the City's expense and capital
budgets for the City's 1995 fiscal year, which were adopted on June 23,
1994.
The 1995-1998 Financial Plan projects revenues and expenditures for the
1995 fiscal year balanced in accordance with GAAP. The projections for the
1995 fiscal year reflect proposed actions to close a previously
projected gap of approximately $2.3 billion for the 1995 fiscal year, which
include City actions aggregating $1.9 billion, a $288 million increase in
State actions over the 1994 and 1995 fiscal years, and a $200 million
increase in Federal assistance. The City actions include proposed agency
actions aggregating $1.1 billion, including productivity savings; tax
and fee enforcement initiatives; service reductions; and savings from the
restructuring of City services. City actions also include savings of $45
million resulting from proposed tort reform, the projected transfer to
the 1995 fiscal year of $171 million of the projected 1994 fiscal year
surplus, savings of $200 million for employee health care costs, $51
million in reduced pension costs, savings of $225 million from
refinancing City bonds and $65 million from the proposed sale of certain
City assets. The proposed savings for employee health care costs are
subject to collective bargaining negotiation with the City's unions; the
proposed savings from tort reform will require the approval of the State
Legislature; and the $200 million increase in Federal assistance is subject to
approval by Congress and the President.
The Financial Plan also set forth projections for the 1996 through
1998 fiscal years and outlines a proposed gap-closing program to close
projected gaps of $1.5 billion, $2.0 billion and a $2.4 billion for the
1996 through 1998 fiscal years, respectively, after successful
implementation of the $2.3 billion gap-closing program for the 1995 fiscal
year.
The projections for the 1996 through 1998 fiscal years assume the
extension by the State Legislature of the 14% personal income tax surcharge
beyond calendar year 1995 and extension of the 12.5% personal income tax
surcharge beyond calendar year 1996, resulting in combined revenues
of $159 million, $633 million and $920 million in the 1996, 1997 and
1998 fiscal years, respectively. However, as part of the tax reduction
program reflected in the Financial Plan, the City is proposing the
elimination of the 12.5% personal income tax surcharge when it expires at a
cost of $184 million in fiscal year 1997 and $455 million in fiscal year
1998. The proposed gap-closing actions include City actions aggregating
$1.2 billion, $1.5 billion and $1.7 billion in the 1996 through 1998 fiscal
years, respectively; $275 million, $375 million and $525 million in proposed
additional State actions in the 1996 through 1998 fiscal years, respectively,
primarily from the proposed State assumption of certain Medicaid costs; and
$100 million and $200 million in proposed additional Federal assistance
in the 1997 and 1998 fiscal years, respectively. The proposed
additional City actions, a substantial number of which are unspecified,
include additional spending reductions, the reduction of City personnel
through attrition, government efficiency initiatives, procurement
initiatives, labor productivity initiatives, and the proposed privatization of
City sewage treatment plants. Certain of these initiatives may be
subject to negotiation with the City's municipal unions. Various actions
proposed in the Financial Plan for the 1996-1998 fiscal years, including
the proposed state actions, are subject to approval by Congress and the
President. The State Legislature has in previous legislative sessions failed
to approve certain of the City's proposals for the State assumption of
certain Medicaid costs and mandate relief, thereby increasing the
uncertainty as to the receipt of the State assistance included in the
Financial Plan. In addition, the Financial Plan assumes the
continuation of the current assumption with respect to wages for City
employees and the assumed 9% earnings on pension fund assets for the 1994
fiscal year are expected to be substantially below the 9% assumed rate,
which will increase the City's future pension contributions. In
addition, a review of the pension fund earnings assumptions is
currently being conducted which could further increase the City's
future pension contributions. In addition, a review of the pension fund
earnings assumptions is currently being conducted which could further
increase the City's future pension
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contributions by a substantial amount.
The City expects that tax revenue for the 1994 fiscal year will be
approximately $65 million less than forecast in the 1994 Modification,
primarily due to shortfalls in the personal income tax and sales tax, and
that expenditures will be approximately $25 million greater than forecast.
Accordingly, the $171 million of the projected surplus for the 1994 fiscal
year, which is currently projected in the 1994 Modification and the
Financial Plan to be transferred to the 1995 fiscal year will decrease to 81
million. As a result, the City will reduce expenditures for the 1995 fiscal
year to offset this decrease, which is expected to be reflected in the
first quarter modification to the Financial Plan. In addition, the Financial
Plan assumes that a special session of the State Legislature, which
may take place in the near future, will enact, and the Governor will sign,
State legislation relating to the proposed tort reform, which would save
the City $45 million in payments for tort liability in fiscal year
1995, and certain anticipated improvements in fine and fee collections
forecast to earn $25 million in City revenue in fiscal year 1995, and that
the State Legislature will not enact proposed legislation mandating
additional pension benefits for City retirees costing the City
approximately $200 million annually. To address these and other
possible contingencies, on July 11, 1994, the Mayor stated that he will
reserve $100 million from authorized spending by City agencies in fiscal
year 1995 in addition to the existing general reserves of $150 million.
In addition, the City has identified a $360 million contingency program
for the 1995 fiscal year, primarily consisting of layoffs and service
reductions.
Actions to Close the Gaps. The 1995-1998 Financial Plan reflects a program
of proposed actions by the City, State and Federal governments to
close the gaps between projected revenues and expenditures of $1.5
billion, $2.0 billion and $2.4 billion for the 1996, 1997 and 1998
fiscal years, respectively.
City gap-closing actions total $1.2 billion in the 1996 fiscal year,
$1.5 billion in the 1997 fiscal year and $1.7 billion in the 1998 fiscal
year. These actions, a substantial number of which are unspecified,
include additional spending reductions, aggregate $501 million, $598
million and $532 million in the 1996 through 1998 fiscal years,
respectively; government efficiency initiatives aggregating $50 million,
$100 million and $150 million in the 1996 through 1998 fiscal years,
respectively; labor productivity initiatives, aggregating $250 million in
each of the 1996 through 1998 fiscal years; and a proposed privatization of
City sewage treatment plants which would result in revenues of $200
million in each of the 1996 through 1998 fiscal years. Certain of these
initiatives may be subject to negotiation with the City's municipal unions.
State actions proposed in the gap- closing program total $275
million, $375 million and $525 million in each of the 1996, 1997 and 1998
fiscal years, respectively. These actions include savings primarily from the
proposed State assumption of certain Medicaid costs.
The Federal actions proposed in the gap- closing program are $100
million and $200 million in increased Federal assistance in fiscal years
1997 and 1998, respectively.
Various actions proposed in the Financial Plan, including
the proposed increase in State aid, are subject to approval by the
Governor and the State Legislature, and the proposed increase in
Federal aid is subject to approval by Congress and the President. State
and Federal actions are uncertain and no assurance can be given that such
actions will in fact be taken or that the savings that the City projects
will result from these actions will be realized. The State Legislature
failed to approve a substantial portion of the proposed State assumption of
Medicaid costs in the last session. The Financial Plan assumes that these
<PAGE>170
proposals will be approved by the State Legislature during the 1995 fiscal
year and that the Federal government will increase its share of funding for
the Medicaid program. If these measures cannot be implemented, the City
will be required to take other actions to decrease expenditures or increase
revenues to maintain a balanced financial plan.
Although the City has maintained balanced budgets in each of its
last thirteen years, and is projected to achieve balanced operating results
for the 1993 fiscal year, there can be no assurance that the gap-
closing actions proposed in the Financial Plan can be successfully
implemented or that the City will maintain a balanced budget in future years
without additional State aid, revenue increases or expenditure reductions.
Additional tax increases and reductions in essential City services could
adversely affect the City's economic base.
Assumptions. The 1995-1998 Financial Plan is based on numerous
assumptions, including the continuing improvement in the City's and the
region's economy and a modest employment recovery during calendar year 1994 and
the concomitant receipt of economically sensitive tax revenues in the
amounts projected. The 1995-1998 Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors,
the extent, if any, to which wage increases for City employees exceed
the annual increases assumed for the 1995 through 1998 fiscal years;
continuation of the 9% interest earnings assumptions for pension fund
assets and current assumptions with respect to wages for City employees
affecting the City's required pension fund contributions; the
willingness and ability of the State, in the context, of the State's
current financial condition, to provide the aid contemplated by the Financial
Plan and to take various other actions to assist the City, including the
proposed State takeover of certain Medicaid costs and State mandate relief;
the ability of HHC, BOE and other such agencies to maintain balanced
budgets; the willingness of the Federal government to provide Federal aid;
approval of the proposed continuation of the personal income tax
surcharge; adoption of the City's budgets by the City Council in
substantially the forms submitted by the Mayor; the ability of the City to
implement proposed reductions in City personnel and other cost
reduction initiatives, which may require in certain cases the cooperation
of the City's municipal unions, and the success with which the City controls
expenditures; savings for health care costs for City employees in the
amounts projected in the Financial Plan; additional expenditures that may be
incurred due to the requirements of certain legislation requiring minimum
levels of funding for education; the impact on real estate tax revenues of
the current weakness in the real estate market; the City's ability to
market its securities successfully in the public credit markets; the level
of funding required to comply with the Americans with Disabilities Act of
1990; and additional expenditures that may be incurred as a result of
deterioration in the condition of the City's infrastructure.
The projections and assumptions contained in the 1995-1998
Financial Plan are subject to revision which may involve substantial
change, and no assurance can be given that these estimates and projections,
which include actions which the City expects will be taken but which are not
within the City's control, will be realized.
Certain Reports. From time to time, the Control Board staff, the City
Comptroller and others issue reports and make public statements
regarding the City's financial condition, commenting on, among other
matters, the City's financial plans, projected revenues and
expenditures and actions by the City to eliminate projected operating
deficits. Some of these reports and statements have warned that the City may
have underestimated certain expenditures and overestimated certain
revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed
the City's Future economic and social conditions and have questioned whether
the City has the capacity to
<PAGE>171
generate sufficient revenues in the future to meet the costs of its
expenditure increases and to provide necessary services.
On March 1, 1994, the City Comptroller issued a report on the state of
the City's economy. The report concluded that, while the City's long
recession is over, moderate growth is the best the City can expect, with
the local economy being held back by continuing weakness in
important international economies.
On July 11, 1994, the City Comptroller issued a report on the City's
adopted budget for the 1995 fiscal year. The City Comptroller
stated that if none of the uncertain proposals are implemented, the
total risk could be as much as $763 million to $1.02 billion. risks which
were identified as substantial risks include a possible $208 million to $268
million increase in overtime costs; approval by the State Legislature of a tort
reform program to limit damage claims against the City, which would
result in savings of $45 million; the $65 million proceeds from a
proposed asset sale; additional expenditures at Health and
Hospitals Corporation totaling $60 million; and $60 million of
increased pension contributions resulting from lower than assumed
pension fund earnings. Additional possible risks include obtaining
the agreement of municipal unions to the proposed reduction in City
expenditures for health care costs by $200 million; uncertainties
concerning the assumed improvement in the collection of taxes, fines and
fees totaling $75 million; and uncertainty concerning the receipt of the
$200 million of increased Federal aid projected for the 1995 fiscal year.
The City Comptroller noted that there are a number of additional issues,
including possible larger than projected expenditures for foster care and
public assistance and the receipt of $100 million from assumed FICA
refunds. The City Comptroller has also stated in a report issued on June 8,
1994 that certain of the reductions in personnel and services proposed in
the City's financial plan submitted to the Control Board on May 10, 1994
(the "May Financial Plan") will have long-term and, in some cases,
severe consequences for City residents.
In addition, on July 11, 1994, the private members of the Control
Board, Robert R. Kiley, Heather L. Ruth and Stanley S. Shuman, issued
a statement which concluded that the 1995 fiscal year is not reasonably
balanced and that further budget cuts are unavoidable in the next six
months. In addition, the private members stated that the Financial Plan does
not set forth a path to structural balance. The private members stated
that, in order to achieve this goal, City managers must be given fiscal
targets they can be expected to meet; solid new proposals must be
developed that back up the savings the City has committed to achieve to
balance future budgets; and the deferral of expenses to future years,
through actions such as the sale of property tax receivables, stretching out
pension contributions and delaying debt service payments through
refundings, must stop. On July 11, 1994, the Control Board staff stated
that the City faces risks of greater than $1 billion and $2 billion for the
1995 and 1996 fiscal years, respectively, and risks of approximately $3
billion for each of the 1997 and 1998 fiscal years.
Substantially all of the City's full- time employees are members of
labor unions. The Financial Emergency Act requires that all collective
bargaining agreements entered into by the City and the Covered Organizations
be consistent with the City's current financial plan, except under certain
circumstances, such as awards arrived at through impasse procedures.
On January 11, 1993, the City announced a settlement with a coalition
of municipal unions, including Local 237 of the International
Brotherhood of Teamsters ("Local 237"), District 37 of the American
Federation of State, County and Municipal Employees ("District Council
37") and other unions
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covering approximately 44% of the City's workforce. The settlement, which
has been ratified by the unions, includes a total net expenditure increase of
8.25% over a 39- month period, ending March 31, 1995 for most of these
employees. On April 9, 1993 the City announced an agreement with the
Uniformed Fire Officers Association (the "UFOA") which is consistent with the
coalition agreement. The agreement has been ratified. The Financial
Plan reflects the costs associated with these settlements and provides for
similar increases for all other City-funded employees.
The Financial Plan provides no additional wage increases for
City employees after their contracts expire in the 1995 and 1996 fiscal
years. Each 1% wage increase for all employees commencing in the 1995 and 1996
fiscal years would cost the City an additional $130 million for the
1995 fiscal year and $140 million for the 1996 fiscal year and $150
million each year thereafter above the amounts provided for in the
Financial Plan.
The terms of eventual wage settlements could be determined through
the impasse procedure in the New York City Collective Bargaining Law,
which can impose a binding settlement.
New York City Indebtedness. Outstanding indebtedness having an
initial maturity greater than one year from the date of issuance of
the City as of March 31, 1994 was $21,290,000 compared to $19,624,000 as of
March 31, 1993.
A substantial portion of the capital improvement in the City are
financed by indebtedness issued by the Municipal Assistance
Corporation of the City of New York ("MAC"). MAC was organized in 1975 to
provide financing assistance for the City and also to exercise certain
review functions with respect to the City's finances. MAC bonds are
payable out of certain State sales and compensating use taxes imposed within
the City, State stock transfer taxes and per capita State aid to the
City. Any balance from these sources after meeting MAC debt service and
reserve fund requirements and paying MAC's operating expenses is remitted
to the City or, in the case of stock transfer taxes, rebated to the taxpayers.
The State is not, however, obligated to continue the imposition of such
taxes or to continue appropriation of the revenues therefrom to MAC, nor
is the State obligated to continue to appropriate the State per capita aid
to the City which would be required to pay the debt service on certain MAC
obligations. MAC has not taxing power and MAC bonds do not create an
enforceable obligation of either the State or the City. As of March 31, 1994,
MAC had outstanding an aggregate of approximately $4.071 billion of
its bonds compared to $4.470 billion as of March 31, 1993.
On February 11, 1991, Moody's Investors Service lowered its rating on
the City's general obligation bonds from A to Baa1. On July 2, 1993,
Standard & Poor's reconfirmed its A- rating of City bonds, continued its
negative rating outlook assessment and stated that maintenance of such
ratings depended upon the City's making further progress towards
reducing budget gaps in the outlying years. In January 1995, Standard &
Poor's reconfirmed its negative outlook and placed it on CreditWatch
because of the City's accounting methods.
On July 10, 1995, Standard & Poor's Ratings Group ("Standard &
Poor's") downgraded its rating on New York City's $23 billion of outstanding
general obligation bonds to "BBB+" from "A-", citing to the City's
chronic structural budget problems and weak economic outlook. Standard &
Poor's stated that New York City's reliance on one- time revenue measures to
close annual budget gaps, a dependence on unrealized labor savings,
overly optimistic estimates of revenues and state and federal aid and
the City's continued high debt levels also contributed to its decision
to lower the rating.
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Litigation
The State is the subject of numerous legal proceedings relating to
State finances, State programs and miscellaneous tort, real property and
contract claims in which the State is a defendant and where monetary
damages sought are substantial. These proceedings could adversely
affect the financial condition of the State in the 1994- 95 fiscal years or
thereafter.
In addition to the proceedings noted below, the State is party to other
claims and litigation which its legal counsel has advised are not
probable of adverse court decisions. Although the amounts of potential
losses, if any are not presently determinable, it is the State's
opinion that its ultimate liability in these cases is not expected to have a
material adverse effect on the State's financial position in the 1994-95 fiscal
year or thereafter.
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APPENDIX D
The following information is a summary of special factors affecting
New Jersey municipal obligations. It does not purport to be a complete
description and is based on information from statements relating to
securities offerings of New Jersey issuers.
Additional Discussion of Special Factors Relating to New Jersey
Municipal Obligations
Risk Factors: Prospective investors should consider the recent
financial difficulties and pressures which the State of New Jersey (the
"State") and certain of its public authorities have undergone.
The State's 1995 fiscal year budget became law on June 30, 1994.
Reflecting the downturn, the rate of unemployment in the State rose
from a low of 3.6% during the first quarter of 1989 to a recessionary peak
of 9.3% during 1992. Since then, the unemployment rate fell to 6.7%
during the fourth quarter of 1993. The jobless rate averaged 7.1%
during the first nine months of 1994, but this estimate is not comparable to
those prior to January because of major changes in the federal survey from
which these statistics are obtained.
In the first nine months of 1994, relative to the same period a
year ago, job growth took place in services (3.5%) and construction
(5.7%), more moderate growth took place in trade (1.9%), transportation
and utilities (1.2%) and finance/insurance/real estate
(1.4%), while manufacturing and government declined by 1.5% and 0.1%,
respectively. The net result was a 1.6% increase in average employment
during the first nine months of 1994 compared to the first nine months of 1993.
The economic recovery is likely to be slow and uneven in both New
Jersey and the nation. Some sectors, like commercial and industrial
construction, will undoubtedly lag because of continued excess capacity.
Also, employers in rebounding sectors can be expected to remain
cautious about hiring until they become convinced that improved business
will be sustained. Other firms will continue to merge or downsize to
increase profitability. As a result, job gains will probably come
grudgingly and unemployment will recede at a corresponding slow pace.
Pursuant to the State Constitution, no money may be drawn from the
State Treasury except for appropriations made by law. In addition, all
monies for the support of State purposes must be provided for in one general
appropriation law covering one and the same fiscal year.
In addition to the Constitutional provisions, the New Jersey
statutes contain provisions concerning the budget and appropriation
system. Under these provisions, each unit of the State requests an
appropriation from the Trustee of Division of Budget and Accounting, who
reviews the budget requests and forwards them with his recommendation to
the Governor. The Governor then transmits his recommended expenditures and
sources of anticipated revenue to the legislature, which reviews the
Governor's Budget Message and submits an appropriations bill to the Governor
for his signing by July 1 of each year. At the time of signing the bill,
the Governor may revise appropriations or anticipated revenues. That action
can be reversed by a two-thirds vote of each House. No supplemental
appropriation may be enacted after adoption of the act, except where there are
sufficient revenues on hand or anticipated, as certified by the
Governor, to meet the appropriation.
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Finally, the Governor may, during the course of the year, prevent the
expenditure of various appropriations when revenues are below those
anticipated or when he determines that such expenditure is not in the best
interest of the State.
One of the major reasons for cautious optimism is found in the
construction industry. Total construction contracts awarded in New
Jersey have turned around, rising by 8.6% in 1993 compared with 1992. By far,
the largest boost came from residential construction awards which increased by
37.7% in 1993 compared with 1992. In addition, non residential building
construction awards have turned around, posting a 6.9% gain.
Nonbuilding construction awards increased approximately 4% in the
first eight months of 1994 compared with the same period in 1993.
Finally, even in the labor market there are signs of recovery. Thanks
to a reduced layoff rate and the reappearance of job opportunities in
some parts of the economy, unemployment in the State has been receding
since July 1992, when it peaked at 9.6% according to U.S. Bureau of
Labor Statistics estimates based on the federal government's monthly
household survey. The same survey showed joblessness dropped to an average
of 6.7% in the fourth quarter of 1993. The unemployment rate registered
an average of 7.8% in the first quarter of 1994, but this rate cannot be
compared with prior data due to the changes in the U.S. Department of
Labor procedures fir determining the unemployment rate that went into
effect in January 1994.
State Aid to Local Governments is the largest portion of fiscal
year 1995 appropriations. In fiscal year 1995, $5,782.2 million
of the State's appropriations consisted of funds which are distributed
to municipalities, counties and school districts. The largest State Aid
appropriation, in the amount of $3,900.1 million, was provided for local
elementary and secondary education programs. Of this amount, $2,431.6
million is provided as foundation aid to school districts by formula based
upon the number of students and the ability of a school district to raise
taxes from its own base. In addition, the State provided $582.5 million for
special education programs for children with disabilities. A $293 million
program was also funded for pupils at risk of educational failure,
including basic skills improvement. The State appropriated $474.8
million on behalf of school districts as the employer share of the teachers'
pension and benefits programs, $263.8 million to pay for the cost of pupil
transportation and $57.4 million for transition aid, which
guaranteed school districts a 6.5% increase over the aid received in
fiscal year 1991 and is being phased out over six years.
Appropriations to the Department of Community Affairs total $635.1
million in State Aid monies for fiscal year 1995. The principal programs
funded were the Supplemental Municipal Property Tax Act ($314.1
million); the Municipal Revitalization Program ($165.0 million);
municipal aid to urban communities to maintain and upgrade
municipal services ($40.7 million); and the Safe and Clean
Neighborhoods Program ($58.9 million). Appropriations to the State
Department of the Treasury total $321.3 million in State Aid monies for
fiscal year 1995. The principal programs funded by these appropriations were
payments under the Business Personal Property Tax Replacement Programs
($158.7 million); the cost of senior citizens, disabled and veterans
property tax deductions and exemptions ($41.7 million); aid to
densely populated municipalities ($25.0 million); Municipal Purposes Tax
Assistance ($30.0 million); and payments to municipalities for services to
state owned property ($34.9 million).
Other appropriations of State aid in fiscal year 1995 include:
welfare programs ($499.1 million); aid to county colleges ($123.6
million); and aid to county mental hospitals ($79.4 million).
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The second largest portion of appropriations in fiscal 1995 is
applied to Direct State Services: the operation of State government's
17 departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. In fiscal 1995, appropriations for Direct
State Services aggregate $5,203.1 million. Some of the major appropriations
for Direct State Services during fiscal 1995 are detailed below.
$595.3 million was appropriated for programs administered by the
Department of Human Services. The Department of Labor is appropriated
$51.4 million for the administration of programs for workers'
compensation, unemployment and disability insurance, manpower development,
and health safety inspection.
$27.7 million is appropriated for administration of the
Medicaid and pharmaceutical assistance to the aged and disabled
programs; $14.9 million for administration of the various
income maintenance programs, including Aid to Families with Dependent
Children(AFDC); $69.3 million for the Division of Youth and Family Services,
which protects the children of the State from abuse and neglect and
$15.0 million for juvenile community programs which serves juveniles who have
violated the laws of the State and have been committed to the Juvenile
Services Division.
The Department of Health was appropriated $32.3 million for
the prevention and treatment of diseases, alcohol and drug abuse programs,
regulation of health care facilities, and the uncompensated care
program.
$689.3 million was appropriated to the Department of Higher Education
for the support of eight State colleges, Rutgers University, the New
Jersey Institute of Technology, and the University of Medicine and
Dentistry of New Jersey.
$932.6 million was appropriated to the Department of Law and Public
Safety and the Department of Corrections.
$92.3 million was appropriated to the Department of Transportation for
the various programs it administers, such as the maintenance and
improvement of the State highway systems and subsidies for railroads and
bus companies.
$176.6 million was appropriated to the Department of Environmental
Protection for the protection of air, land, water, forest, wildlife and
shellfish resources and for the provision of outdoor recreational facilities.
The primary method for State financing of capital projects is through
the sale of the general obligation bonds of the State. These bonds are
backed by the full faith and credit of the State. State tax revenues and
certain other fees are pledged to meet the principal and interest payments
required to pay the debt fully. No general obligation debt can be issued
by the State without prior voter approval, except that no voter approval is
required for any law authorizing the creation of a debt for the
purpose of refinancing all or a portion of outstanding debt of the
State, so long as such law requires that the refinancing provide a debt
service savings.
All appropriations for capital projects and all proposals for
State bond authorizations are subject to the review and recommendation of
the New Jersey Commission on Capital Budgeting and Planning. This
permanent commission was established in November, 1975, and is
charged with the preparation of the State Capital Improvement Plan, which
contains proposals for State spending for capital projects.
<PAGE>177
The aggregate outstanding general obligation bonded indebtedness of
the State as of June 30, 1993 was $3.549.7 billion. The debt service
obligation for outstanding indebtedness is $119.9 million for fiscal year
1994.
Aside from its general obligation bonds, the State's "moral obligation"
backs certain obligations issued by the New Jersey Housing and Mortgage
Finance Agency, the South Jersey Port Corporation (the "Corporation") and the
Higher Education Assistance Authority. As of June 30, 1992, there was
outstanding in excess of $1 billion of moral obligation bonded
indebtedness issued by such entities, for which the maximum annual debt service
was over $101 million as of such date. The State provides the Corporation with
funds to cover debt service and property tax requirements when earned
revenues are anticipated to be insufficient to cover these obligations. For
the calendar years 1986 through 1992, the State has appropriated
$12,237,565.00 to cover property tax shortfalls of the Corporation.
At any given time, there are various numbers of claims and cases
pending against the State, State Agencies and employees, seeking recovery
of monetary damages that are primarily paid out of the fund created
pursuant to the Tort Claims Act, N.J.S.A. 59:1-1 et seq. In addition,
at any given time there are various contract claims against the State
and State agencies seeking recovery of monetary damages. The State is unable
to estimate its exposure for these claims and cases. An independent
study estimated an aggregate potential exposure of $50 million for claims
pending, as of January 1, 1982. It is estimated that were a similar study
made of claims currently pending, the amount of such estimated exposure
would be somewhat higher. New Jersey is involved in a number of lawsuits in
which adverse decisions could materially affect revenues or
expenditures. Such cases include challenges to its system of educational
funding, the methods by which the State Department of Human Services
shares with county governments the maintenance recoveries and costs for
residents in State psychiatric hospitals and residential facilities
for the developmentally disabled.
Other lawsuits that could materially affect revenue or expenditures
include a suit by a number of taxpayers seeking refunds of taxes paid to
the Spill Compensation Fund pursuant to N.J.S.A. 58:10-23.11; a suit
alleging that unreasonably low Medicaid payment rates have been
implemented for long- term care facilities in New Jersey; a suit alleging
unfair taxation on interstate commerce; a suit by Essex County seeking
to invalidate the State's method of funding the medical system and a suit
seeking return of moneys paid by various counties for maintenance of
Medicaid or Medicare eligible residents of institutions and facilities for
the developmentally disabled, and a suit challenging the imposition of
premium tax surcharges on insurers doing business in New Jersey, and
assessments upon property and casualty liability insurers pursuant to the
Fair Automobile Insurance Reform Act.
Legislation approved June 30, 1992, effective immediately, called for
revaluation of several public employee pension funds, authorized an
adjustment to the assumed rate of return on investment and refunds $773
million in public employer contributions to the State from various pension
funds, to be reflected as a revenue source for Fiscal Year 1992 and $226
million in Fiscal Year 1993 and each fiscal year thereafter. Several labor
unions filed suit seeking a judgment directing the State Treasurer to
refund all monies transferred from the pension funds and paid into the
General Fund. An adverse determination would have a significant impact on
Fiscal Years 1992 and 1993 revenue estimates.
Bond Ratings: Citing a developing pattern of reliance on
non-recurring measures to achieve budgetary balance, four years of financial
operations marked by revenue shortfalls and operating deficits, and the
likelihood that financial pressures will persist, on August 24, 1992
Moody's lowered from Aaa to
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Aa1 the rating assigned to New Jersey general obligation bonds. Currently,
Standard & Poor's rates New Jersey general obligation bonds AA+. On
July 6, 1992, Standard & Poor's affirmed its AA+ ratings on New Jersey's
general obligation and various lease and appropriation backed debt, but its
ratings outlook was revised to negative for the longer term horizon (beyond
four months) for resolution of two items: (i) the Federal Health Care
Facilities Administration ruling concerning retroactive Medicaid hospital
reimbursements and (ii) the State's uncompensated health care
funding system, which is under review in the U.S. Supreme Court.
<PAGE>179
APPENDIX E
The following information is a summary of special factors affecting
Florida municipal obligations. It does not purport to be a complete
description and is based on information from statements relating
to securities offerings of Florida issuers.
Additional Discussion of Special Factors Relating to Florida Municipal
Obligations In 1980, Florida was the seventh most populous state in the
U.S. The State has grown dramatically since then an as of April 1, 1993,
ranks fourth with an estimated population of 13.5 million.
Florida's attraction, as both a growth and retirement state, has kept net
migration fairly steady with an average of 292,988 new residents a year
from 1983 through 1993. The U.S. average population increase since 1982 is
about 1% annually, while Florida's average annual rate of increase is about
2.5%. Florida continues to be the fastest growing of the ten largest states.
This strong population growth is one reason the State's economy is
performing better than the nation as a whole. In addition to
attracting senior citizens to Florida as a place for retirement, the State
is also recognized as attracting a significant number of
working age individuals. Since 1983, the prime working age population
(18-44) has grown at an average annual rate of 2.6%. The share of
Florida's total working age population (18- 59) to total State
population is approximately 54%. This share is not expected to change
appreciably into the twenty-first century.
The State's personal income has been growing strongly the last
several years and has generally out performed both the U.S. as a whole and
the southeast in particular, according to the U.S. Department of Commerce
and the Florida Consensus Economic Estimating Conference. This is due to the
fact that Florida's population has been growing at a very strong pace and,
since the early 70's the State's economy has diversified so as to provide
greater insulation from national economic downturns. As a result,
Florida's real per capita personal income has tracked closely with the
national average and has tracked above the southeast. From 1984
through 1993, the State's real per capita income rose an average 5.4% a
year, while the national real per capita income increased at an average 5.5%.
Because Florida has a proportionately greater retirement age
population, property income (dividends, interest and rent) and transfer
payments (Social Security and pension benefits among other sources
of income) are relatively more important sources of income. For example,
Florida's total wages and salaries and other labor income in 1993 was 62%
of total personal income, while a similar figure for the nation for 1990
was 72%. Transfer payments are typically less sensitive to the
business cycle than employment income and, therefore, act as
stabilizing forces in weak economic periods.
The State's per capita personal income in 1993 of $20,857 was slightly
above the national average of $20,817 and significantly ahead of that for
the southeast United States, which was $18,753. Real personal income in
the State is estimated to increase 4.5% in 1994-95 and 4.2% in 1995-96. By
the end of 1995-96, real personal income per capita in the State is
projected to average 4.5% higher than its 1993-94 level.
Since 1980, the State's job creation rate is well over twice the
rate for the nation as a whole, and its growth rate in new non-agricultural
jobs is the fastest of the 11 most populous states and second only to
California in the absolute number of new jobs created. Contributing to the
State's rapid rate of growth in employment and income is international
trade. In addition, since 1980, the State's unemployment rate has
generally tracked below that of the Nation's unemployment rate. However, as
the State's economic growth has slowed from its previous highs, the State's
unemployment rate has tracked above the national average.
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The average rate in Florida since 1980 has been 6.5% while the national
average is 7.1%. According to the U.S. Department of Commerce, the Florida
Department of Labor and Employment Security, and the Florida
Consensus Economic Estimating Conference (together the "Organization")
the State's unemployment rate was 8.2% during 1992. As of January 1994,
the Organization estimates that the unemployment rate will be 6.7% for
1993-94 and 6.1% in 1994-95.
The rate of job creation in Florida's manufacturing sector has exceeded
that of the U.S. From the beginning of 1980 through 1993, the state added over
50,100 new manufacturing jobs, an 11.7% increase. During the same period,
national manufacturing employment declined ten out of the fourteen years, for
a loss of 2,977,000 jobs.
Total non-farm employment in Florida is expected to increase 2.7% in
1993-94 and rise 3.8% in 1994-95. Trade and services, the two largest,
account for more than half of the total non-farm employment. Employment in
the service sectors should experience an increase of 5.4% in 1994-95, while
growing 4.7% in 1995-96. Trade is expected to expand 3.1% in 1995 and 3.2%
in 1996. The service sector is now the State's largest employment category.
Construction
The State's economy has in the past been highly dependent on the
construction industry and construction related manufacturing. This dependency
has declined in recent years and continues to do so as a result of
continued diversification of the State's economy. The State is still
somewhat at the mercy of the construction and construction related
manufacturing industries. For example, in 1980, total contract
construction employment as a share of total non-farm employment was just
over 7%, and in 1993, the share had edged downward to 5%. This trend is
expected to continue as the State's economy continues to diversify. Florida,
nevertheless, has a dynamic construction industry, with single and
multi-family housing starts accounting for 8.5% of total U.S. housing starts
in 1993 while the State's population is 5.3% of the U.S. total population.
Florida's housing starts since 1980 have represented an average of 11.0% of
the U.S.'s total annual starts, and since 1980, total housing starts have
averaged 156,450 a year.
A driving force behind the State's construction industry has been
the State's rapid rate of population growth. Although the State currently is
the fourth most populous state, its annual population growth is now
projected to decline as the number of people moving into the State is
expected to hover near the mid 250,000 range annually throughout
the 1990s. This population trend should provide fuel for business and home
builders to keep construction activity lively in Florida for some time to
come. However, other factors do influence the level of construction in
the State. For example, federal tax reform in 1986 and other changes to
the federal income tax code have eliminated tax deductions for owners
of more than two residential real estate properties and have lengthened
depreciation schedules on investment and commercial properties.
Economic growth and existing supplies of homes also contribute to the
level of construction in the State. Also, while interest rates
remain low currently, an increase in interest rates could
significantly adversely impact the financing of new construction with the
State, thereby adversely impacting unemployment and other economic factors
within the State. In addition, available commercial office space has
tended to remain high over the past few years. So long as this glut of
commercial rental space continues, construction of this be of space will
likely continue to remain slow.
Single and multi-family housing starts in 1994-95 are projected to
reach a combined level of 118,000, increasing to 124,100 next year.
Lingering recessionary effects on consumers and tight credit are some of
the reasons for relatively slow core construction activity, as well as
lingering effects from the 1986
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tax reform legislation discussed above. However, construction is one of
the sectors most severely affected by Andrew. Total construction
expenditures are forecasted to increase 6.6% this year and increase
7.5% next year.
The State has continuously been dependent on the highly cyclical
construction and construction related manufacturing industries. While
that dependency has decreased, the State is still somewhat at the mercy
of the construction related manufacturing industries. The
construction industry is driven to a great extent by the State's rapid growth
in population. There can be no assurance that population growth will continue
throughout the 1990's in which case there could be an adverse impact on
the State's economy through the loss of construction and
construction related manufacturing jobs. Also, while interest rates
remain low currently, an increase in interest rates could significantly
adversely impact the financing of new construction within the State,
thereby adversely impacting unemployment and other economic factors
within the State. In addition, available commercial office space has
tended to remain high over the past few years. So long as this glut of
commercial rental space continues, construction of this type of space
will likely continue to remain slow. Tourism
Tourism is one of State's most important industries. Approximately
41.1 million tourists visited the State in 1993, as reported by
the Florida Department of Commerce. In terms of business activities and
state tax revenues, tourists in Florida in 1993 represented an estimated
4.5 million additional residents. Visitors to the State tend to arrive
equally by air and car. The State's tourist industry over the years has
become more sophisticated, attracting visitors year-round and, to
a degree, reducing its seasonality. The dollar's depreciation has
enhanced the State's tourism industry. Tourist arrivals are expected to
increase by almost 5.0% percent this year and 3.4% next year. Tourist arrivals
to Florida by air and car are expected to diverge from each other, air
decreasing 9.2% and 2.95 next year and auto increasing 0.7% this year and
4.0% next year. By the end of the State's current fiscal year, 42.1 million
domestic and international tourists are expected to have visited the State.
In 1995-96, tourist arrivals should approximate 43.6 million.
Revenues and Expenses
Estimated fiscal year 1994-95 General Revenue plus Working Capital
funds available to the State total $14,624.4 million, a 5.7% increase over
1993-94. This reflects a transfer of $159 million in non-recurring
revenue due to Andrew, to a hurricane relief trust fund. Of the total General
Revenue plus Working Capital funds available to the State, $13,858.4 million
of that is Estimated Revenues (excluding the Andrew impact) which
represents an increase of 7.9% over the previous year's Estimated
Revenues. With effective General Revenues plus Working Capital Fund
appropriations at $14.311.1 million, unencumbered reserves at the end of
1994-95 are estimated at $313.3 million. Estimated, fiscal year
1995-96 General Revenue plus Working Capital and Budget Stabilization
funds available total $15,145.9 million. a 3.6% increase over 1994-95. The
$14,647.2 million in Estimated Revenues represents an increase of
5.7% over the previous year's Estimated Revenues.
In fiscal year 1993-94, approximately 66% of the State's total direct
revenue to its three operating funds were derived from State taxes, with
Federal grants and other special revenue accounting for the balance. State
sales and use tax, corporate income tax, intangible personal property tax,
and beverage tax amounted to 66%, 8%, 4% and 4%, respectively, of total
General Revenue Funds available during fiscal 1993-94. In that same
year, expenditures for education, health and welfare, and public safety
amounted to approximately 49%, 32%, and 12%, respectively, of total
expenditures from the General Revenue Fund.
<PAGE>182
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less than 10% of
the State's sales and use tax is designated for local governments and is
distributed to the respective counties in which collected for use by the
counties, and the municipalities therein. In addition to this distribution,
local governments may (by referendum) assess a 0.5% or a 1.0%
discretionary sales surtax within their county. Proceeds from this
local option sales tax are earmarked for funding local infrastructure
programs and acquiring land for public recreation or conservation or
protection of natural resources as provided under applicable Florida
law. Certain charter counties have other taxing powers. In addition,
and non-consolidated counties with a population in excess of 800,000 may
levy a local option sales tax to fund indigent health care. It
alone cannot exceed 0.5% and when combined with the infrastructure
surtax cannot exceed 1.0%. For the fiscal year ended June 30, 1994,
sales and use tax receipts (exclusive of the tax on gasoline and special
fuels) totaled $10,012.5 million, an increase of 6.9% over fiscal year
1992-1993.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely dedicated trust
funds for specific purposes and are not included in the State's General
Revenue Fund.
The State imposes an alcoholic beverage, wholesale tax (excise tax) on
beer, wine, and liquor. This tax is one of the State's major tax sources,
with revenues totaling $439.8 million in fiscal year ending June 30, 1994.
Alcoholic beverage tax receipts decreased 1.0% from the previous year's
total. The revenues collected from this tax are deposited into the
State's General Revenue Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund. For the
fiscal year ended June 30, 1994, receipts from this source were
$1,047.4 million, and increase of 23.7% from fiscal year 1992-93.
The State imposes a documentary stamp tax on deeds and other documents
relating to realty, corporate shares, bonds, certificates of
indebtedness, promissory notes, wage assignments, and retail charge
accounts. The documentary stamp tax collections totaled $775.0
million during fiscal year 1993-94, a 21.3% increase from the previous
fiscal year. Beginning in fiscal year 1992-93, 71.29% of these taxes are
to be deposited to the General Revenue Fund.
The State imposes an intangible personal property tax on
stocks, bonds, including bonds secured by liens in Florida real
property, notes, governmental leaseholds, and certain other
intangibles, not secured by alien on Florida real property. The
annual rate of tax is 2 mils. Second, the State imposes a non-recurring 2
mil tax on mortgages and other obligations secured by liens on Florida
real property. In fiscal year 1993-94, total intangible personal
property tax collections were $836.0 million, a 6.7% increase over the prior
year. Of the tax proceeds, 66.5% are distributed to the General Revenue Fund.
The State's severance tax taxes, oil, gas and sulfur production, as
well as the severance of phosphate rock and other solid minerals. Total
collections from severance taxes total $54.8 million during fiscal year
1993-94, down 15.0% from the previous year. Currently, 60% of this amount
is transferred to the General Revenue Fund.
The State began its own lottery in 1988. State law requires that lottery
revenues be distributed 50% to the public in prizes, 38.0% for use in
enhancing education, and the balance, 12.0% for costs of
<PAGE>183
administering the lottery. Fiscal year 1993-94 lottery ticket sales totaled
$2.15 billion, providing education with approximately $816.2 million.
Debt-Balanced Budget Requirement
At the end of fiscal 1993, approximately $5.61 billion in principal
amount of debt secured by the full faith and credit of the State was
outstanding. In addition, since July 1, 1993, the State issued about
$1.13 billion in principal amount of full faith and credit bonds.
The State Constitution and statutes mandate that the State budget,
as a whole, and each separate fund within the State budget, be kept
in balance form currently available revenues each fiscal year. If the
Governor or Comptroller believes a deficit will occur in any State fund, by
statute, he must certify his opinion to the Administrative
Commission, which then is authorized to reduce all State agency budgets and
releases by a sufficient amount to prevent a deficit in any fund.
Additionally, the State Constitution prohibits issuance of State obligations
to fund State operations.
Litigation
Currently under litigation are several issues relating to State
actions or State taxes that put at risk substantial amounts of General
Revenue Fund monies. Accordingly, there is no assurance that any of
such matters, individually or in the aggregate, will not have a immaterial
adverse affect on the State's financial position.
Florida law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged the
constitutionality of this tax preference and sought a refund of taxes paid.
Recently, the Florida Supreme Court ruled in favor of the State. This case
and others, along with pending refund claims, total about $150 million.
The State imposes a $295 fee on the issuance of certificates of title
for a motor vehicles previously titled outside the State. The State has
been sued by plaintiffs alleging that this fee violates the Commerce Clause
of the U.S. Constitution. The Circuit Court in which the case was filed has
granted summary judgment for the plaintiffs and has enjoined further
collection of the impact fee and has ordered refunds to all those who have
paid the fee since the collection of the fee went into effect. The State
has appealed the lower Court's decision and an automatic stay has been
granted to the State allowing it to continue to collect the fee. The
potential refund exposure to the State if it should lose the case may be in
excess off $100 million.
The State maintains a rating of Aa and AA from Moody's Investors
Service and Standard & Poors Corporation, respectively, on the majority
of its general obligation bonds, although the rating of a particular series
of revenue bonds relates primarily to the project, facility, or other
revenues source from which such series derives funds for repayment. While
these ratings and some of the information presented above indicate that the
State is in satisfactory economic health, there can be no assurance that
there will not be a decline in economic conditions or that particular
conditions or that particular Bonds purchased by the Trust will not be
adversely affected by any such changes.
<PAGE>184
APPENDIX F
The following information is a summary of special factors affecting
Georgia Municipal Obligations. It does not purport to be a complete
description and is based on information from statements relating
to securities offerings of Georgia issuers. Additional Discussion of
Special Factors Relating to Georgia Municipal Obligations
On December 31, 1992, the state government of Georgia had the 46th lowest debt
level per capita of all states in the United States, which is reflective
of a very conservative fiscal approach taken by elected state
officials, tempered during a three to four year economic slow-down.
Typically, general obligation bonds of the state are issued pursuant to
the powers granted under Article VII, Section IV of the Constitution of the
State of Georgia ( the "Georgia Constitution"), which provides
that the bonds are the direct and general obligations of the state.
The Georgia Constitution further mandates that the General Assembly
"shall raise by taxation and appropriate each fiscal year ... such amounts
as are necessary to pay debt service requirements in such fiscal year on
all general obligation debt". The Georgia Constitution further provides
for the establishment of a special trust fund which is designated the
"State of Georgia General Obligation Debt Sinking Fund" which is used for
the payment of annual debt service requirements on all general obligation
debt.
Virtually all debt obligations represented by bonds issued by the State
of Georgia, counties, or municipalities or other public authorities require
validation by a judicial proceeding prior to the issuance of such
obligation. The judicial validation makes these obligations
incontestable and conclusive, as provided under the Georgia
Constitution.
The State of Georgia operates on a fiscal year beginning on July 1 and
ending on June 30. Each year the State Economist, the Governor, and
the State Revenue Commissioner jointly prepare a revenue forecast upon which is
based the state budget which is considered, amended, and approved
by the Georgia General Assembly. Since 1975, the Governor and the
General Assembly have attempted to maintain a $100 million reserve fund,
which in 1992 was eroded because of a revenue shortfall. For the first ten
months of the fiscal year ending June 30, 1995, the State of Georgia enjoyed
an 8.0% growth in revenues and had an $565,3111,040.50 increase in revenues
above the same ten month period ending fiscal 1994. However, this is
decrease compared to fiscal year 1994 which had a 9.5% growth in revenues
over fiscal year 1993. The surplus for fiscal year 1993 far exceeded the
Governor's budget allocation of $124 million.
In the past two years, the Governor has successfully eliminated more than
5,000 state jobs, which has contributed dramatically to his efforts to
balance the state budget.
For the next several years, Georgia has a very bright economic future
highlighted by a $2 billion stimulus to the economy which is expected from
Atlanta's hosting of the 1996 Summer Olympic Games. Manufacturing activity,
particularly in the textile, apparel and carpet sectors, has increased
dramatically as a result of increased home building. However, the real
estate/construction industry remains in a recession caused by over-building
of commercial office space and industrial parks in the late 1980s. Military
base closings in other states are expected to mildly impact the Georgia
economy with the consolidation of military installations so that Georgia will
have a net gain in service personnel. In recent years, Georgia has
enjoyed the economic stimulus caused by a number of major corporate
relocations led by United Parcel Service of America, Inc., which moved
its World Headquarters from Greenwich, Connecticut to Atlanta.
This move was followed by Holiday Inn Worldwide, which moved its
headquarters to Atlanta from Memphis.
<PAGE>185
APPENDIX G
The following information is a summary of special factors affecting
Pennsylvania Municipal Obligations. It does not purport to be a complete
description and is based on information from statements relating to
securities offerings of Pennsylvania issuers. Additional Discussion of
Special Factors Relating to Pennsylvania Municipal Obligations
Potential purchasers of Units of the Trust should consider the
fact that the Trust's portfolio consists primarily of securities
issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial risks
associated with an investment in such securities. Although the General
Fund of the Commonwealth (the principal operating fund of the Commonwealth)
experienced deficits in fiscal 1990 and 1991, tax increases and spending
decreases helped return the General Fund balance to a surplus at June 30,
1992 of $87.5 million and at June 30, 1993 of $698.9. The deficit in the
Commonwealth's unreserved/undesignated funds of prior years also was reversed
to a surplus of $64.4 million as of June 30, 1993.
Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly
into medical and health services, education and financial services.
Agricultural industries continue to be an important part of the economy,
including not only the production of diversified food and livestock
products, but substantial economic activity in agribusiness and
food-related industries. Service industries currently employ the greatest
share of non-agricultural workers, followed by the categories of trade and
manufacturing. Future economic difficulties in any of these industries
could have an adverse impact on the finances of the Commonwealth or its
municipalities, and could adversely affect the market value of the Bonds
in the Pennsylvania Trust or the ability of the respective obligors to
make payments of interest and principal due on such Bonds.
Certain litigation is pending against the Commonwealth that could
adversely affect the ability of the Commonwealth to pay debt service on its
obligations, including suits relating to the following matters: (i) the
ACLU has filed suit in federal court demanding additional funding
for child welfare services; the Commonwealth settled a similar suit in the
Commonwealth Court of Pennsylvania and is seeking the dismissal of the
federal suit, inter alia, because of that settlement. The district court has
denied class certification to the ACLU, and the parties have stipulated to
a judgment against the plaintiffs to allow plaintiffs to appeal the denial of
a class certification to the Third Circuit; (ii) in 1987, the Supreme
Court of Pennsylvania held that the statutory scheme for county funding of
the judicial system to be in conflict with the Constitution of the
Commonwealth but stayed judgment pending enactment by the legislature of
funding consistent with the opinion and the legislature has yet to
consider legislation implementing the judgment; (iii) several banks have
filed suit against the Commonwealth contesting the constitutionality of a
law enacted in 1989 imposing a bank shares tax; in July 1994, the
Commonwealth Court en banc upheld the constitutionality of the 1989 bank
shares tax law but struck down a companion law to provide credits against
the bank shares tax for new banks; cross appeals from that decision
to the Pennsylvania Supreme Court have been filed; (iv) litigation has
been filed in both state and federal court by an association of rural and
small schools and several individual school districts and parents
challenging the constitutionality of the Commonwealth's system for
funding local school districts-- the federal case has been stayed pending
resolution of the state case and the state case is in the pre-trial state
(no available estimate of potential liability); (v) the ACLU has brought a
class action on behalf of inmates challenging the conditions of
confinement in thirteen of the Commonwealth's correctional institutions; a
proposed settlement agreement has been submitted to the court and members
of the class, but the court has not yet set a date for hearing on
<PAGE>186
the terms of the agreement (no available estimate of potential cost of
complying with the injunction sought but capital and personnel costs
might cost millions of dollars) and (vi) a consortium of public
interest law firms has filed a class action suit alleging that the
Commonwealth has not complied with a federal mandate to provide screening,
diagnostic and treatment services for all Medicaid-eligible children under
21; the district court denied class certification and has scheduled the
case for trial (potentially liability estimated at between $9 million
and $55 million); and (vii) litigation has been filed in federal court by
the Pennsylvania Medical Society seeking payment of the full co-pay and
deductible in excess of the maximum fees set under the Commonwealth's
medical assistance program for outpatient services provided to medical
assistance patients who were also eligible for Medicare; the Commonwealth
received a favorable decision in the federal district court, but the
Pennsylvania Medical Society won a reversal in the federal circuit court
(potential liability estimated at $50 million per year).
The Commonwealth's general obligation bonds have been rated AA- by
Standard & Poor's and A1 by Moody's for more than the last five years.
The City of Philadelphia (the "City") has been experiencing severe
financial difficulties which has impaired its access to public credit
markets and a long-term solution to the City's financial crisis is
still being sought. The City experienced a series of General Fund deficits
for fiscal years 1988 through 1992.
The City has no legal authority to issue deficit reduction bonds on its
own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority to provide fiscal oversight for
Pennsylvania cities (primarily Philadelphia) suffering recurring financial
difficulties. The Authority is broadly empowered to assist cities in
avoiding defaults and eliminating deficits by encouraging the adoption of sound
budgetary practices and issuing bonds. In order for the Authority to
issue bonds on behalf of the City, the City and the Authority
entered into an intergovernmental cooperative agreement providing the
Authority with certain oversight powers with respect to the fiscal affairs of
the City, and the Authority approved a five-year financial plan prepared by
the City. On June 16, 1992, the Authority issued a $474,555,000 bond issue on
behalf of the City. The Authority approved the latest update of the
five-year financial plan on May 2, 1994. The City has reported a surplus of
approximately $15 million for fiscal year ending June 30, 1994. In July
1993, the Authority issued $643,430,000 of bonds to refund certain general
obligation bonds of the City and to fund additional capital projects. In
September 1993, the Authority issued $178,675,000 of bonds to advance
refund certain of the bonds of the City and to fund additional capital
projects.
<PAGE>187
APPENDIX H
The following information is a summary of special factors affecting
Ohio Municipal Obligations. It does not purport to be a complete
description and is based on information from statements relating
to securities offerings of Ohio issuers. Additional Discussion of
Special Factors Relating to Ohio Municipal Obligations
The Ohio Trust will invest substantially all of its net assets in Ohio
Obligations. The Ohio Trust is therefore susceptible to political,
economic and regulatory factors that may affect issuers of Ohio Obligations.
The following information constitutes only a brief summary of some of the
complex factors that may affect the financial situation of issuers in
Ohio, and is not applicable to "conduit" obligations on which the public
issue itself has no financial responsibility.
The creditworthiness of obligations issued by local Ohio issuers may
be unrelated to the creditworthiness of obligations issued by the State, and
generally there is no responsibility on the part of the State to make
payments on those local obligations. There may be specific factors
that are applicable in connection with investment in particular Ohio
Obligations or in the obligations of particular Ohio issuers, and it is
possible the investment will be in Ohio Obligations or in obligations of
particular issuers as to which such specific factors are applicable. However,
the information set forth below is intended only as a general summary
and not a discussion of any such specific factors that may affect
any particular issuer or issue of Ohio Obligations.
Ohio is the seventh most populous state, with a 1990 Census Count of
10,847,000 indicating a 0.5% population increase from 1980.
The economy of Ohio, while diversifying more into the service and
other non- manufacturing areas, continues to rely in part on durable
goods manufacturing, which is largely concentrated in motor vehicles and
equipment, steel, rubber products and household appliances. As a
result, general economic activity in Ohio, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture also is an important
segment of the economy in the State, and the State has instituted several
programs to provide financial assistance to farmers. The State's economy,
has had varying effects on different geographic areas of the State and the
political subdivisions located within those geographic areas.
In prior years, the State's overall unemployment rate is commonly
somewhat higher than the national average. In January 1993 and February
1993, the unemployment rate was 8.2 and 7.8, respectively, compared to the
national rates 7.9 and 7.7 respectively. However, for both 1991 and
1992 the State rate was below the national rate; the State rates were
6.4% and 7.2%, and the national rates 6.7% and 7.4% respectively. The
unemployment rate, and its effects, vary among particular geographic
areas of the State.
There can be no assurance that future state-wide or regional economic
difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the portfolio of the Ohio Trust or the ability of the
particular obligors to make timely payments of debt service on (or lease
payments relating to) those obligations.
<PAGE>188
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending a
fiscal year or biennium in a deficit position. Most operations are
financed through the General Reserve Fund (GRF), with personal income and
sales-use taxes being the major GRF sources.
Growth and depletion of GRF ending fund balances show a consistent
pattern related to national economic conditions, with the June 30 (end of
fiscal year) balance reduced during less favorable national economic
periods and increased during more favorable economic times.
Key end of biennium fund balances at June 30, 1991 were $135,365,000
(unaudited) (GRF) and approximately $300,000,000 (Budget Stabilization Fund
(BSF), a cash and budgetary management fund). Necessary
corrective steps were taken in fiscal year 1991 to respond to lower
than estimated receipts and higher expenditures in certain categories.
Those steps included the transfer of $64,000,000 from the BSF to the
GRF. The State reported biennium ending fund balances of $135.3 million
(GRF) and $300 million (BSF).
The State has established procedures for, and has timely taken,
necessary actions to ensure a resource/expenditures balance during less
favorable economic periods. These include general and selected reductions
in appropriations spending; none have been applied to appropriations
needed for debt service or lease rentals on any State obligations.
To allow time to complete the resolution of certain Senate and House
differences in the budget and appropriations for the current biennium
(beginning July 1, 1991), an interim appropriations act was enacted,
effective July 1; it included debt service and lease rental appropriations
for the entire 1992-93 biennium, while continuing most other
appropriations for 31 days at 97% of fiscal year 1991 monthly levels.
The general appropriations act for the entire biennium was passed on July
11, 1991 and signed by the Governor. It authorized the transfer, which has
been made, of $200 million from the BSF to the GRF and provided for
transfers in fiscal year 1993 back to the BSF if revenues are sufficient
for the purpose (which the State Office of Budget and Management, OBM, at
present thinks unlikely).
Based on updated fiscal year financial results and economic forecast for
the State, in light of the continuing uncertain nationwide economic
situation, OBM projected, and was timely addressed, a fiscal year 1992
imbalance in GRF resources and expenditures. GRF receipts were
significantly below original forecasts, a shortfall resulting primarily
from lower collections of certain taxes, particularly sales and use
taxes. Higher than earlier projected expenditure levels totaling
approximately $143,000,000 resulted from higher spending in certain
areas, particularly human services, including Medicaid. As an initial action,
the Governor ordered most State agencies to reduce GRF appropriations
spending in the final six months of fiscal year 1992 by a total of
approximately $184 million (debt service and lease rental obligations were
not affected). The General Assembly authorized, and OBM made in June 1992,
the transfer to the GRF of the $100.4 million BSF balance and additional
amounts from certain other funds. Other administrative revenue and
spending actions resolved the remaining GRF imbalance, resulting in
positive GRF fiscal year 1992 ending fund and cash balances.
A significant GRF shortfall, approximately $520 million,
was then projected for fiscal year 1993. It had been addressed by
appropriate legislative and administrative actions. As a first step the
Governor ordered, effectively July 1, 1992, $300 million in selected
GRF spending reductions. Executive and legislative action in December
1992 (a combination of tax revisions and additional appropriations
spending reductions) is projected by OBM to balance GRF resources and
expenditures in this biennium and provide
<PAGE>189
a better base for the appropriations for the next biennium. Those
actions included tax revisions estimated to produce an
additional $194,500,000 this fiscal year, and additional appropriations
spending reductions totaling approximately $50,000,000 are provided for in
that legislation and subsequent action by the Governor.
Litigation filed on February 1, 1993 seeks to have a new tax on
soft drinks, included in those tax revisions, declared invalid and its
collection enjoined. The trial court's preliminary injunction has been
stayed by the Ohio Supreme Court on procedural grounds, and that tax
is for now being collected. OBM had estimated approximately
$18,500,000 being collected from that tax this fiscal year, representing
less than 10% of the projected additional tax revenues. Several bases for
invalidity were asserted, including a claim that the bill in which this and
other elements of the tax package ( as well as certain capital
appropriations and financing authorizations ) were included did not
comply with a constitutional "one-subject" procedural requirement.
Supplementing the general authorization for the Governor's spending
reduction orders described above and exercised several times in this
biennium, the biennial appropriations act authorizes the OBM Trustee to
implement up to 1% fiscal year reduction in GRF amounts appropriated if on
March 1 of either fiscal year of the biennium receipts for that fiscal year
are for any reason more than $150,000,000 under estimates and the
then estimated GRF ending fund balance is less than $50,000,000.
Expressly, excerpted from this cutback authorization are debt service and
lease rental appropriations. In light of the other corrective actions
described above, this supplemental spending reduction authorization was not
implemented in fiscal year 1992 and is not expected to be
implemented in fiscal year 1993.
The general appropriations process for the next biennium (beginning July 1,
1993) has commenced with the Governor's presentation of a proposed GRF
budget to the General Assembly. That budget document and the related
appropriations bill as introduced and passed by the House include all necessary
GRF appropriations for biennial State debt service and lease rental
payments.
The incurrence or assumption of debt by the State without a popular
vote is, with limited exceptions, prohibited by current provisions of
the State Constitution. The State may incur debt to cover casual deficits or
failures in revenues or to meet expenses not otherwise provided for, but
limited in amount to $750,000. The State is expressly precluded from
assuming the debts of any local government or corporation. (An
exception in both cases is made for any debt incurred to repel
invasion, suppress insurrection, or defend the State in war.)
By thirteen constitutional amendments (the last adopted in 1993), Ohio
voters have authorized the incurrence of State debt to which taxes or
excesses were pledged for payment. At January 31, 1994, $712.6 million
(excluding certain highway bonds payable primarily from highway use
charges) of this debt was outstanding or awaiting delivery. The only
such State debt then still authorized to be incurred are portions of the
highway bonds and the following: (a) up to $100 million of obligations for
coal research and development may be outstanding at any one time ($43.1
million outstanding); (b) $1.2 billion of obligations authorized for local
infrastructure improvements, no more than $120 million may be issued in
any calendar year ($645.2 million outstanding or awaiting delivery, $480
million remaining to be issued); and (c) up to $200 million in
general obligation bonds for parks and recreation purposes may be
outstanding at any one time ( no more than $50 million to be issued in
any one year, and none have yet been issued).
The Constitution also authorized the issuance, for certain
purposes, of State obligations, the owners of which are not given the
right to have excises or taxes levied to pay debt service. Those special
obligations include bonds and notes issued by, among others, the Ohio
<PAGE>190
Public Facilities Commission and the Ohio Building Authority. A total of
$4.28 billion of those obligations were outstanding at January 31, 1994.
A 1990 constitutional amendment authorized greater State and
political subdivision participation in the provision of individual and family
housing, including borrowing for this purpose. The General Assembly may
authorize the issuance of State obligations secured by a pledge of all or
such portion as it authorizes of State revenues or receipts,
although the obligations may not be supported by the State's full
faith and credit.
State and local agencies issue revenue obligations that are payable from
revenues of revenue-producing facilities or categories of facilities, which
obligations are not "debt" within constitutional provisions or payable from
taxes. In general, lease payment obligations under lease-purchase
agreements of Ohio issuers (in connection with which certificates of
participation may be issued) are limited in duration to the issuer's
fiscal period, and are renewable only upon appropriations being made
available for the subsequent fiscal periods.
Local school districts in Ohio receive a major portion (on a
statewide basis, historically approximately 46%) of their operating
moneys from State subsidies ( known as the Foundation Program ), but
are dependent on local ad valorem property taxes and in, 88 districts,
income taxes for significant portions of their budgets. Litigation
has recently been filed, similar to that in other states, questioning the
constitutionality of Ohio's system of school funding. A small number of the
State's 612 local school districts have in any year required special
assistance to avoid year-end deficits. A current program ( Emergency
School Advancement Fund ) provides for school district cash-need borrowing
directly from commercial lenders, with State diversion of subsidy
distributions to repayment if needed; 26 districts borrowed a total of
$41.8 million in fiscal year 1991 under this program, in fiscal year
1992, borrowings totaled $68.6 million (including over $46.6 million by one
district);in fiscal year 1993, 43 districts borrowed approximately $94.5
million (including $75 million for one district) and in fiscal year
1994 loan approvals totaled at January 31, 1994, $9.90 million for 16
districts.
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations, and, with other
local governments, receive local government support and property tax
relief monies distributed by the State. Procedures have been
established for those few municipalities that have on occasion faced
significant financial problems, which include establishment of a joint
State/local commission to monitor the municipality's fiscal affairs,
with a financial plan developed to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to
23 cities and villages, in 18 of which the fiscal situation has been
resolved and the procedures terminated.
At present the State itself does not levy any ad valorem taxes on real
or tangible personal property. Those taxes are levied by political
subdivisions and other local taxing districts. The Constitution has since
1934 limited the amount of the aggregate levy of ad valorem property taxes,
without a vote of the electors or municipal charter provision, to 1% of
true value in money, and statutes limit the amount of the aggregate levy
without a vote or charter provision to 10 mills per $1 of assessed
valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes unlimited
as to amount or rate.
Although revenue obligations of the State or its political subdivisions may
be payable from a specific project or source, including lease
<PAGE>191
rentals, there can be no assurance that future economic difficulties and
the resulting impact on State and local government finances will not
adversely affect the market value of Ohio obligations held in the portfolio of
the Trust or the ability of the respective obligors to make timely
payments of principal and interest on such obligations.
The outstanding Bonds issued by the Sinking Fund are rated Aa by
Moody's Investors Service ("Moody's") and AAA by Standard & Poor's
Corporation ("S&P"). In January 1982, S&P adjusted its rating on certain of
the State's general obligation bonds from AA+ to AA. Previously, in
November 1979, the ratings on general obligation debt of the State were
changed by Moody's and S&P from Aaa and AAA to Aa and AA+, respectively. S&P
did not at either time change its AAA ratings on the Bonds. The outstanding
State Bonds issued by the Ohio Public Facilities Commission and the
Ohio Building Authority are rated A+ by S&P and A by Moody's.
<PAGE>192
ANNUAL REPORT
OF
SMITH BARNEY MUNI FUNDS -- LIMITED TERM PORTFOLIO
FOR THE FISCAL YEAR ENDED MARCH 31, 1995
<PAGE>193
- --------------------------------------------------------------------------------
ANNUAL REPORT
- --------------------------------------------------------------------------------
1995
1995
1995 [ARTWORK APPEARS HERE]
1995
1995
Smith Barney
Muni Funds
Limited Term
Portfolio
------------------------------------------------
March 31, 1995
[LOGO APPEARS HERE] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>194
- ----------------------
LIMITED TERM PORTFOLIO
- ----------------------
Dear Shareholder:
We are pleased to present the annual report and audited financial statements for
Smith Barney Muni Funds: Limited Term Portfolio for the fiscal year ended
March 31, 1995.
Municipal bond prices posted extremely strong gains in the first quarter of
1995, erasing most of the losses from last year's turbulent market. The Limited
Term Portfolio had a total return of 5.69% (Class A shares) for the fiscal year.
This return compared favorably with the 5.59% average total return for all
intermediate-term municipal bond funds over the same period, as reported by
Lipper Analytical Services.
Over the past five years ended March 31, 1995, the Portfolio produced a
cumulative total return of 40.61%. It should be noted that this longer-term
performance has been achieved without the necessity for any capital-gains
distributions, an important consideration for investors interested in after-tax
income.
Market and Economic Overview
Since our last report to you in November, the fixed-income markets, and
municipal bonds in particular, have enjoyed a powerful rally. Municipal bond
yields have declined more than a full percentage point, as evidenced by the drop
in the average yield on Moody's 10-Year AA Muni Bond Index from a high of 6.53%
on November 18, 1994 to 5.33% on March 31, 1995. This was substantially better
than the performance of the 10-year Treasury, which experienced a decline in
yield of 80 basis points from 8.13% to 7.20% during the same time frame.
The vastly improved bond markets reflect a growing consensus that inflation will
remain under control, and the Federal Reserve Board will be successful in
engineering a "soft landing" by slowing the economy down to a more sustainable,
non-inflationary rate of growth. The seven increases in the federal funds rate
(the rate banks charge each other for overnight loans), orchestrated by the Fed
since February 1994, appear to be slowing the pace of economic growth. Recent
economic reports show a slower rate of increase in employment, producer prices,
and retail sales. Industrial production and capacity utilization were also lower
than expected, signalling a possible slowdown in the country's strong
manufacturing sector. These generally favorable economic fundamentals are more
than offsetting concerns about the substantial decline in the value of the
dollar relative to the Japanese yen and German mark on the foreign exchange
markets.
1
<PAGE>195
Late in April, several tax-reform proposals which recommend a flat federal
income tax rate began to receive increased attention in the national financial
press and from municipal bond market participants. Adoption of a flat tax would
diminish the advantages of tax exemption for municipal bonds. Although the
various plans being circulated are only proposals, the publicity surrounding
them has recently caused some investors to back away from the municipal bond
market. In our opinion it is much too early in the process to predict what
changes in the tax laws, if any, will actually take place, but tax-reform will
certainly be a major topic of political debate over the next few years. Many
observers believe that the more radical proposals for changes in the way taxes
are collected have little chance for enactment.
Absent these tax-reform concerns, municipals would probably continue to be
strong performers relative to Treasuries and other taxable investments due to
the low supply of new issues. Not only did last year's spike in interest rates
sharply reduce refinancing activity in the municipal market, but voter pressure
on states and municipalities to rein in spending and cut taxes, or at least
avoid tax increases, has also resulted in a roughly 30% decline in new money
financing. In addition, the universe of existing municipal bonds is shrinking.
In 1995, an estimated $230 billion of older, high-coupon issues will mature or
be called as they reach their first optional call dates. With estimates of new-
issue volume at less than $150 billion, the net reduction in municipal debt
outstanding could approach $100 billion this year, contracting the market by
about eight percent. Ordinarily, a reduction in supply of this magnitude would
be expected to provide a powerful boost for municipal bond values as it did
earlier this year. Uncertainties about various tax proposals, however, will
probably keep municipals from trading any better than their normal relationship
to taxable investment alternatives.
Portfolio Strategy and Outlook
While we have a generally positive outlook for the fixed-income markets, the
size of the rally we have experienced so far would seem to leave little room for
disappointment, and any sign of a rebound in economic activity is likely to
result in a return to higher interest rates. We also believe that the unique
supply and demand characteristics of the municipal market and tax-reform
uncertainties will tend to exaggerate price swings relative to taxable
investments.
In light of this viewpoint, we are taking a more cautious approach to
structuring the interest-rate sensitivity of the Portfolio. Relative stability
of principal is a key element of this fund, which is positioned in the short end
of the five- to 10-year intermediate maturity range. In this regard, we are
placing emphasis on higher coupon issues trading at a premium to their face
value. Such bonds will decline less in price than current coupon or market
discount
2
<PAGE>196
bonds should the economy rebound and cause a rise in interest rates. In
addition, the maturities of these holdings are effectively shorter than their
stated maturity date, which serves to further reduce the Portfolio's interest-
rate sensitivity. Examples of such issues are bonds priced to a call date
earlier than maturity, bonds with sinking funds designed to retire a portion of
the issue prior to maturity, and housing bonds that are subject to early call
from prepayments on mortgages. We believe that positioning the Portfolio in this
manner is the best way to achieve our objective of the highest tax-free income
consistent with prudent investment risk.
We thank you for your investment in the Portfolio and your continued confidence
in our investment management.
Sincerely,
/s/ Heath B. McLendon /s/ Peter M. Coffey
Heath B. McLendon Peter M. Coffey
Chairman and Vice President and
Chief Executive Officer Investment Officer
April 28, 1995
3
<PAGE>197
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Historical Performance - Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns/(1)/
=======================================================================================
<S> <C> <C> <C> <C> <C>
3/31/95 $6.55 $6.54 $0.37 $0.00 5.69%
- ---------------------------------------------------------------------------------------
3/31/94 6.68 6.55 0.37 0.00 3.65
- ---------------------------------------------------------------------------------------
3/31/93 6.45 6.68 0.39 0.00 9.82
- ---------------------------------------------------------------------------------------
3/31/92 6.38 6.45 0.42 0.00 7.99
- ---------------------------------------------------------------------------------------
3/31/91 6.28 6.38 0.40 0.00 8.23
- ---------------------------------------------------------------------------------------
3/31/90 6.20 6.28 0.46 0.00 9.07
- ---------------------------------------------------------------------------------------
Inception* - 3/31/89 6.25 6.20 0.13 0.00 1.09
=======================================================================================
Total $2.54 $0.00
=======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance - Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns/(1)/
=======================================================================================
<S> <C> <C> <C> <C> <C>
3/31/95 $6.54 $6.54 $0.35 $0.00 5.51%
- ---------------------------------------------------------------------------------------
3/31/94 6.68 6.54 0.35 0.00 3.15
- ---------------------------------------------------------------------------------------
Inception* - 3/31/93 6.62 6.68 0.09 0.00 2.28
=======================================================================================
Total $0.79 $0.00
=======================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly
and capital gains, if any, annually.
4
<PAGE>198
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge/(1)/
-------------------------
Class A Class C
================================================================================
<S> <C> <C>
Year Ended 3/31/95 5.69% 5.51%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/95 7.05 N/A
- --------------------------------------------------------------------------------
Inception* through 3/31/95 7.16 4.92
- --------------------------------------------------------------------------------
With Sales Charge/(2)/
-------------------------
Class A Class C
================================================================================
Year Ended 3/31/95 3.64% 4.51%
- --------------------------------------------------------------------------------
Five Years Ended 3/31/95 6.62 N/A
- --------------------------------------------------------------------------------
Inception* through 3/31/95 6.82 4.92
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge/(1)/
-------------------------
<S> <C>
Class A (Inception* through 3/31/95) 55.03%
- --------------------------------------------------------------------------------
Class C (Inception* through 3/31/95) 11.32
- --------------------------------------------------------------------------------
<FN>
(1) Assumes reinvestment of all dividends and capital gain distributions at
net asset value and does not reflect deduction of the applicable sales
charge with respect to Class A shares or the applicable contingent deferred
sales charges ("CDSC") with respect to Class C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions at
net asset value. In addition, Class A shares reflect the deduction of the
maximum initial sales charge of 2.00% and Class C shares reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed less than
one year from initial purchase.
* Inception dates for Class A and C shares are November 28, 1988 and January 5,
1993, respectively.
</TABLE>
5
<PAGE>199
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Limited Term Portfolio vs.
Lehman 5 Year Bond Index and Lehman Long Bond Index/+/
(unaudited)
- --------------------------------------------------------------------------------
November 1988 - March 1995
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
54962 Limited Term Portfolio
Lehman Long\rBond Index Lehman 5 Year\rBond Index Limited Term
<S> <C> <C> <C>
11/28/88 10000 10000 9796.24
Mar-89 10100 10023.99 9899.7
Mar-90 11199.58 10994.09 10781.32
Mar-91 12071.42 12021.99 11653.54
Mar-92 13439.83 13046.06 12567.94
Mar-93 15402.35 14394.9 13785.75
Mar-94 15574.13 14821.36 14273.46
Mar-95 16980.37 15666.58 15075.9
<FN>
+ Hypothetical illustration of $10,000 invested in Class A shares at inception
on November 28, 1988, assuming deduction of the maximum 2.00% sales charge at
the time of investment and reinvestment of dividends (after deduction of
applicable sales charges) and capital gains (at net asset value) through March
31, 1995. The Indices are unmanaged and are not subject to the same management
and trading expenses of a mutual fund. The performance of the Portfolio's
other classes may be greater or less than the Class A shares performance
indicated on this chart, depending on whether greater or lesser sales charges
and fees were incurred by shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
values may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
</TABLE>
6
<PAGE>200
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Education -- 13.8%
$2,825,000 A* Arizona Education Loan Marketing Corp., Education
Loan Revenue Bonds, 7.00% due 3/1/02(a) $2,987,438
3,000,000 A* Arkansas State Student Loan Authority Revenue,
Sub Series A-2, 6.125% due 12/1/00(a) 3,037,500
1,000,000 Aa* Brazos, TX Higher Education Authority, Series C-1,
6.00% due 11/1/99(a) 1,013,750
Colorado Student Obligation Board Authority,
Student Loan Revenue:
1,350,000 A* Series A-1, 6.60% due 9/1/98 1,400,625
355,000 A* Series A, 6.625% due 6/1/99 369,644
Idaho Student Loan Fund Marketing Association Inc.,
Student Loan Revenue Refunding:
1,000,000 Aaa* 6.40% due 4/1/99 1,002,500
955,000 Aaa* 6.00% due 4/1/00(a) 958,581
1,000,000 A+ Illinois Student Assistance Commission,
Student Loan Revenue, Series H, 6.10% due 3/1/01(a) 1,012,500
1,500,000 AAA Indiana Bond Bank, Pike Township Metropolitan
School District, AMBAC-Insured, 5.80% due 2/1/08 1,496,250
1,000,000 A* Kentucky Higher Education Student Loan Corp.,
Insured Student Loan Revenue, Series 91B,
6.50% due 12/1/00(a) 1,032,500
230,000 AAA Louisiana Public Facilities Authority, Revenue
Supplemental Student Loan B, AMBAC-Insured,
8.125% due 12/1/99 258,462
Montana State Higher Education Student Assistance
Corp., Student Loan Revenue:
1,345,000 A* Series 92B, 5.80% due 12/1/95(a) 1,355,088
1,515,000 A Series 92B, 7.05% due 6/1/04(a) 1,602,112
4,000,000 A1* New England Education Loan Marketing Corp.,
MA Student Loan Revenue Refunding, Series F,
5.625% due 7/1/04(a) 3,915,000
1,475,000 AAA North Texas Higher Education Authority Inc.,
Student Loan Revenue, AMBAC-Insured,
7.00% due 4/1/01(a) 1,532,156
2,000,000 AAA Pennsylvania State Higher Education Assistance
Agency, Student Loan Revenue Refunding, Series A,
FGIC-Insured, 6.80% due 12/1/00 2,100,000
1,500,000 A* Rhode Island Student Loan Authority Revenue
Refunding, Series 92B, 6.75% due 12/1/01(a) 1,578,750
750,000 A South Dakota Student Loan Assistance Corp.,
Student Loan Revenue, 7.35% due 8/1/98(a) 784,687
</TABLE>
See Notes to Financial Statements.
7
<PAGE>201
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Education -- 13.8% (continued)
$1,000,000 AA State of Texas College Student Loan Bonds, Series 1991,
zero coupon due 2/1/01(a) $ 730,000
1,500,000 AAA Schuykill County, PA Redevelopment Authority Lease
Revenue, FGIC-Insured, Series 91A, 6.85% due 6/1/03 1,642,500
810,000 A* Texas State Higher Education Coordinating Board,
College Student Loan Revenue, 6.80% due 4/1/98(a) 841,388
Utah State School District Co-op Revenue Financing
Pool, LOC Swiss Bank:
875,000 AAA 8.30% due 2/15/98 930,781
945,000 AAA 8.30% due 2/15/00 1,025,325
2,220,000 AAA 8.375% due 2/15/10 2,389,275
1,825,000 Aa* Volunteer State Student Funding Corp., TN Education
Loan Revenue Bonds, Senior Series 1993B, 5.15%
due 12/1/02(a) 1,758,844
- --------------------------------------------------------------------------------------------------
36,755,656
- --------------------------------------------------------------------------------------------------
Escrowed to Maturity(e) -- 8.0%
280,000 AAA Austin, TX Independent School District, (Escrowed to
Maturity with U.S. Government Securities), 9.00%
due 7/1/00 329,700
610,000 AAA Babylon, NY Industrial Development Agency, Waste
Facilities Revenue, Babylon Community Waste
Management, Series A, (Escrowed to Maturity with
U.S. Government Securities), 7.50% due 7/1/95 614,770
2,525,000 AAA Boston, MA Water & Sewer Community Revenue,
Series A, (Escrowed to Maturity with U.S.
Government Securities), 10.65% due 1/1/99 2,828,000
500,000 AAA Broward County, FL Health Facilities Authority Revenue,
Holy Cross Hospital Project, (Escrowed to Maturity
with U.S. Government Securities), 8.75% due 6/1/95 503,695
220,000 AAA Enid, OK Hospital Authority Revenue, St. Mary's
Hospital Crossover Refunding, (Escrowed to Maturity
with U.S. Government Securities), 8.00% due 7/1/98 235,125
1,255,000 AAA Erie County, OH Hospital Improvement, Sandusky
Memorial Hospital, (Escrowed to Maturity with U.S.
Government Securities), 8.75% due 1/1/06 1,513,844
2,395,000 AAA Galveston, TX Sewer System Revenue Refunding,
Series B (Escrowed to Maturity with U.S. Government
Securities), 7.80% due 5/1/99 2,568,638
1,050,000 AAA Illinois Educational Facilities Authority Revenue, Chicago
Osteopathic Medical, Series A, (Escrowed to Maturity
with U.S. Government Securities), 8.75% due 7/1/05 1,325,625
</TABLE>
See Notes to Financial Statements.
8
<PAGE>202
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Escrowed to Maturity(e) -- 8.0% (continued)
$ 40,000 AAA Kenton County, KY Airport Board Revenue, Greater
Cincinnati International Airport, MBIA-Insured,
(Escrowed to Maturity with U.S. Government
Securities), 7.20% due 3/1/96(a)(d) $ 40,950
830,000 AAA Michigan State Hospital Finance Authority Revenue,
St. Joseph's Mercy Hospital, Series A, (Escrowed to
Maturity with U.S. Government Securities), 9.25%
due 7/1/03 998,075
1,170,000 AAA New Jersey Educational Facilities Authority, Fairleigh
Dickinson University, Series C, (Escrowed to Maturity
with U.S. Government Securities), 7.75% due 7/1/01 1,330,875
1,850,000 AAA New Jersey State Turnpike Authority Revenue
Refunding, (Escrowed to Maturity with U.S.
Government Securities), 10.375% due 1/1/03 2,250,063
30,000 AAA New York City GO, Series F, (Escrowed to Maturity
with U.S. Government Securities), 8.10% due 11/15/99 33,938
1,110,000 AAA Ohio State Water Development Authority Revenue, Safe
Water, Series A, (Escrowed to Maturity with
U.S. Government Securities), 9.375% due 12/1/10 1,393,050
2,155,000 AAA Owensboro, KY Electric, Light & Power, (Escrowed
to Maturity with U.S. Government Securities),
10.50% due 1/1/04 2,634,487
1,035,000 AAA San Francisco, CA Airport Improvement Corp., Lease
Revenue, United Airlines, (Escrowed to Maturity with
U.S. Government Securities), 7.875% due 7/1/99 1,121,681
1,385,000 AAA Sullivan County, TN Health & Educational Facilities,
Holston Valley Community Hospital, (Escrowed to
Maturity with U.S. Government Securities),
7.00% due 9/1/99 1,488,875
- --------------------------------------------------------------------------------------------------
21,211,391
- --------------------------------------------------------------------------------------------------
Finance -- 0.4%
40,000 A- Concord Santa Cruz Southgate, CA COP, ABAG Finance
Corp., 7.10% due 6/1/99 40,050
1,000,000 A New York State Local Government Assistance Corp.,
6.60% due 4/1/98 1,045,000
- --------------------------------------------------------------------------------------------------
1,085,050
- --------------------------------------------------------------------------------------------------
General Obligation -- 6.4%
175,000 A Boston, MA GO, 7.75% due 10/1/95 177,733
</TABLE>
See Notes to Financial Statements.
9
<PAGE>203
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===================================================================================================
<C> <C> <S> <C>
General Obligation -- 6.4% (continued)
$ 1,525,000 AAA Harris County, TX Capital Appreciation Refunding,
MBIA-Insured, zero coupon due 10/1/00 $ 1,139,937
2,000,000 AAA Highlands Rancho Metro District #2, Douglas County,
CO GO Refunding, Series 1991, LOC Swiss Bank,
6.70% due 6/15/01 2,070,000
500,000 AA+ King County, WA Unlimited Tax Obligation, 9.00%
due 12/1/98 568,125
1,500,000 A+ Massachusetts Dedicated Income Tax Bonds, Fiscal
Recovery Loan Act of 1990, Series A, 7.25%
due 6/1/96 1,543,125
2,000,000 BBB New Haven, CT GO, Series B, 9.00% due 12/1/01 2,335,000
New York City GO:
970,000 A- Series F, 8.10% due 11/15/99 1,059,725
1,500,000 A- Series D, 7.20% due 2/1/00 1,582,500
North Slope Borough, AK GO:
6,000,000 AAA MBIA-Insured, zero coupon due 1/1/01 4,380,000
900,000 AAA Unlimited Tax Obligation Refunding, Series G,
AMBAC-Insured, 7.50% due 6/30/97(d) 947,250
750,000 AA+ Port of Houston Authority, Harris County, TX Port
Improvement Unlimited Tax Obligation, 8.50%
due 11/1/98(a) 834,375
500,000 AA San Antonio, TX Limited Tax, 9.00% due 8/1/95 507,320
- --------------------------------------------------------------------------------------------------
17,145,090
- --------------------------------------------------------------------------------------------------
Hospitals -- 13.1%
750,000 A ABAG Finance Authority Nonprofit Corps, California
Mortagage Insured, COP, Rehabilitation Mental
Health Services Inc. Project, 6.10% due 6/1/02(d) 766,875
1,915,000 BBB+ Alachua County, FL Health Facilities Authority Revenue,
Santa Fe Healthcare Facilities Project, 6.875%
due 11/15/02 1,998,781
600,000 AA- Bexar County, TX Health Facilities Development Corp.,
Health Facilities Revenue Refunding, Independence Hill
Project, LOC Banque Paribas, 7.50% mandatory tender
12/1/98(d) 651,750
1,000,000 AAA Calcasieu Parish Louisiana Memorial Hospital Services
District Revenue, Lake Charles Memorial Hospital,
Series A, Connie Lee-Insured, 7.50% due 12/1/05 1,147,500
</TABLE>
See Notes to Financial Statements.
10
<PAGE>204
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Hospitals -- 13.1% (continued)
$ 3,500,000 BBB Colorado Health Facilities Authority Hospital Revenue
Bonds, Series 1993, Rocky Mountain Adventist
Health Guaranteed, 6.25% due 2/1/04 $ 3,473,750
2,135,000 A* Harris County, TX Health Facilities Development Corp.,
Memorial Health System Guaranteed, 7.125%
due 6/1/05 2,289,788
Illinois Health Facilities Authority Revenue Refunding:
1,000,000 Baa1* Trinity Medical Center, 6.50% due 7/1/00 1,011,250
3,025,000 A+ OSF-Healthcare System, 5.25% due 11/15/01 2,945,594
1,425,000 Ba1* Langhorne Manor Higher Education & Health Authority,
Bucks County (Lower Bucks Hospital), 6.375%
due 7/1/99 1,400,062
Massachusetts Health & Education Facilities
Authority Revenue:
1,750,000 Baa* Massachusetts Eye & Ear Infirmary, Series A,
7.00% due 7/1/98 1,760,938
1,700,000 Aa* Series D, Daughters of Charity National Health
System, 5.50% due 7/1/04 1,693,625
1,000,000 AAA Mississippi Equipment & Facilities Authority,
Mississippi Baptist Medical Center, MBIA-Insured,
7.30% due 5/1/01 1,101,250
New Jersey Healthcare Facilities Financing Authority:
1,000,000 Baa1* Elizabeth General Medical Center, Series C, 7.10%
due 7/1/99 1,035,000
1,030,000 A- Pascack Valley Hospital, Series 91, 6.50% due 7/1/01 1,068,625
1,045,000 BBB+ New York Medical Care Facilities Finance Agency
Revenue, Mental Health Facilities, 7.10% due 2/15/99 1,098,556
320,000 A- Ouachita Parish, LA Hospital Services District #1,
Hospital Revenue Bonds, Glenwood Regional
Medical Center, Series 1991, 7.25% due 7/1/00 338,400
2,170,000 A- Palm Beach County, FL Health Facilities Authority
Revenue, Good Samaritan Health System Guaranteed,
6.15% due 10/1/06 2,159,150
Philadelphia, PA Hospitals & Higher Education Facilities
Authority Revenue:
1,675,000 BBB+ Refunding, Philadelphia MR Project Guaranteed,
5.50% due 8/1/01 1,633,125
350,000 Aa* St. Agnes Medical Center, FHA-Insured, 6.75%
due 8/15/01 365,313
</TABLE>
See Notes to Financial Statements.
11
<PAGE>205
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Hospitals -- 13.1% (continued)
$ 1,000,000 AAA Rio Grande Valley, TX Health Facilities, Valley Baptist
Medical Center Series, Short RITES, MBIA-Insured,
coupon varies weekly till 8/1/02 then converts to
6.25%, 7.40% due 8/1/06(c) $ 1,032,500
1,750,000 A+ Riverside, CA Asset Leasing Corp. Leasehold Revenue
Bonds, 1993 Series A, Riverside Hospital Project,
6.00% due 6/1/04 1,741,250
3,000,000 BBB++ Scranton-Lackawanna, PA Health & Welfare Authority
Revenue, Allied Services Rehabilitation Hospitals,
7.125% due 7/15/05 2,962,500
1,300,000 BBB++ Valley Health System, CA COP Refunding Project,
6.25% due 5/15/99 1,288,625
- --------------------------------------------------------------------------------------------------
34,964,207
- --------------------------------------------------------------------------------------------------
Housing: Multi-Family -- 9.1%
3,000,000 A Aurora, IL Multi-Family Revenue Refunding Housing,
Fox Village Unit 18D Project, LOC Banque Paribas,
7.75% due 9/1/98 3,131,250
1,250,000 AA- Broward County, FL HFA Multi-Family Housing Revenue,
Surety Bond-Continental Casualty, Waters Edge
Apartments Project, 9.70% mandatory tender 11/1/95 1,281,250
2,930,000 A+ City of Burnsville, MN Multi-Family Housing Revenue
Refunding Bonds, The Atrium Project, Policy of
Indemnity Commercial Union Insurance Co. PLC
Reinsured by Trygg-Hansa Ins. Co. of Sweden, 7.20%
tender 5/1/02 3,047,200
500,000 AAA Fairfax County, VA Redevelopment & Housing Authority
Multi-Family Refunding Kingsley 91A, 6.50%
due 11/1/01 517,500
2,850,000 Aa3* Gary, IN Economic Development Revenue, Miller
Partnership, LP Series A, LOC Royal Bank of
Scotland, 7.40% mandatory tender 4/1/01(a) 2,907,000
2,995,000 AA- Lombard, IL Multi-Family Housing, Clover Creek
Apartments, Surety Bond-Continental Casualty Co.,
6.50% due 12/15/96 3,043,669
1,000,000 AA- Maine State Housing Authority, Series A-3, 6.90%
due 11/15/98 1,043,750
500,000 AAA Nashville & Davidson County, TN Metropolitan
Government IDB Revenue, FNMA-Collateralized,
Club Bellvue, 8.50% mandatory tender 5/1/97 511,250
</TABLE>
See Notes to Financial Statements.
12
<PAGE>206
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Housing: Multi-Family -- 9.1% (continued)
$ 590,000 A* Odessa, TX Housing Development Corp. #2, Multi-
Family Revenue Refunding, Chaparral Village - A,
6.375% due 12/1/03 $ 591,475
2,260,000 AAA Onterie Center Housing Finance Corp., IL Mortgage
Revenue Refunding, Onterie Center Project, Series A,
MBIA-Insured, 6.50% due 7/1/02 2,361,700
2,500,000 AAA Prince Georges County, MD Housing Authority
Mortgage Revenue Refunding, Cambridge Crossing
Apartments, Series A, LOC Federal Home Loan Bank
Atlanta, 5.90% mandatory tender 2/1/04 2,512,500
975,000 AAA Ridgeland, MS Multi-Family Housing Revenue, Series
1985, Sun Chase Apartments, FNMA-Collateralized,
6.50% mandatory tender 10/1/97 984,750
2,500,000 AA+ Tulsa, OK Home Finance Authority, Multi-Family
Housing Waterford Project, Series A, AXA Reinsurance,
UK PLC Guaranteed, 5.35% mandatory tender 12/1/04 2,390,625
- --------------------------------------------------------------------------------------------------
24,323,919
- --------------------------------------------------------------------------------------------------
Housing: Single-Family -- 2.7%
80,000 AA Alaska State Housing Finance Corp., State Guaranteed
Veterans Mortgage Program, Third Series 83, 9.10%
due 12/1/97(d) 82,600
2,500,000 Aa* California State Department of Veterans Affairs, Home
Purchase Revenue, Series A, 7.50% due 8/1/98(a) 2,571,875
80,000 Aaa* Louisiana Housing Finance Agency Mortgage Revenue,
GNMA-Collateralized, Single-Family, 7.60%
due 11/1/97(a) 82,200
Missouri State Housing Development Commission,
Single-Family Insured Mortgage Revenue Loans:
20,000 Aaa* FHA-VA, 9.60% due 8/1/96 20,500
45,000 AAA 10.00% due 8/1/98 47,250
1,355,728 AAA Monroe-West Monroe, Ouachita Parish, LA Public Trust
Financing Authority, FHLMC-Guaranteed, 8.50%
due 5/20/02 1,413,347
210,000 A* Quincy, IL Single-Family Mortgage Revenue Refunding,
Series 1994, 4.25% due 9/1/99 208,688
315,000 AAA St. Louis County, MO Single-Family Mortgage Revenue,
MBIA-Insured, 9.75% mandatory tender 10/1/95 320,512
</TABLE>
See Notes to Financial Statements.
13
<PAGE>207
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Housing: Single-Family -- 2.7% (continued)
$ 1,000,000 AAA Texas Department of Housing & Community Affairs,
GNMA & FNMA-Collateralized, Home Mortgage
Revenue Bonds, Series B, RIBS Variable Rate,
9.308% due 6/18/23(a)(c) $ 1,078,750
Texas State Housing Agency Mortgage Revenue
Single-Family:
210,000 Aa* 1987D, 7.75% due 7/1/99 217,875
665,000 Aa* Series 85A, 9.10% due 9/1/00 682,456
410,000 AA Wyoming Community Development Authority, Single-
Family Mortgage, Series 1988C, 7.80% due 6/1/99(a) 424,350
- --------------------------------------------------------------------------------------------------
7,150,403
- --------------------------------------------------------------------------------------------------
Industrial Development -- 13.8%
1,500,000 A Bel Air, MD Revenue Refunding, May Department
Stores Co. Project, 6.375% due 10/1/99 1,561,875
1,000,000 A Belmont County, OH IDR Refunding, May Department
Stores, Series 91, 6.50% due 1/1/00 1,046,250
255,000 A* Coweta County, GA Development Authority IDR, Sivaco
National Wire Georgia Project, Series 1994, Atlantic
Steel Industries Guaranteed, 5.40% due 2/1/09(a) 227,269
3,000,000 Ba1* Griffin-Spalding County, GA Development Authority
Revenue Refunding, Borden Inc. Project, Borden Inc.
Guaranteed, 7.20% due 6/1/00 3,022,500
2,405,000 AAA Hamburg, IA IDR, ADC II Project, FGIC-Insured, 8.40%
mandatory tender 6/1/95 2,417,025
1,295,000 A1* Illinois Development Finance Authority Revenue,
Economic Development, LOC American National Bank
and Trust, L. Karp and Sons Inc. Project, 7.25%
mandatory tender 9/1/95(a) 1,304,713
2,000,000 A+ Iowa Finance Authority, Governors Square Project,
Policy of Indemnity Commercial Union Assurance Co.
PLC Reinsured by Trygg-Hansa Insurance Co. of
Sweden, 7.25% mandatory tender 4/1/02 2,100,000
2,500,000 A Kanawha, WV Commercial Development Revenue,
May Department Stores Guaranteed, 5.70% due 6/1/97 2,543,750
3,000,000 A Marion, IA Commercial Development Revenue, Collins
Road Project, Commercial Union-Insured/Reinsured
by Trygg-Hansa Insurance Co. of Sweden, 7.25%
mandatory tender 7/1/02 3,142,500
</TABLE>
See Notes to Financial Statements.
14
<PAGE>208
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Industrial Development --13.8% (continued)
$ 3,500,000 BBB+ Metropolitan Government Nashville & Davidson County,
TN Industrial Development Board Revenue Refunding &
Improvement, Osco Treatment Inc. Guaranteed, 6.00%
due 5/1/03(a) $ 3,395,000
2,750,000 A+ Missouri Economic Development Export & Infrastructure
Board Industrial Revenue Refunding, Mark Twain Tower
Project, Lincoln National Guaranteed, 5.375%
mandatory tender 5/1/00 2,701,875
2,390,000 Aa3* New Jersey EDA, Growth Bonds, LOC Banque
Nationale de Paris, 6.20% due 12/1/02(a) 2,449,750
New York City IDA:
1,510,000 Aa1* Keystone Electric, LOC Ambro Bank, 7.50% due 3/1/98(a) 1,515,662
485,000 Aa1* SuperFlex, Ltd. Project, Composite Offering XVIII 1989,
Series A, LOC Algemene Bank Netherlands, NV, 7.75%
optional tender 11/1/99(a) 494,700
735,000 Aa1* IDR Oakdale Knitting Mills Inc., Composite Offering
XXX 1990, Series G, LOC Algemene Bank Netherlands,
NV, 7.70% mandatory tender 11/1/00(a) 755,212
Ohio State Economic Development Revenue, Ohio
Enterprise Bond Fund:
365,000 A- Superior Forge & Steel Corp. Project, 6.75%
due 6/1/96(a) 370,019
300,000 A- Series 1989-5B, Sponge Inc. Project, 7.75%
due 6/1/99(a) 311,250
90,000 Baa3* Pocahontas, IA IDR International Harvester Co., 10.25%
due 10/1/00 92,138
3,040,000 AA++ Seaford, DE Economic Development Revenue Refunding,
Seaford Association Project, 6.375% due 1/1/04 3,093,200
2,235,000 AA- Simi Valley, CA Community Development Agency COP,
Simi Valley Business Center, 6.05% due 10/1/18 2,265,731
2,000,000 A+ St. Louis County, MO IDA Refunding, Westport
Residence Joint Venture, Lincoln National
Guaranteed, 5.10% mandatory tender 12/1/00 1,902,500
- --------------------------------------------------------------------------------------------------
36,712,919
- --------------------------------------------------------------------------------------------------
Lifecare -- 0.5%
1,355,000 BBB Illinois Development Finance Authority Health Facilities
Revenue, Community Living Options, 6.375%
due 3/1/00 1,363,469
- --------------------------------------------------------------------------------------------------
Miscellaneous -- 6.0%
2,595,000 BBB Clarksville, TN Natural Gas Aquisition Corporation, Gas
Revenue, Series A, 6.50% due 11/1/00 2,591,756
</TABLE>
See Notes to Financial Statements.
15
<PAGE>209
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Miscellaneous -- 6.0% (continued)
$ 1,000,000 Baa* Delaware County, PA Authority Revenue, Elwyn Inc.
Project, 7.75% due 6/1/00 $ 1,048,750
2,500,000 A* Hoffman Estate, IL Tax Increment Junior Lien, Hoffman
Estate Development, Series 91, 6.50% due 5/15/01 2,615,625
2,700,000 A- Illinois Development Finance Authority Revenue, Debt
Restructure - East St. Louis, 6.875% due 11/15/05 2,720,250
810,000 NR Lehigh County, PA General Purpose Authority, Wiley
House Revenue, Series 1991, 8.50% due 11/1/96 824,175
1,990,000 Baa1* Leon County, FL COP, Series 92A, 5.875% due 1/1/98 1,992,488
1,050,000 BBB Tampa, FL Capital Improvement Program Revenue
Collateralized, Series 88B, 7.40% due 10/1/97 1,095,937
3,000,000 A* Texas National Research Lab Finance Corp., Lease
Revenue Superconducting Supercollider Project,
6.55% due 12/1/02 3,067,500
- --------------------------------------------------------------------------------------------------
15,956,481
- --------------------------------------------------------------------------------------------------
Pollution Control -- 1.5%
1,200,000 AAA Burke County, GA Development Authority PCR,
Refunding, Ogelthorpe Power Co., 7.50% due 1/1/03 1,315,500
1,500,000 AAA Montgomery, AL Industrial Development Board PCR,
General Electric Co. Project, 7.00% due 9/15/00(a) 1,623,750
500,000 A2* North Hampton County, PA IDA Revenue PCR,
Metropolitan Edison Co., 10.50% due 9/1/95 511,875
600,000 BB Ohio State Water Development Authority Pollution
Control Facilities Revenue, Cleveland Electric
Illuminating Co., 9.75% due 11/1/97(a) 645,750
- --------------------------------------------------------------------------------------------------
4,096,875
- --------------------------------------------------------------------------------------------------
Power -- 1.8%
1,500,000 A+ Chelan County, WA Public Utility District No. 1, Chelan
Hydro Consolidated System Revenue Bonds, Series
1991A, 7.00% due 7/1/01(a) 1,620,000
2,000,000 AAA Clarion County, PA IDA Energy Development Revenue,
Piney Creek Project, LOC Swiss Bank, 7.25%
mandatory tender 11/1/00(a) 2,112,500
1,000,000 BB Sam Rayburn, TX Municipal Power Supply System
Revenue Refunding, Series A, 6.20% due 10/1/01 945,000
- --------------------------------------------------------------------------------------------------
4,677,500
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>210
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Pre-Refunded(e) -- 4.4%
$ 1,500,000 AAA Berks County, PA Municipal Authority, Lutheran Home at
Topton, Series B, LOC Meridian Bank, (Escrowed with
U.S. Government Securities to 4/1/98 Call @ 100),
7.25% due 4/1/01 $ 1,599,375
1,000,000 AAA Dade County, FL Health Facilities Authority Baptist Hospital
Miami, MBIA-Insured, (Escrowed with U.S. Government
Securities to 5/1/97 Call @ 102), 6.90% due 5/1/99 1,062,500
2,000,000 AAA District of Columbia GO, Series C, (Escrowed with U.S.
Government Securities to 6/1/96 Call @ 102), 8.00%
due 6/1/99 2,112,500
2,360,000 AAA Gila County, AZ IDA PCR, (Escrowed with U.S. Government
Securities to 2/15/01 Call @ 101), 11.25% due 4/1/01 2,708,100
Illinois Health Facilities Authority Revenue:
1,000,000 AAA Lutheran Social Services, LOC Industrial Bank of Japan,
(Escrowed with U.S. Government Securities to 8/1/00
Call @ 102), 7.65% mandatory tender 8/1/02 1,130,000
750,000 AAA Servantcor Hospital, Series B, (Escrowed with U.S.
Government Securities to 8/15/99 Call @ 102),
7.50% due 8/15/01 833,438
1,000,000 AAA Las Vegas Valley, NV Water District, MBIA-Insured,
(Escrowed with U.S. Government Securities to 11/1/97
Call @ 102), 7.625% due 5/1/01 1,087,500
775,000 AAA New York Medical Care Facilities Finance Agency Revenue,
Hospital & Nursing Home Mortgage, FHA-Insured,
(Escrowed with U.S. Government Securities to 2/15/97
Call @ 102), 7.75% due 2/15/02 841,844
335,000 AAA Ohio State Building Authority Toledo Government Office
Building, Series A, (Escrowed with U.S. Government
Securities to 4/1/03 Call @ 100), 10.125% due 10/1/06 421,262
- --------------------------------------------------------------------------------------------------
11,796,519
- --------------------------------------------------------------------------------------------------
Public Facilities -- 3.4%
1,710,000 AAA Iowa State COP, Series A, AMBAC-Insured, 5.75%
due 7/1/98 1,754,887
4,000,000 Aa* Mt. Stearling, KY Lease Revenue, Kentucky League of
Cities A, Transamerica Life Guaranteed, 5.625%
due 3/1/03 3,915,000
155,000 AAA Pittsburg, PA Stadium Authority Guaranty Revenue,
FGIC-Insured, 7.00% due 10/15/95 156,744
1,060,000 AAA South Dakota State Lease Revenue Certificates, Series A,
CGIC-Insured, 8.20% due 9/1/02 1,248,150
</TABLE>
See Notes to Financial Statements.
17
<PAGE>211
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Public Facilities -- 3.4% (continued)
$ 1,315,000 AAA Texas State Refunding, Texas Parks & Wildlife,
AMBAC-Insured, zero coupon due 10/1/02 $ 874,475
1,000,000 AA Tuscon, AZ COP, Asset Guaranty, 6.00% due 7/1/04 1,020,000
- --------------------------------------------------------------------------------------------------
8,969,256
- --------------------------------------------------------------------------------------------------
Short-Term(b) -- 1.5%
1,900,000 VMIG 1 Maricopa, AZ IDA Hospital Facilities Revenue,
Samaratin Hospital, 4.50% due 12/1/08 1,900,000
2,100,000 VMIG 1 New York City Municipal Water Finance Authority,
Series G, 4.40% due 6/15/24 2,100,000
- --------------------------------------------------------------------------------------------------
4,000,000
- --------------------------------------------------------------------------------------------------
Solid Waste -- 3.1%
Detroit, MI Economic Development Corp. Facilities
Recovery Revenue, FSA-Insured:
3,000,000 AAA Series A, 7.00% due 5/1/01 3,318,750
1,000,000 AAA Series 91A, 6.60% due 5/1/02(a) 1,076,250
1,500,000 AA- Illinois Development Financing Authority Solid Waste
Disposal Revenue Bonds, Waste Management Inc.
Project, Series 1990, 7.125% due 1/1/01 1,627,500
2,000,000 Baa* Onondaga County, NY Resource Recovery Agency Project
Revenue Bonds, Series 1992, 6.625% due 5/1/00(a) 1,997,500
250,000 AA Regional Waste Systems Inc., Maine Solid Waste Resource
Recovery System, 7.55% due 7/1/98(a)(d) 266,562
- --------------------------------------------------------------------------------------------------
8,286,562
- --------------------------------------------------------------------------------------------------
Tax Allocation -- 0.2%
505,000 BBB Miami Beach, FL Redevelopment Agency Tax Increment
Revenue, City Center Historic Convention Village,
4.75% due 12/1/00 473,437
- --------------------------------------------------------------------------------------------------
Transportation -- 5.1%
1,000,000 AAA Clark County, NV Airport Improvement Revenue,
BIG-Insured, 7.90% due 7/1/00(a) 1,092,500
Denver, CO City & County Airport Revenue:
1,590,000 Baa* Series 1992B, 7.00% due 11/15/01(a) 1,590,000
1,000,000 Baa* Series 1992B, 7.00% due 11/15/02(a) 1,000,000
1,000,000 Baa* Series 1994A, 7.20% due 11/15/02(a) 1,030,000
2,445,000 AAA Hawaii Airport System Revenue, MBIA-Insured,
Second Series of 91, 6.10% due 7/1/99(a) 2,539,744
</TABLE>
See Notes to Financial Statements.
18
<PAGE>212
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued) March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
==================================================================================================
<C> <C> <S> <C>
Transportation -- 5.1% (continued)
$ 1,250,000 A Indiana Transportation Finance Authority, Airport Facilities
Lease Revenue, Series A, United Air, 6.125%
due 11/1/02 $ 1,292,188
210,000 AAA Kenton County, KY Airport Board Revenue, Greater
Cincinnati International Airport, MBIA-Insured, 7.20%
due 3/1/96(a)(d) 214,725
Massachusetts Port Authority Revenue:
500,000 Aa* Series 1990A, 7.00% due 7/1/96(a) 515,625
1,000,000 AAA Series A, FGIC-Insured, 7.20% due 7/1/03(a) 1,093,750
3,000,000 AA- Ocean Highway and Port Authority, Nassau County,
FL Adjustable Demand Revenue Bonds, Series 1990,
LOC ABN AMBRO Bank NV, 6.25% due 12/1/02(a) 3,161,250
- --------------------------------------------------------------------------------------------------
13,529,782
- --------------------------------------------------------------------------------------------------
Utilities -- 1.7%
600,000 A- Georgia Muni Gas Authority Revenue, Southern Storage
Gas Project, 6.30% due 7/1/09 603,000
3,000,000 AAA Mohave, AZ Industrial Development Authority IDR Bonds,
Citizens Utilities Co. Project 1988B, 6.875%
due 9/1/03(a) 3,157,500
770,000 Baa1* Philadelphia, PA Gas Works Revenue Bonds, 13th
Series, 7.40% due 6/15/00 842,187
- --------------------------------------------------------------------------------------------------
4,602,687
- --------------------------------------------------------------------------------------------------
Water & Sewer -- 3.5%
4,155,000 A Austin, TX Water, Sewer and Electric, 14.00%
due 11/15/01 5,666,381
1,000,000 AAA Centennial Water and Sanitation District Douglas County,
CO GO, Water & Sewer Refunding Bonds,
LOC Swiss Bank Corp., 6.625% due 6/15/98 1,027,500
1,500,000 NR New Jersey EDA Water Facilities Revenue, Series 1991,
New Jersey American Water Co. Inc. Project, Private
Placement, 7.40% due 5/1/01(a) 1,590,000
985,000 A Texas Water Resource Finance Authority Revenue,
Series 89, 7.40% due 8/15/00 1,053,950
- --------------------------------------------------------------------------------------------------
9,337,831
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--100%
(Cost--$261,735,129)(f) $266,439,034
==================================================================================================
</TABLE>
See pages 20 and 21 for definition of ratings and certain securities
descriptions.
See Notes to Financial Statements.
19
<PAGE>213
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Schedule of Investments (continued)
- --------------------------------------------------------------------------------
(a) Income from these issues is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Variable rate obligation payable at par on demand at any time on no more
than seven days notice.
(c) Residual interest bonds -- coupon varies inversely with level of
short-term tax-exempt interest rates.
(d) Securities segregated by Custodian for open purchase commitment.
(e) Pre-refunded bonds escrowed by U.S. Government Securities and bonds
escrowed to maturity by U.S. Government Securities are considered by manager
to be triple-A rated even if issuer has not applied for new ratings.
(f) The cost for Federal income tax purposes is substantially the same.
+ Duff & Phelps Credit Rating Co.
++ Fitch Investors Services, Inc.
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Corporation, except those identified by an
asterisk (*) are rated by Moody's Investors Services. The definitions of the
applicable rating symbols are set forth below:
Standard & Poor's -- Ratings from "AA" to "BB" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
AAA -- Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in a
small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic
rating from "Aa" to "Baa", where 1 is the highest and 3 the lowest
ranking within its generic category.
Aaa -- Bonds that are rated "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 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.
20
<PAGE>214
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Bond Ratings (continued)
- --------------------------------------------------------------------------------
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 some time 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 which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate,
and therefore not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this
class.
NR -- Indicates that the bond is not rated by Standard & Poor's
Corporation or Moody's Investors Services.
- --------------------------------------------------------------------------------
Short-Term Securities Rating
- --------------------------------------------------------------------------------
SP-1 -- Standard & Poor's highest rate rating indicating very strong or
strong capacity to pay principal and interest; those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable rate demand
obligation (VRDO) rating indicating that the degree of safety
regarding timely payment is either overwhelming or very strong;
those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having a demand feature -- VRDO
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to
the advent of the VMIG 1 rating.
MIG 1 -- Moody's highest rating for short-term municipal obligations.
- --------------------------------------------------------------------------------
Security Descriptions
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governments
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity Corporation
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance Company
COP -- Certificate of Participation
EDA -- Economic Development Authority
FAIRS -- Floating Adjustable Interest Rate Securities
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FSA -- Federal Savings Association
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PCFA -- Pollution Control Financing Authority
PCR -- Pollution Control Revenue
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
VA -- Veterans Administration
VRDD -- Variable Rate Demand Note
VRWE -- Variable Rate Wednesday Demand
21
<PAGE>215
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities March 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost - $261,735,129) $ 266,439,034
Cash 58,576
Receivable for securities sold 955,000
Receivable for Fund shares sold 899,754
Interest receivable 5,198,981
Other assets 21,772
- --------------------------------------------------------------------------------
Total Assets 273,573,117
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 1,687,584
Payable for Fund shares purchased 205,696
Distribution costs payable 135,080
Management fees payable 104,098
- --------------------------------------------------------------------------------
Total Liabilities 2,132,458
- --------------------------------------------------------------------------------
Total Net Assets $ 271,440,659
================================================================================
NET ASSETS:
Par value of capital shares $ 41,516
Capital paid in excess of par value 271,788,443
Undistributed net investment income 37,862
Accumulated net realized loss on security transactions (5,131,067)
Net unrealized appreciation of investments 4,703,905
- --------------------------------------------------------------------------------
Total Net Assets $ 271,440,659
================================================================================
Shares Outstanding:
Class A 37,443,382
----------------------------------------------------------------------------
Class C 4,072,805
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $6.54
----------------------------------------------------------------------------
Class C * $6.54
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 2.04% of net asset value per share) $6.67
================================================================================
<FN>
* Redemption price is NAV of Class C shares reduced by 1.00% if shares are
redeemed less than one year from initial purchase.
</TABLE>
See Notes to Financial Statements.
22
<PAGE>216
Smith Barney Muni Funds
Limited Term Portfolio
- ------------------------------------------------------------------------------
Statement of Operations For the Year Ended March 31, 1995
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 18,693,059
- ------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 3) 1,351,567
Distribution costs (Note 3) 299,070
Registration fees 101,086
Shareholder servicing agent fees 53,881
Pricing service fees 32,000
Custodian fees 31,475
Shareholder communications fees 28,872
Audit and legal fees 15,827
Trustees' fees 7,001
Other 4,000
- ------------------------------------------------------------------------------
Total Expenses 1,924,779
- ------------------------------------------------------------------------------
Net Investment Income 16,768,280
- ------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 112,187,811
Cost of securities sold 115,929,287
- ------------------------------------------------------------------------------
Net Realized Loss (3,741,476)
- ------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 2,097,769
End of year 4,703,905
- ------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 2,606,136
- ------------------------------------------------------------------------------
Net Loss on Investments (1,135,340)
- ------------------------------------------------------------------------------
Increase In Net Assets From Operations $ 15,632,940
==============================================================================
</TABLE>
See Notes to Financial Statements.
23
<PAGE>217
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended March 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 16,768,280 $ 16,346,956
Net realized loss from security transactions (3,741,476) (454,765)
Increase (decrease) in net unrealized appreciation
of investments 2,606,136 (7,475,919)
- ----------------------------------------------------------------------------------------
Increase In Net Assets From Operations 15,632,940 8,416,272
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income (17,091,230) (16,375,813)
- ----------------------------------------------------------------------------------------
Decrease In Net Assets From
Distributions To Shareholders (17,091,230) (16,375,813)
- ----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS:
Net proceeds from sale of shares 48,752,624 140,364,229
Net asset value of shares issued for
reinvestment of dividends and distributions 9,178,863 8,437,469
Cost of shares reacquired (113,025,019) (71,012,257)
- ----------------------------------------------------------------------------------------
Increase (Decrease) In Net Assets From
Fund Share Transactions (55,093,532) 77,789,441
- ----------------------------------------------------------------------------------------
Increase (Decrease) In Net Assets (56,551,822) 69,829,900
NET ASSETS
Beginning of year 327,992,481 258,162,581
- ----------------------------------------------------------------------------------------
End of year* $271,440,659 $327,992,481
========================================================================================
*Includes undistributed net investment income of: $37,862 $360,812
========================================================================================
</TABLE>
See Notes to Financial Statements.
24
<PAGE>218
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Limited Term Portfolio ("Portfolio") is a separate investment portfolio
of the Smith Barney Muni Funds ("Fund"). The Fund, a Massachusetts business
trust, is registered under the Investment Company Act of 1940, as amended, as a
non-diversified, open-end management investment company and consists of this
Portfolio and twelve other separate investment portfolios: California, Florida,
Georgia, New Jersey, New York, Ohio, Pennsylvania, National, California Limited
Term, Florida Limited Term, California Money Market and New York Money Market
Portfolios. The financial statements and financial highlights for the other
portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) security transactions are accounted for on the trade date; (b)
securities are valued at bid prices provided by an independent pricing service
that are based on transactions in municipal obligations, quotations from
municipal bond dealers, market transactions in comparable securities and various
relationships between securities; short-term securities maturing within 60 days
are valued at cost plus (minus) accreted discount (amortized premium), which
approximates value; (c) gains or losses on the sale of securities are calculated
by using the specific identification method; (d) interest income, adjusted for
amortization of premiums and accretion of original issue discount, is recorded
on the accrual basis; market discount is recognized upon the disposition of the
security; (e) direct expenses are charged to each portfolio and each class;
management fees and general fund expenses are allocated on the basis of relative
net assets; and (f) the Fund intends to comply with the requirements of the
Internal Revenue Code pertaining to regulated investment companies and to make
the required distributions to shareholders; therefore, no provision for Federal
income taxes has been made.
2. Exempt-Interest Dividends and Other Distributions
The Portfolio intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Portfolio.
Capital gain distributions, if any, are taxable to shareholders, and are
declared and paid at least annually. At March 31, 1995 the Limited Term
Portfolio had a net capital loss carryover of $5,131,067 available to offset
future capital gains. To the extent that this carryover loss is used to offset
capital gains it is probable that any gains so offset will not be distributed.
25
<PAGE>219
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
The amount and expiration of the carryovers are indicated below. Expiration
occurs on March 31 of the year indicated.
<TABLE>
<CAPTION>
2000 2001 2003
================================================================================
<S> <C> <C> <C>
Limited Term Portfolio $450,254 $195,915 $4,484,898
================================================================================
</TABLE>
3. Management Agreements and Transactions with Affiliated Persons
Smith Barney Mutual Funds Management, Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager to the Fund. The
Limited Term Portfolio pays SBMFM a management fee calculated at the annual rate
of 0.45% of its average daily net assets. Such fees are calculated daily and
paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. SB advised the Fund that it received sales charges of approximately
$271,731 (paid by purchasers of the Portfolio's Class A shares) for the year
ended March 31, 1995. All officers and two Trustees of the Fund are employees of
SB.
Effective November 7, 1994, the Fund adopted a new class structure,
renaming Class B shares as Class C shares and exchanging the former Class C
shares into Class A shares. Under the new structure, a contingent deferred sales
charge ("CDSC") of 1.00% is imposed on Class C shares if redemption occurs less
than one year from initial purchase. Any CDSC imposed on redemptions is paid to
SB. For the year ended March 31, 1995, there were approximately $35,201 in such
charges.
On September 16, 1994, a new Distribution Plan was approved by the Fund's
shareholders. Pursuant to this Distribution Plan, the Limited Term Portfolio
pays a service fee with respect to its Class A shares calculated at an annual
rate of 0.15% of the average daily net assets. In addition, the Portfolio will
continue to pay a service and distribution fee with respect to its Class C
shares calculated at an annual rate of 0.15% and 0.20%, respectively, of the
average daily net assets.
4. Investments
During the year ended March 31, 1995, the aggregate cost of purchases and
proceeds from sales (including maturities, but excluding short-term securities)
of investments were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $ 64,177,803
- --------------------------------------------------------------------------------
Sales 112,187,811
================================================================================
</TABLE>
26
<PAGE>220
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At March 31, 1995, the gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $ 6,239,802
Gross unrealized depreciation (1,535,897)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 4,703,905
================================================================================
</TABLE>
5. Capital Shares
At March 31, 1995, there were an unlimited amount of shares of $.001 par
value capital stock authorized. The Fund has established multiple classes of
shares within each Portfolio of the Fund. Each share of a class represents an
identical interest in the Portfolio and has the same rights, except that each
class bears certain expenses specifically related to the distribution of its
shares. At March 31, 1995, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class C
================================================================================
<S> <C> <C>
Total Paid-In Capital $244,283,284 $27,546,675
================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1995 March 31, 1994
---------------------------- --------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A*
Shares sold 6,753,825 $ 43,787,327 15,022,441 $101,659,920
Shares issued on reinvestment 1,257,227 8,139,136 1,112,648 7,525,790
Shares redeemed (16,560,560) (106,844,106) (9,391,335) (63,345,164)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (8,549,508) $ (54,917,643) 6,743,754 $ 45,840,546
============================================================================================
Class C+
Shares sold 763,796 $ 4,965,297 3,516,779 $ 23,785,553
Shares issued on reinvestment 160,710 1,039,727 82,112 555,173
Shares redeemed (958,968) (6,180,913) (350,865) (2,358,040)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (34,462) $ (175,889) 3,248,026 $ 21,982,686
============================================================================================
<FN>
* On October 10, 1994 the former Class C shares were exchanged into class A
shares; therefore the Class C share activity for the period from April 1, 1994
to October 9, 1994 is included with the Class A share activity. The year ended
March 31, 1994 includes only Class A share activity.
+ On November 7, 1994, the former Class B shares were renamed Class C shares.
</TABLE>
27
<PAGE>221
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares (a) 1995 1994 1993 1992 1991
=================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $6.55 $6.68 $6.45 $6.38 $6.28
- -------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.36 0.37 0.39 0.42 0.43
Net realized and unrealized gain (loss)
on investments -- (0.13) 0.23 0.07 0.07
- -------------------------------------------------------------------------------------------------
Total Income from Investment Operations 0.36 0.24 0.62 0.49 0.50
- -------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.37) (0.37) (0.39) (0.42) (0.40)
- -------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.37) (0.39) (0.42) (0.40)
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $6.54 $6.55 $6.68 $6.45 $6.38
- -------------------------------------------------------------------------------------------------
Total Return 5.69% 3.65% 9.82% 7.99% 8.23%
- -------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $244,818 $281,771 $242,491 $157,426 $64,660
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.61% 0.53% 0.55% 0.49% 0.33%
Net investment income 5.61 5.53 5.90 6.42 6.77
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21.80% 24.72% 24.53% 26.27% 14.92%
=================================================================================================
<FN>
(a) On October 10, 1994 the former Class C shares were exchanged into Class A
shares.
</TABLE>
28
<PAGE>222
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares (a) 1995 1994 1993(b)
============================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $6.54 $6.68 $6.62
- ----------------------------------------------------------------------------
Income from Investment Operations:
Net investment income 0.35 0.35 0.10
Net realized and unrealized gain (loss)
on investments -- (0.14) 0.05
- ----------------------------------------------------------------------------
Total Income from Investment Operations 0.35 0.21 0.15
- ----------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.35) (0.35) (0.09)
- ----------------------------------------------------------------------------
Total Distributions (0.35) (0.35) (0.09)
- ----------------------------------------------------------------------------
Net Asset Value, End of Year $6.54 $6.54 $6.68
- ----------------------------------------------------------------------------
Total Return 5.51% 3.15% 2.28%++
- ----------------------------------------------------------------------------
Net Assets, End of Year (000s) $26,622 $26,869 $5,738
- ----------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.89% 0.88% 0.88%+
Net investment income 5.34 5.10 5.35+
- ----------------------------------------------------------------------------
Portfolio Turnover Rate 21.80% 24.72% 24.53%
============================================================================
<FN>
(a) On November 7, 1994 the former Class B shares were renamed Class C shares.
(b) From January 5, 1993 (inception date) to March 31, 1993.
++ Not annualized, as the result may not be representative of the total
return for the year.
+ Annualized.
</TABLE>
29
<PAGE>223
Smith Barney Muni Funds
Limited Term Portfolio
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the
Limited Term Portfolio of Smith Barney Muni Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Limited Term Portfolio of Smith
Barney Muni Funds as of March 31, 1995, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the five-year period then ended. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit also includes examining
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities owned
as of March 31, 1995, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Limited Term Portfolio of Smith Barney Muni Funds as of March 31, 1995, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
May 8, 1995
30
<PAGE>224
SMITH BARNEY
- ------------
A Member of Travelers Group [LOGO APPEARS HERE]
Smith Barney
Muni Funds
Trustees
Jessica M. Bibliowicz
Ralph D. Creasman
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P.Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
C. Richard Youngdahl
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Peter M. Coffey
Vice President
Daniel Malone
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Muni Funds Limited Term Portfolio. It is not authorized for
distribution to prospective investors unless accompanied by a current Prospectus
for the Portfolio, which contains information concerning the Portfolio's
investment policies and expenses as well as other pertinent information.
Smith Barney Muni Funds
388 Greenwich Street
New York, New York 10013
FD2305 E5 82106
<PAGE>225
SEMI-ANNUAL REPORT
OF
SMITH BARNEY MUNI FUNDS -- LIMITED TERM PORTFOLIO
FOR THE SIX MONTH PERIOD ENDED SEPTEMBER 30, 1995
[TO BE FILED BY AMENDMENT]
<PAGE>226
ANNUAL REPORT
OF
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1994
<PAGE>227
[Small box above fund
name showing an
aerial shot of the
land and ocean
surrounding it.]
SMITH BARNEY
LIMITED
1994
ANNUAL MATURITY
REPORT
MUNICIPALS
FUND
..................................
NOVEMBER 30, 1994
[LOGO] SMITH BARNEY MUTUAL
FUNDS
INVESTING FOR YOUR
FUTURE.
EVERYDAY.
<PAGE>228
DEAR SHAREHOLDER:
Limited Maturity Municipals Fund
We are pleased to provide the annual report and portfolio of investments for
the fiscal year ended November 30, 1994 for Smith Barney Limited Maturity
Municipals Fund. Since we last reported to you six months ago, prices for
tax-exempt bonds continued to weaken as the Federal Reserve raised interest
rates. As a result, the net asset value per Class A share of the Fund declined
to $7.94 from $8.26; however, the Fund's tax-exempt distributions of $0.34 per
Class A share offset this decline, and resulted in a slightly positive total
return for this fiscal period of 0.23% for Class A shares. Further
information about the performance of your investment during this and previous
fiscal periods is available in this report.
ECONOMIC AND INTEREST RATE OVERVIEW
The Federal Reserve raised short-term interest rates six times in 1994
beginning in February, which is a remarkable number of increases in less than
one year. The Federal Reserve's goal was to curb any creeping inflation before
it actually appeared. However, the rise in short-term interest rates also
resulted in a rise in longer-term interest rates and consequently a decline in
the asset value of many longer-term investments. As a result, most fixed
income investments performed poorly in 1994, especially in comparison to the
strong performance they experienced in 1993.
1994 was also a politically intriguing year. First, higher Federal income tax
rates that were retroactive to 1993 took effect. Second, Congress became
embroiled in controversial legislation on health care which, had it been
successful, could have led to higher taxes. Third, the NAFTA and GATT trade
agreements were successfully passed. Fourth, and perhaps most significant, the
Republicans achieved an overwhelming victory in both the House and Senate by
promising lower taxes and spending, and much less government. The many
Republican victories at the state level -- not only in the state legislatures
but also the governorships -- are even more significant as these 30 states
will have much power over the electoral process in 1996.
For many investors this was the first glance into a new and more challenging
investment environment that tested their ability to maintain a long-term
investment focus. However, we now anticipate that interest rates will soon
stabilize as the results of the new Congress become more apparent and the
effects of the Federal Reserve's interest rate policy become more positive. We
expect that the recent GATT and NAFTA trade pacts will also demonstrate that
the U.S. is still a world leader in both economic policy and financial
markets.
1
<PAGE>229
PORTFOLIO SUMMARY
In response to the Federal Reserve's policy of higher short- term interest
rates and generally declining prices in the tax-exempt market, our investment
strategy has been to keep the Fund's average maturity at approximately 3
years, which enables the Fund to maximize its tax-exempt income yet minimize
its exposure to rising interest rates. At the end of this reporting period,
over half of the Fund's assets were invested in municipal bonds rated AAA/Aaa
and AA/Aa by Standard & Poor's Corporation or Moody's Investor Services, Inc.,
respectively. We believe these high-quality investments provide the portfolio
with greater protection against credit risk and are also more liquid. The
majority of the Fund's holdings were in general obligation, hospital,
education, and housing issues.
DIVIDEND POLICY
The Fund does not pay a level monthly dividend rate but instead distributes to
shareholders the accrued monthly income earned by the portfolio. We will
continue to strive to offer an attractive dividend distribution as we also
face uncertain interest rates and continued volatility.
We appreciate your confidence during the difficult investment environment of
1994, and join you in looking forward to a more benign 1995. Should you have
any questions about your investment in the Fund or how other Smith Barney
mutual funds may be useful in helping you reach your financial goals, please
speak with your Smith Barney Financial Consultant.
Sincerely,
/s/ Heath B. McLendon /s/ Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman of the Board Vice President and
and Investment Officer Investment Officer
January 12, 1995
2
<PAGE>230
Smith Barney
LIMITED MATURITY MUNICIPALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
Industry Breakdown
Pie chart depicting the allocation of the Income Trust Limited Maturity
Municipals Fund investment securities held at November 30, 1994 by industry
classification. The pie is broken in pieces representing industries in the
following percentages:
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
General Obligation 20.3%
Privately Placed Tax-Exempt Municipal
Lease Agreement and Net Other Assets
and Liabilities 2.1%
Education 14.3%
Housing 12.0%
Transportation 6.2%
Pollution Control 5.5%
Other Munmicipal Bonds and Notes 14.2%
Hospital 15.6%
Industry Development 2.6%
Utility 7.2%
</TABLE>
<TABLE>
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS
<CAPTION>
Standard & Percent
Moody's Poor's of Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
AAA OR AAA 34.9%
- ----------------------------------------------------------------------------
AA AA 16.8
- ----------------------------------------------------------------------------
A A 24.9
- ----------------------------------------------------------------------------
BAA BBB 22.0
- ----------------------------------------------------------------------------
NR NR 1.4
- ----------------------------------------------------------------------------
100.0%
----------------------
<FN>
AVERAGE MATURITY 3.0 years
</TABLE>
3
<PAGE>231
Smith Barney
LIMITED MATURITY MUNICIPALS FUND
<TABLE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE - CLASS A SHARES (UNAUDITED)
- --------------------------------------------------------------------------------
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
November 30 Beginning Ending Distributed Paid Return*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/91-
11/30/92 $7.90 $8.07 -- $0.36 6.88%
- --------------------------------------------------------------------------------------
1993 8.07 8.26 $0.00+ 0.36 6.98%
- --------------------------------------------------------------------------------------
1994 8.26 7.94 0.00+ 0.34 0.23%
- --------------------------------------------------------------------------------------
Total $0.00+ $1.06
- --------------------------------------------------------------------------------------
Cumulative Total Return -- (12/31/91 through 11/30/94) 14.59%
- --------------------------------------------------------------------------------------
<FN>
* Figures assume reinvestment of all dividends and capital gains distributions
at net asset value and do not reflect deduction of a
front-end sales charge (maximum 2.00%).
+ Amount represents less than $0.01 per share.
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
<TABLE>
- -------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** - CLASS A SHARES (UNAUDITED)
- -------------------------------------------------------------------------------------
<CAPTION>
Without Sales Charges With Sales Charges***
With fees Without fees With fees Without fees
waived waived waived waived
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 11/30/94 0.23% (0.09)% (1.78)% (1.92)%
- -------------------------------------------------------------------------------------
Inception (12/31/91) through
11/30/94 4.78% 4.37% 4.06% 3.65%
- -------------------------------------------------------------------------------------
<FN>
** All average annual total return figures shown reflect the reinvestment of dividends
and capital gains distributions at net asset value. The investment adviser and
administrator waived fees from December 31, 1991 to the present. A shareholder's
actual return for the period during which waivers were in effect would be the higher
of the two numbers shown.
*** Average annual total return figures shown assume the deduction of a maximum 2.00% sales charge.
NOTE: On November 7, 1994, existing shares of the Fund were designated Class A shares. Class A shares are sold subject to a
2.00% front-end sales charge; however, purchases of Class A shares, which when combined with current holdings of Class A shares
offered with a sales charge equal or exceed $500,000 in the aggregate, will be made at net asset value with no initial sales
charge but will be subject to 1.00% contingent deferred sales charge if redeemed within 12 months of purchase. Class A shares
of the Fund are subject to a service fee of 0.15% of the value of the
average daily net assets attributable to that class.
</TABLE>
4
<PAGE>232
GROWTH OF $10,000 INVESTED IN CLASS A SHARES OF
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
VS. LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX
AND LIPPER ANALYTICAL SERVICES, INC. PEER GROUP AVERAGE INDEX+
- --------------------------------------------------------------------------------
December 31, 1991 - November 30, 1994
<TABLE>
DESCRIPTION OF MOUNTAIN CHART IN SMITH BARNEY COVERS (CLASS A)
A line graph depicting the total growth (including reinvestment of dividends and capital gains) of a hypothetical investment of
$10,000 in Smith Barney Income Trust Limited Maturity Municipals Fund Class A shares on December 31, 1991 through November 30, 1994
as compared with the growth of a $10,000 investment in the Lehman Brothers 5 Year Municipal Bond Index and the Lipper Analytical
Services, Inc. Peer Group Average Index. The plot points used to draw the line graph were as follows:
<CAPTION>
GROWTH OF $10,000 GROWTH OF $10,000
INVESTMENT IN THE INVESTMENT IN THE
GROWTH OF $10,000 LEHMAN BROTHERS LIPPER ANALYTICAL
INVESTED IN CLASS A 5 YEAR MUNICIPAL SERVICES, INC. PEER
MONTH ENDED SHARES OF THE FUND BOND INDEX GROUP AVERAGE INDEX
<S> <C> <C> <C>
12/31/91 $9,800 $10,000 $10,000
12/91 $9,800 - -
3/92 $9,889 $10,006 $10,066
6/92 $10,139 $10,342 $10,301
9/92 $10,350 $10,611 $10,489
12/92 $10,547 $10,762 $10,636
3/93 $10,790 $11,045 $10,852
6/93 $11,004 $11,301 $11,022
9/93 $11,214 $11,560 $11,190
12/93 $11,310 $11,701 $11,306
3/94 $11,107 $11,372 $11,139
6/94 $11,196 $11,494 $11,222
9/94 $11,303 $11,605 $11,314
11/94 $11,230 $11,422 $11,234
<FN>
+ Illustration of $10,000 invested in Class A shares at inception on December 31, 1991 through November 30, 1994, assuming
deduction of a maximum 2.00% sales charge at the time of investment and reinvestment of dividends and capital gains at net asset
value.
</TABLE>
LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX is an unmanaged, broad-based
index which includes about 3,400 tax-free issues totaling approximately $39
billion in market capitalization. The average maturity of the securities in
the index is approximately 5.09 years.
LIPPER ANALYTICAL SERVICES, INC. PEER GROUP AVERAGE INDEX is composed of an
average of the Fund's peer group of mutual funds (47 as of November 30,
1994) investing in limited maturity municipal securities.
This period was one in which municipal bond prices fluctuated and the
results should not be considered as a representation of the dividend
income or capital gain or loss which may be realized from an investment in
the Fund today. No adjustment has been made for shareholder tax liability
on dividends or capital gains.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
5
<PAGE>233
Smith Barney
LIMITED MATURITY MUNICIPALS FUND
<TABLE>
- -------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE - CLASS C SHARES (UNAUDITED)
- -------------------------------------------------------------------------------------------
<CAPTION>
Net Asset Value Capital Gains Dividends Total
Beginning Ending Distributed Paid Return*
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Inception (11/17/94)
through 11/30/94 $7.92 $7.94 -- $0.00+ 0.31%
- -------------------------------------------------------------------------------------------
<FN>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not reflect deduction of any
contingent deferred sales charge.
+ Amount represents less than $0.01 per share.
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN** - CLASS C SHARES (UNAUDITED)
- --------------------------------------------------------------------------------
<CAPTION>
With fees Without fees
waived waived
- --------------------------------------------------------------------------------
<S> <C> <C>
Inception (11/17/94) through 11/30/94 0.31% 0.31%
- --------------------------------------------------------------------------------
<FN>
** All cumulative total return figures shown reflect the reinvestment of
dividends and capital gains distributions at net asset value. The
investment adviser and administrator waived fees from November 17, 1994 to
the present. A shareholder's actual return for the period during which
waivers were in effect would be the higher of the two numbers shown.
NOTE: On November 7, 1994, the Fund began offering Class C and Class Y
shares. Class C shares may be subject to a 1.00% contingent deferred sales
charge if redeemed within 12 months of purchase and are subject to annual
service and distribution fees of 0.15% and 0.20%, respectively, of the
value of the average daily net assets attributable to that class. As of
November 30, 1994, no Class Y shares had been sold.
</TABLE>
6
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- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
KEY TO INSURANCE ABBREVIATIONS
- --------------------------------------------------------------------------------
AMBAC -- American Municipal Bond Assurance Corporation
CGIC -- Capital Guaranty Insurance Corporation
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- -----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES - 97.9%
ALABAMA - 1.0%
Alabama Housing Finance Authority, Single Mortgage,
$ 245,000 5.250% due 4/1/98 Aaa NR $ 238,875
255,000 5.250% due 10/1/98 Aaa NR 247,669
260,000 5.400% due 4/1/99 Aaa NR
251,875
ARIZONA - 1.1%
810,000 Yuma & La Paz County, Arizona, Community College
District, (Arizona Western College), (AMBAC
Insured),
6.200% due 7/1/98 Aaa AAA 830,250
CALIFORNIA - 1.3%
1,000,000 Central Valley, California, Financing Authority,
Cogeneration Project Revenue, (Carson Inc.),
5.000% due 7/1/98 NR BBB- 963,750
COLORADO - 2.0%
610,000 Arapahoe County, Colorado, Certificates of
Participation, (AMBAC Insured),
5.400% due 12/1/96 Aaa AAA 615,338
390,000 Colorado Housing Finance Authority, Single Family
Project, Series A3
5.750% due 5/1/97 NR AA 387,562
500,000 Meridian, Colorado, Metropolitan District, General
Obligation, Refunding Bonds,
7.000% due 12/1/97 A3 NR 522,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>235
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- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- -------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
CONNECTICUT - 0.8%
$ 625,000 New Haven, Connecticut, General Obligation, Series B,
5.700% due 12/1/97 Baa BBB- $ 622,656
DISTRICT OF COLUMBIA - 3.3%
995,000 District of Columbia, Certificates of Participation,
6.000% due 1/1/97 NR BBB 987,538
250,000 District of Columbia, General Obligation,
Series A, 5.000% due 6/1/98 Baa A- 240,625
1,295,000 District of Columbia, Metropolitan Area
Transportation, (FGIC Insured),
6.000% due 7/1/98 Aaa AAA 1,320,900
FLORIDA - 3.2%
850,000 Broward County, Florida, Educational Facilities
Authority Revenue,
5.150% due 4/1/99 NR AAA 822,375
1,125,000 Dade County, Florida, Health Facilities
Authority Hospital Revenue, Series A,
(Baptist Hospital, Miami),
5.750% due 5/1/16 NR A+ 1,134,844
500,000 Florida Housing Finance Agency, Adjustable
Multifamily Mortgage, Series QQ, (FSA red),
5.500% due 11/1/07 Aaa AAA 495,625
GEORGIA - 1.8%
1,250,000 Municipal Electric Authority of Georgia,
Special Obligation Refunding, Second Crossover
Series, 8.125% due 1/1/17 A A+ 1,350,000
GUAM - 2.3%
1,800,000 Government of Guam, General Obligation Bonds,
Series A,
5.750% due 8/15/99 NR BBB 1,782,000
IDAHO - 0.3%
220,000 Idaho Housing Agency, Single Family Mortgage,
Refunding Bonds,
5.500% due 1/1/97 Aa NR 218,350
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>236
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- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
ILLINOIS - 8.4%
$ 250,000 Hoffman Estates, Illinois, Tax Increment
Revenue, Junior Lien, (Hoffman Estates
Development Project),
6.500% due 5/15/01 Baa1 BBB+ $ 247,500
1,000,000 Illinois Development Financing Authority,
Adjustable Demand Revenue Bonds, (Catholic
Charities Housing),
Series A,
5.000% due 1/1/28 Aa2 NR 985,000
500,000 Illinois Educational Facilities Authority,
Adjustable Demand Revenue Bonds, (Museum of
Science and Industry),
5.625% due 10/1/26 Aa3 NR 496,875
Illinois Health Facilities Authority, Revenue
Bonds:
1,040,000 (Children's Memorial Hospital),(MBIA Insured),
6.000% due 8/15/98 Aaa AAA 1,055,600
1,045,000 (Delnor Community Hospital),(FSA Insured),
4.500% due 5/15/98 Aaa AAA 1,004,506
1,650,000 Joliet, Illinois, Corporate Purpose, (MBIA
Insured),
5.400% due 1/1/98 Aaa AAA 1,643,812
1,000,000 St. Clair County, Illinois, General Obligation,
(FGIC Insured),
4.600% due 10/1/98 Aaa AAA 968,750
INDIANA - 2.1%
Indiana Bond Bank, Special Project:
415,000 Series F,
5.800% due 8/1/97 NR A 421,744
500,000 Guaranteed Revolving,
4.900% due 2/1/99 NR A 483,125
750,000 Warrick County, Indiana, Environmental
Improvement, (Southern Indiana Gas & Electric
Project), Series A,
4.650% due 5/1/28 Aa2 AA 721,875
IOWA - 3.2%
500,000 Iowa State, Certificates of Participation,
Series A, (AMBAC Insured),
5.400% due 7/1/96 Aaa AAA 504,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>237
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- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
IOWA (CONTINUED)
$ 435,000 Iowa State, Housing Finance Authority, Single
Family Mortgage, Series F, (AMBAC Insured),
5.150% due 1/1/98 Aaa AAA $ 432,281
350,000 Iowa Student Loan Liquidity Corporation,
Student Loan Revenue, Series A,
6.000% due 3/1/98 Aa1 NR 350,875
1,190,000 Sioux City, Iowa, Hospital Revenue Refunding,
(Sisters of Mercy Health), Series D, (MBIA Insured),
5.000% due 8/15/98 Aaa AAA 1,163,225
KENTUCKY - 1.3%
990,000 University of Louisville, Kentucky, Series J,
4.875% due 5/1/98 A1 AA- 975,150
LOUISIANA - 1.7%
305,000 Louisiana Public Facilities Revenue, Student
Loan, Louisiana Opportunity Loan, Series A,
(FSA Insured),
5.700% due 1/1/97 Aaa AAA 307,669
500,000 Louisiana State, General Obligation Refunding
Bond, Series A, (CGIC Insured),
6.600% due 8/1/97 Aaa AAA 520,000
500,000 New Orleans, Louisiana, Exhibit Hall Authority,
Hotel Occupancy Tax Revenue, (AMBAC Insured),
5.250% due 1/15/97 Aaa AAA 501,250
MAINE - 0.3%
250,000 Maine Health & Higher Educational Facilities,
Special Obligation Revenue, Medium Term
Facilities, (FSA Insured),
5.500% due 7/1/97 Aaa AAA 250,625
MARYLAND - 0.4%
320,000 Montgomery County, Maryland, Housing Authority,
Multifamily Revenue, Series 85A, (Hunt Club),
6.000% due 2/1/97++++ Aa AA+ 318,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>238
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LIMITED MATURITY MUNICIPALS FUND
- -------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- --------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
MASSACHUSETTS - 8.4%
$ 750,000 Lowell, Massachusetts, General Obligation,
5.500% due 8/15/97 Baa1 NR $ 751,875
Massachusetts Municipal Electric Wholesale Company,
Power Supply System Revenue:
Series C:
285,000 5.800% due 7/1/96 A BBB+ 287,850
205,000 6.000% due 7/1/97 A BBB+ 208,075
Series E:
100,000 5.100% due 7/1/97 A BBB+ 99,125
445,000 Massachusetts State Health and Educational
Facilities Authority, Medical Center of
Central Massachusetts,
Series A,
6.000% due 7/1/97 A A 451,119
1,000,000 Massachusetts State Housing Authority,
5.350% due 1/1/99 Aaa AAA 975,000
Massachusetts Water Resources Authority,
500,000 Series A,
5.600% due 7/15/96 A A 502,500
New England Educational Loan Marketing
Corporation, Student Loan:
1,000,000 Series B,
5.000 due 6/1/98 A1 A- 967,500
1,000,000 Series C,
4.750% due 7/1/98 A1 A- 962,500
500,000 Plymouth County, Massachusetts, Certificates of
Participation, Series A,
5.700% due 10/1/96 NR BBB- 498,750
720,000 Springfield, Massachusetts, School Project,
Series B,
5.300% due 9/1/97 Baa NR 719,100
MICHIGAN - 1.3%
750,000 Detroit, Michigan, District State Aid,
5.625% due 5/1/97 Baa BBB+ 751,875
250,000 Michigan Higher Education Student Loan,
Education Revenue, Series XIV-A,
5.400% due 10/1/96 A NR 249,062
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>239
Smith Barney
LIMITED MATURITY MUNICIPALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- -------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
NEVADA - 2.8%
$ 1,000,000 Clark County, Nevada, Airport Systems Revenue,
(MBIA Insured),
7.500% due 7/1/97 Aaa AAA $1,057,500
1,000,000 Clark County, Nevada, General Obligation, (FGIC
Insured),
7.500% due 7/1/04 Aaa AAA 1,080,000
NEW HAMPSHIRE - 0.4%
275,000 New Hampshire Higher Education & Health
Authority Revenue, (Elliot Hospital of Manchester),
(AMBAC Insured),
5.700% due 10/1/97 Aaa AAA 277,750
NEW JERSEY - 3.3%
500,000 Atlantic County, New Jersey, Utilities
Authority, Solid Waste Revenue,
6.250% due 3/1/97 Baa NR 501,875
435,000 Camden County, New Jersey, Pollution Control
Finance Authority, Solid Waste Resource
Recovery Revenue, Series D,
6.350% due 12/1/97 Baa1 BBB+ 437,175
1,075,00 Hudson County, New Jersey, Improvement
Authority,
5.750% due 1/1/98 NR BBB- 1,044,094
500,000 New Jersey Health Care Facilities Center,
(Atlantic City Medical Center), Series C,
5.600% due 7/1/96 A A- 501,250
NEW MEXICO - 0.5%
410,000 New Mexico Mortgage Finance Authority, Single
Family, Series A1,
5.500% due 1/1/97 Aa AA 406,412
NEW YORK - 13.1%
1,450,000 Babylon, New York, Industrial Development
Authority, Babylon Community Waste Management,
Series A,
7.650% due 7/1/97 Baa1 NR 1,527,937
600,000 Metropolitan Transit Authority, New York,
Service Contract Transit Fees, Series 5,
6.100% due 7/1/98 Baa1 BBB 605,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>240
Smith Barney
LIMITED MATURITY MUNICIPALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- ---------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
NEW YORK (CONTINUED)
Metropolitan Transit Authority, New York,
General Obligation:
$ 500,000 6.600% due 1/1/99 Aaa AAA $ 517,500
750,000 Series C,
5.400% due 8/1/97 Baa1 A- 753,750
2,000,000 Series H,
5.100% due 8/1/98 Baa1 A- 1,982,500
1,000,000 Series I,
6.000% due 8/1/96 Baa1 A- 1,011,250
850,000 New York State, Certificates of Participation,
5.150% due 2/1/98 Baa1 BBB 822,375
640,000 New York State, Medical Care Facilities Agency,
Mental Health Service Facilities Improvement,
Series D,
6.300% due 8/15/97 Baa1 BBB+ 653,600
1,250,000 New York State, Transportation Highway
Authority, Service Contract, Highway and Bridge
Revenue,
5.200% due 4/1/97 Baa1 BBB 1,237,500
North County, New York, Solid Waste Disposal,
Series A:
455,000 5.400% due 7/1/95 Baa NR 454,431
400,000 6.000% due 7/1/97 Baa1 NR 399,500
NORTH CAROLINA - 0.8%
615,000 Charlotte, North Carolina, Certificates of
Participation, Municipal Facilities Purchase
Project, Series A,
4.900% due 1/1/98 NR AA 603,469
OHIO - 1.3%
1,000,000 Ohio State, Public Facilities Commission,
Series II-A, (FSA Insured),
5.300% due 12/1/97 Aaa AAA 1,003,750
OKLAHOMA - 1.6%
Cleveland County, Oklahoma, Home Loan
Authority, Single Family Mortgage Revenue:
175,000 6.000% due 8/1/96 A NR 174,344
150,000 6.100% due 2/1/97 A NR 149,250
190,000 6.100% due 8/1/97 A NR 188,813
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>241
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LIMITED MATURITY MUNICIPALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
OKLAHOMA (CONTINUED)
$ 750,000 Grand River Dam Authority,
4.700 % due 6/1/97 A A- $ 742,500
OREGON - 0.6%
500,000 Clackamas County, Oregon, Hospital Facilities
Authority Revenue, (Sisters of Providence),
Series A,
5.300% due 10/1/96 A1 AA- 500,000
PENNSYLVANIA - 6.7%
125,000 Falls Township, Pennsylvania Hospital Authority
Revenue, (Delaware Valley Medical), (FHA
Insured),
6.000% due 8/1/01 NR AAA 116,719
500,000 Lehigh County, Pennsylvania, Industrial and
Community Development Authority,
(Strawbridge Project),
7.200% due 12/15/01 NR BBB 500,000
500,000 Pennsylvania State Higher Education,
(Thomas Jefferson University), Series A,
5.500% due 8/15/97 Aa A+ 503,125
1,170,000 Pennsylvania State Industrial Development
Authority Revenue, (AMBAC Insured),
6.000% due 1/1/99 Aaa AAA 1,184,625
Philadelphia, Pennsylvania, Hospitals and
Higher Education Facilities Authority:
(Albert Einstein Medical Center):
365,000 6.300% due 10/1/96 A BBB+ 365,912
390,000 6.500% due 10/1/97 A BBB+ 388,538
1,000,000 (Graduate Health Systems),
6.500% due 7/1/97 Baa1 BBB+ 1,001,250
275,000 Philadelphia, Pennsylvania, Water & Sewer
Revenue, 12th Series,
7.300% due 7/1/96 NR AAA 284,969
750,000 Westmoreland County, Pennsylvania,
Industrial Development Authority, (Valley
Landfill Project),
4.375% due 5/1/18++++ Aa1 AA 737,813
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>242
Smith Barney
LIMITED MATURITY MUNICIPALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- ---------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
PUERTO RICO - 0.5%
$ 420,000 Puerto Rico Medical Hospital, Series A,
(St. Lukes Hospital),
5.400% due 6/1/97 NR A- $ 412,650
RHODE ISLAND - 0.7%
500,000 Rhode Island State, Student Loan Authority,
Series A,
5.700% due 12/1/96 A NR 500,625
SOUTH CAROLINA - 0.7%
500,000 South Carolina State, Public Service Authority,
Revenue, (Santee-Cooper Project), Series D,
5.500% due 7/1/98 A1 A+ 500,625
TEXAS - 9.4%
500,000 Arlington, Texas, Waterworks & Sewer Revenue,
Refunding and Improvement, (FGIC Insured),
5.400% due 6/1/97 Aaa AAA 503,750
2,000,000 Bell County, Texas, Health Facilities
Development
Corporation, Central Texas Pooled Health,
Series A,
4.750% due 10/1/23 NR AA 1,907,500
1,000,000 Brazos, Texas, Higher Education Authority,
Series A-1,
5.300% due 12/1/97 Aa NR 987,500
300,000 Dallas-Forth Worth, Texas, Regional Airport
Revenue, Series A, (FGIC Insured),
5.875% due 11/1/07 Aaa AAA 296,250
1,000,000 Harris, Texas, Port Houston Authority, (MBIA
Insured),
5.700% due 5/1/99 Aaa AAA 1,001,250
1,000,000 North Texas, Higher Education Authority,
Student Loan Revenue, Series B,
4.850% due 4/1/98 Aaa NR 967,500
1,000,000 Tarrant County, Texas, Housing Finance
Corporation, Multifamily Housing, (Bedford
Springs),
4.500% due 9/1/06 NR AA- 1,000,000
500,000 Texas State, Veterans Housing Assistance,
(FHA Insured),
6.050% due 12/1/12 Aa AA 488,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>243
Smith Barney
LIMITED MATURITY MUNICIPALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES (CONTINUED)
VIRGIN ISLANDS - 0.8%
$ 635,000 Virgin Islands Public Financing Authority,
Matching
Revenue Funding, Series A,
6.250% due 10/1/96 NR NR $ 638,969
VIRGINIA - 1.3%
500,000 Fairfax County, Virginia, Redevelopment &
Housing Authority, Multifamily Housing Revenue
Refunding, Mortgage Loan, Kingsley, Series A,
(FHA Insured),
6.500% due 11/1/01 NR AAA 495,000
500,000 Virginia Educational Loan Authority, Guaranteed
Revenue, Series C,
4.850% due 3/1/98 Aaa NR 485,625
WASHINGTON - 2.7%
485,000 Washington State Housing Finance, Single Family
Mortgage Revenue, (GNMA and FNMA Securities
Program), Series D,
5.800% due 7/1/97 NR AAA 480,150
1,500,000 Washington State Public Power Supply, Series B,
(Nuclear Project No. 3),
7.000% due 7/1/97 Aa AA 1,554,375
WISCONSIN - 4.7%
Wisconsin Housing Economic and Development
Authority:
1,045,000 4.500% due 11/1/98 A1 A 983,606
250,000 Series A,
5.400% due 11/1/97 A1 A 246,875
2,360,000 Wisconsin, State, Health & Educational
Facilities
Authority, (Aurora Health Care),(MBIA Insured),
5.500% due 8/15/98 Aaa AAA 2,351,150
WYOMING - 1.8%
1,500,000 Platte County, Wyoming, Pollution Control
Revenue,
4.200% due 1/1/99 A2 A 1,396,875
- --------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $76,320,398) 74,724,426
- --------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>244
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LIMITED MATURITY MUNICIPALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (continued) NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS
(UNAUDITED) MARKET VALUE
FACE VALUE
MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
PRIVATELY PLACED TAX-EXEMPT
MUNICIPAL LEASE AGREEMENT -- 0.5% (COST $421,286)
TENNESSEE -- 0.5%
$ 416,907 The Health and Educational Facilities Board of
the Metropolitan Government of Nashville and
Davidson County, Tennessee, on behalf of Cocke
County, Baptist Hospital 7.250% due 9/1/96+++ NR NR $ 413,780
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $76,741,684*) 98.4% 75,138,206
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 1.6 1,204,744
- --------------------------------------------------------------------------------------------
NET ASSETS 100.0% $76,342,950
- --------------------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+++ Backed by an irrevocable bank letter of credit in the
amount of $416,907.
++++ "Put" bonds and notes with demand features with
maturities greater than one year.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>245
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<TABLE>
- ---------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (Cost $76,741,684) (Note 1)
See accompanying schedule $75,138,206
Interest receivable 1,368,066
Receivable for investment securities sold 1,218,145
Receivable for Fund shares sold 170,047
Unamortized organization costs (Note 7) 25,088
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS 77,919,552
- ---------------------------------------------------------------------------------------------
LIABILITIES:
Due to custodian $1,117,693
Dividends payable 187,253
Payable for Fund shares redeemed 126,366
Investment advisory fee payable (Note 2) 47,985
Administration fee payable (Note 2) 27,420
Service fee payable (Note 3) 9,734
Custodian fees payable (Note 2) 6,000
Transfer agent fees payable (Note 2) 3,500
Accrued expenses and other payables 50,651
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,576,602
- ---------------------------------------------------------------------------------------------
NET ASSETS $76,342,950
=============================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>246
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Limited Maturity Municipals Fund
<TABLE>
- -------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (continued) NOVEMBER 30, 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS CONSIST OF:
Undistributed net investment income $ 8,275
Accumulated net realized loss on investments sold (661,793)
Net unrealized depreciation of investments (1,603,478)
Par value 9,618
Paid-in capital in excess of par value 78,590,328
- -------------------------------------------------------------------------------------------
TOTAL NET ASSETS $76,342,950
- -------------------------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES
NET ASSET VALUE per share+
($76,236,934 / 9 ,605,017 shares of
beneficial interest outstanding) $7.94
- -------------------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE per share ($7.94 / 0 .98)
(based on sales charge of 2.00% of the offering price on
November 30, 1994) $8.10
- -------------------------------------------------------------------------------------------
CLASS C SHARES
NET ASSET VALUE and offering price per share+
($106,016 / 13,354 shares of beneficial interest
outstanding) $7.94
- -------------------------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value
less any applicable contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>247
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<TABLE>
- -------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest $4,631,334
EXPENSES:
Investment advisory fee (Note 2) $ 327,452
Administration fee (Note 2) 187,115
Service fee (Note 3) 140,336
Transfer agent fees (Notes 2 and 4) 39,658
Custodian fees (Note 2) 33,711
Legal and audit fees 29,427
Amortization of organization costs (Note 7) 12,042
Trustees' fees and expenses (Note 2) 5,520
Other 102,501
Fees waived by investment adviser and
administrator (Note 2) (129,091)
- -------------------------------------------------------------------------------------------
TOTAL EXPENSES 748,671
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,882,663
===========================================================================================
REALIZED AND UNREALIZED GAINS/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized loss on investments during the year (616,478)
Net unrealized depreciation of investments
during the year (3,140,215)
===========================================================================================
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (3,756,693)
===========================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 125,970
===========================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>248
Smith Barney
Limited Maturity Municipals Fund
<TABLE>
- --------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------
<CAPTION>
YEAR YEAR
ENDED ENDED
11/30/94 11/30/93
<S> <C> <C>
Net investment income $ 3,882,663 $ 2,761,200
Net realized loss on investments sold during the year (616,478) (36,551)
Net unrealized appreciation/(depreciation) of investments
during the year (3,140,215) 1,092,054
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 125,970 3,816,703
Distributions to shareholders from net investment income:
Class A (3,882,660) (2,752,925)
Class C (3) --
Distribution to shareholders from net realized gain on
investments:
Class A (8,764) (20,318)
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A (16,418,251) 58,998,036
Class C 106,015 --
- --------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (20,077,693) 60,041,496
NET ASSETS:
Beginning of year 96,420,643 36,379,147
- --------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $8,275 and $8,275, respectively) $76,342,950 $96,420,643
============================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>249
Smith Barney
Limited Maturity Municipals Fund
<TABLE>
- ------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
11/30/94* 11/30/93 11/30/92*
<S> <C> <C> <C>
Net asset value, beginning of year $ 8.26 $ 8.07 $ 7.90
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+ 0.34 0.36 0.36
Net realized and unrealized gain/(loss) on
investments (0.32) 0.19 0.17
- ------------------------------------------------------------------------------------------------
Total from investment operations 0.02 0.55 0.53
- ------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.34) (0.36) (0.36)
Distributions from net realized capital gains (0.00)** (0.00)** --
- ------------------------------------------------------------------------------------------------
Total distributions (0.34) (0.36) (0.36)
- ------------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.94 $ 8.26 $ 8.07
- ------------------------------------------------------------------------------------------------
Total return++ 0.23% 6.98% 6.88%
- ------------------------------------------------------------------------------------------------
Ratios/Supplemental data:
Net assets, end of year (in 000's) $ 76,237 $ 96,421 $36,379
Ratio of operating expenses to average net
assets+++ 0.80% 0.75% 0.65%***
Ratio of net investment income to average net
assets 4.15% 4.24% 4.74%***
Portfolio turnover rate 28% 4% 22%
- ------------------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on December 31, 1991. Those
shares in existence prior to
November 7, 1994 were designated Class A shares.
** Amount represents less than $0.01 per share.
***Annualized.
+ Net investment income per share before waiver of fees by
investment adviser and administrator for
the years ended November 30, 1994 and 1993 and waiver of
fees by investment adviser, sub-investment
adviser and administrator, and/or custodian and
distributor for the period ended November 30, 1992
were $0.33, $0.33 and $0.31, respectively.
++ Total return represents aggregate total return for the
period indicated and does not reflect any
applicable sales charges.
+++Annualized operating expense ratios before waiver of fees
by investment adviser and administrator
for the years ended November 30, 1994 and 1993 and waiver
of fees by investment adviser, sub-investment
adviser and administrator, and/or custodian and
distributor for the period ended November 30, 1992 were
0.94%, 1.07% and 1.28%, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>250
Smith Barney
Limited Maturity Municipals Fund
<TABLE>
- -------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<CAPTION>
PERIOD
ENDED
11/30/94*
<S> <C>
Net asset value, beginning of period $7.92
- -------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+ 0.00**
Net realized and unrealized gain on investments 0.02#
- -------------------------------------------------------------------------------------------
Total from investment operations 0.02
Less distributions:
Distributions from net investment income 0.00**
- -------------------------------------------------------------------------------------------
Total distributions 0.00
- -------------------------------------------------------------------------------------------
Net asset value, end of period $7.94
- -------------------------------------------------------------------------------------------
Total return++ 0.31%
- -------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 106
Ratio of operating expenses to average net assets+++ 1.00%***
Ratio of net investment income to average net assets 3.94%***
Portfolio turnover rate 28%
- -------------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares on November
17, 1994.
** Amount represents less than $0.01 per share.
*** Annualized.
+ Net investment income per share before waiver of fees
by investment adviser and
administrator for the period ended November 30, 1994
was less than $0.01.
++ Total return represents aggregate total return for the
period indicated and does not
reflect any applicable sales charges.
+++ Annualized operating expense ratio before waiver of
fees by investment adviser and
administrator for the period ended November 30, 1994
was 1.14%.
# The amount in this caption for each share outstanding
throughout the period may not
accord with the change in aggregate gains and losses in
portfolio securities for the
period because of the timing of purchases and
withdrawals of shares in relation to the
fluctuating market values of the portfolio.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>251
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Trust (the "Trust") was organized as a "Massachusetts
business trust" under the laws of the Commonwealth of Massachusetts on October
17, 1991. The Trust is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management investment company. The Trust consists of the following
four funds: Smith Barney Limited Maturity Treasury Fund, Smith Barney Limited
Maturity Municipals Fund (the "Fund"), Smith Barney Intermediate Maturity
California Municipals Fund and Smith Barney Intermediate Maturity New York
Municipals Fund. At the time of this report, the Fund offered three classes of
shares: Class A shares, Class C shares and Class Y shares. Class A shares are
sold with a front-end sales charge. Class C shares may be subject to a
contingent deferred sales charge ("CDSC") if redeemed within 12 months of
purchase. Class Y shares are available to investors making an initial
investment of at least $5 million and are not subject to any sales charges,
distribution or service fees. As of November 7, 1994, the Fund began offering
Class C and Class Y shares, however, as of November 30, 1994, only Class C
shares had been sold. All shares of the Fund existing prior to November 7,
1994, were designated Class A shares. Each class of shares has identical
rights and privileges except with respect to the effect of the respective
sales charges, the distribution and/or service fees borne by each class,
expenses allocable exclusively to each class, voting rights on matters
affecting a single class and the exchange privilege of each class. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
Portfolio valuation: Securities are valued by The Boston Company Advisors,
Inc. ("Boston Advisors") after consultation with an independent pricing
service (the "Service") approved by the Board of Trustees. When, in the
judgment of the Service, quoted bid prices for securities are readily
available and are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid prices and asked
prices. Securities for which, in the judgment of the Service, there are no
readily obtainable market quotations (which may constitute a majority of the
portfolio securities) are carried at fair value as determined by the Service,
based on methods which include consideration of: yields or prices of municipal
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Securities, not valued by
the Service, for which market quotations are not readily available are valued
at fair
24
<PAGE>252
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
value as determined in good faith by or under the direction of the Board of
Trustees. Short-term investments that mature in 60 days or less are valued at
amortized cost.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Securities purchased or sold on a when-issued
or delayed-delivery basis may be settled one month or more after the trade
date. Interest income is recorded on the accrual basis. Realized gains and
losses from securities sold are recorded on the identified cost basis.
Investment income and realized and unrealized gains and losses are allocated
based upon the relative net assets of each class.
Dividends and distributions to shareholders: Dividends from net investment
income are determined on class level and are declared daily and paid generally
on the 10th day of the calendar month. Distributions determined on a Fund
level, if any, of any net short- and long-term capital gains earned by the
Fund will be declared and paid annually after the close of the fiscal year in
which they are earned. Additional distributions of net investment income and
capital gains for the Fund may be made at the discretion of the Board of
Trustees in order to avoid the application of a 4.00% nondeductible excise tax
on certain undistributed amounts of net investment income and capital gains.
To the extent net realized capital gains can be offset by capital losses and
loss carryforwards, it is the policy of the Fund not to distribute such gains.
Income distributions and capital gain distributions on a Fund level are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments of income and gains on various investment securities
held by the Fund, timing differences and differing characterization of
distributions made by the Fund as a whole.
Federal income taxes: The Trust intends that the Fund separately qualify
as a regulated investment company, if such qualification is in the best
interest of its shareholders, which distributes exempt-interest dividends, by
complying with the requirements of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies and by distributing
substantially all of its earnings to its shareholders. Therefore, no Federal
income tax provision is required.
25
<PAGE>253
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT
AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with a division of Mutual Management Corp., which was transferred
effective November 7, 1994 to Smith Barney Mutual Funds Management Inc.
("SBMFM"). Mutual Management Corp. and SMBFM are both wholly owned
subsidiaries of Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned subsidiary of The Travelers Inc. Under the Advisory Agreement, the Fund
pays a monthly fee at the annual rate of 0.35% of the value of its average
daily net assets.
Prior to April 20, 1994, the Fund was party to an administration agreement
(the "Administration Agreement") with Boston Advisors, an indirect wholly
owned subsidiary of Mellon Bank Corporation ("Mellon"). Under the
Administration Agreement, the Fund paid a monthly fee at the annual rate of
0.20% of the value of its average daily net assets.
As of the close of business on April 20, 1994, SBMFM (formerly known as
"Smith, Barney Advisers, Inc.") succeeded Boston Advisors as the Fund's
administrator. The new administration agreement contains substantially the
same terms and conditions, including the level of fees, as the predecessor
agreement.
into a sub-administration agreement (the "Sub-Administration Agreement") with
Boston Advisors. Under the Sub-Administration Agreement, SBMFM pays Boston
Advisors a portion of its administration fee at a rate agreed upon from time
to time between SBMFM and Boston Advisors.
From time to time the investment adviser and administrator may voluntarily
waive a portion or all of its investment advisory and/or administrative fees
otherwise payable to it. For the year ended November 30, 1994, the
investment adviser and administrator voluntarily waived fees of $82,149 and
$46,942, respectively.
For the year ended November 30, 1994, Smith Barney Inc. ("Smith Barney")
received $154,588 from investors representing commissions (sales charges) on
sales of Class A shares.
A CDSC is generally payable by Class C shareholders and may be payable by
certain Class A shareholders in connection with the redemption of shares
within one year
26
<PAGE>254
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
after the date of purchase. For the year ended November 30, 1994, $81,916 in
CDSC were paid to Smith Barney by Class A shareholders.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as a Trustee or officer
of the Trust. The Trust pays each Trustee who is not an officer, director or
employee of Smith Barney or any of its affiliates $4,000 per annum plus $500
per meeting attended and reimburses each such Trustee for travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Trust's custodian. The Shareholder Services Group, Inc.,
a subsidiary of First Data Corporation, serves as the Trust's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares pursuant to a
distribution agreement with the Trust and sells shares of the Fund through
Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a services
and distribution plan (the "Plan"). Under this Plan, the Fund compensates
Smith Barney for servicing shareholder accounts for Class A and Class C
shareholders, and covers expenses incurred in distributing Class C shares.
Smith Barney is paid an annual service fee with respect to Class A and Class C
shares of the Fund at the annual rate of 0.15% of the value of the average
daily net assets of each respective class of shares. Smith Barney is also paid
an annual distribution fee with respect to Class C shares at the annual rate
of 0.20% of the value of the average daily net assets of that class. For the
year ended November 30, 1994, the Fund incurred $140,336 in service fees for
Class A. For the period ended November 30, 1994, the Fund incurred no service
or distribution fees for Class C shares.
Under its terms, the Plan shall remain in effect from year to year, provided
that such continuance is approved annually by vote of the Trust's Trustees,
including a majority of those Trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation
of the Plan.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class
of shares are prorated among the classes based upon the relative net assets of
each class.
27
<PAGE>255
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Operating expenses directly attributable to a class of shares are charged to
that class' operations. In addition to the above service and distribution
fees, class specific operating expenses for the year ended November 30, 1994
included transfer agent fees of $39,658 for Class A shares. For the period
ended November 30, 1994, there were no transfer fees attributable to Class C
shares.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, for the year ended November 30, 1994 were $25,355,625 and
37,631,278, respectively.
At November 30, 1994, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $107,065,
and aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $1,710,543.
<TABLE>
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest which
are divided into three classes (Class A, Class C, and Class Y) with a $.001
par value. Changes in shares of beneficial interest in the Fund were as
follows:
<CAPTION>
YEAR ENDED YEAR ENDED
11/30/94* 11/30/93
Class A Shares Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 3,175,899 $ 26,079,012 8,687,874 $71,494,853
Issued as reinvestment of dividends 353,609 2,875,739 249,827 2,058,125
Redeemed (5,604,134) (45,373,002) (1,768,690) (14,554,942)
- -----------------------------------------------------------------------------------------------
Net increase/(decrease) (2,074,626) $(16,418,251) 7,169,011 $58,998,036
- -----------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>256
Smith Barney
Limited Maturity Municipals Fund
<TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
<CAPTION>
PERIOD ENDED
11/30/94*
Class C Shares Shares Amount
- --------------------------------------------------------------
<S> <C> <C>
Sold 13,354 $106,015
- --------------------------------------------------------------
Net increase 13,354 $106,015
- --------------------------------------------------------------
<FN>
* The Fund began offering Class C and Class Y shares on November 7, 1994.
Those shares in existence prior to November 7, 1994 were designated Class A
shares. As of November 30, 1994, no Class Y shares had been sold.
</TABLE>
7. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations. All such costs are being
amortized on the straight-line method over a period of five years from
commencement of operations of the Fund. In the event that any of the initial
shares of the Fund are redeemed during such amortization period, the Fund will
be reimbursed for any unamortized organization costs in the same proportion as
the number of shares redeemed bears to the number of initial shares held at
the time of redemption.
8. CAPITAL LOSS CARRYFORWARD
As of November 30, 1994, the Fund had available for Federal tax purposes
unused capital loss carryforward of $483,118 expiring in the year 2002.
29
<PAGE>257
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF SMITH BARNEY
INCOME TRUST:
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of Smith Barney Limited
Maturity Municipals Fund, of Smith Barney Income Trust (formerly Smith Barney
Shearson Income Trust), as of November 30, 1994 and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the two years in the period then ended and for the period from
December 31, 1991 (commencement of operations) to November 30, 1992. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of November 30, 1994 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Smith Barney Limited Maturity Municipals Fund, of Smith Barney Income Trust,
as of November 30, 1994, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the two years in the
period then ended and for the period from December 31, 1991 (commencement of
operations) to November 30, 1992, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 18, 1995
30
<PAGE>258
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED) FISCAL YEAR ENDED NOVEMBER 30, 1994
- --------------------------------------------------------------------------------
Of the dividends paid by the Fund from investment income for the year
ended November 30, 1994, 100% are tax-exempt for regular Federal income tax
purposes.
31
<PAGE>259
Smith Barney
Limited Maturity Municipals Fund
- --------------------------------------------------------------------------------
PARTICIPANTS
- --------------------------------------------------------------------------------
DISTRIBUTOR
Smith Barney, Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER AND
ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
32
<PAGE>260
LIMITED
SMITH BARNEY
MATURITY
- ------------
MUNICIPALS A Member of TravelersGroup
FUND
[LOGO]
TRUSTEES
Burt N. Dorsett
Elliot S. Jaffe
Heath B. McLendon
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen J. Treadway
President
This report is
submitted for the
Lawrence T. McDermott general information
Vice President of the shareholders of
Investment Officer Smith Barney
Limited Maturity
Municipals
Lewis E. Daidone Fund. It is not
Senior Vice President authorized for
and Treasurer distribution to
prospective
Christina T. Sydor investors unless
Secretary accompanied
or preceded by an
effective
Prospectus for the
Fund, which
contains information
concerning
the Fund's
investment policies,
fees and expenses as
well as
other pertinent
information.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York
10013
Fund 163, 482, 498
FD 0309 A5
[LOGO] Recycled
Recyclable
<PAGE>261
SEMI-ANNUAL REPORT
OF
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
FOR THE SIX-MONTH PERIOD ENDED MAY 31, 1995
<PAGE>262
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
AN AERIAL SHOT OF THE LAND AND
OCEAN SURROUNDING IT.
SEMI- SMITH BARNEY
ANNUAL LIMITED
REPORT MATURITY
MUNICIPALS
FUND
.......................................
MAY 31, 1995
[LOGO]
<PAGE>263
Limited Maturity Municipals Fund
DEAR SHAREHOLDER:
We are pleased to provide you with the semiannual report
and portfolio of investments for Smith Barney Limited
Maturity Municipals Fund for the six-month period ended May
31, 1995. Although bond prices declined precipitously
during the first part of the Fund's fiscal year, the
municipal market improved in late 1994 and into 1995,
allowing the Fund to provide investors in Class A shares with a
total return of 4.66% for the six-month period ended May 31, 1995.
Class C shares, a newly-available class of shares, earned a total
return of 4.55% for the period between November 17, 1994 and May 31,
1995. Additional performance data for each class of shares during
this and previous reporting periods is available in the "Financial
Highlights" section of this report.
ECONOMIC AND MARKET UPDATE
After implementing tighter monetary policy by raising the Federal
funds rate 300 basis points (three percentage points) over a
13-month period beginning in February 1994, the Federal Reserve
Board has succeeded in slowing the rate of economic growth. Growth
continued to slow during the second quarter of 1995 with the
decline in consumption expenditures intensifying. The retail sector of the
economy appears even softer and most retail chains seem to have little pricing
power. Even the automobile industry, which enjoyed a very strong 1994, has
encountered weaker sales in 1995. Individuals financed a large portion of
their purchases with debt throughout 1994 and as a result individuals' debt
levels are becoming a source of concern. This is acting as a drag on
consumption expenditures and could continue to hamper consumption trends for
the rest of 1995 as consumers try to bring their debt levels down to more
manageable levels. The industrial side of the economy has benefited from
strong overseas demand but this also appears to be moderating based upon
recent economic statistics on industrial production. In summary, while we do
not anticipate a recession, we believe an economic slowdown exists that will
present more of a challenge to corporate profitability, especially in those
sectors of the economy that depend on the consumer. Although unemployment
rates are relatively low, the corporate sector continues to trim costs and cut
payrolls, which could further hinder consumer spending.
After initially rising for most of 1994 as the Federal Reserve raised
short-term interest rates, longer-term interest rates declined since November
as it
1
<PAGE>264
became apparent that the Federal Reserve was successfully slowing the rate of
economic growth and keeping inflation under control. The municipal market had
stronger performance during the first five months of 1995. New bond issuance
is at remarkably low levels nationally, contributing to increases in prices
for tax-exempt securities. A defining moment for the municipal market occurred
when Orange County, California filed for bankruptcy in December of 1994 and
cast a pall on the entire market. Its impact on the broader market since then
has been minimal, but has strongly impacted the securities of the County
itself.
Some uncertainties surround the market, however. Among these are the many flat
tax proposals being championed by members of both political parties. Real
legislative action is several years away and must be REVENUE NEUTRAL to make
any economic sense -- a very difficult balancing act to accomplish. These
discussions have caused periodic weakness in the municipal market during the
past months and will no doubt continue to cause periodic weakness over the
next few years, which may create some attractive investment opportunities.
PORTFOLIO STRATEGY
At the end of this reporting period, 98% of the portfolio was rated investment
grade (BBB/Baa and higher) by either Standard & Poor's Corporation or Moody's
Investors Service, Inc. The Fund invested its assets in general obligation,
hospital, education, and housing bonds. The average maturity of the Fund was
2.2 years as of May 31, 1995. This investment allocation is very similar to
the one we reported to you in the Fund's annual report.
We look forward to reporting to you in the Fund's next report to investors.
Should you have any questions about your investment in the Fund or how other
Smith Barney mutual funds may be useful in helping you reach your financial
goals, please speak with your Smith Barney Financial Consultant.
Heath B. McLendon Lawrence T. McDermott
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
JULY 18, 1995
2
<PAGE>265
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31, 1995
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Income Trust Limited Maturity
Municipals Fund investment securities held at May 31, 1995 by industry
classification. The pie is broken in pieces representing industries in the
following percentages:
<TABLE>
<CAPTION>
INDUSTRY BREAKDOWN PERCENTAGE
<S> <C>
Pollution Control 6.7%
Hospital 17.7%
Industrial Control 3.2%
Utility Revenue 8.6%
General Obligation 19.5%
Privately Placed Tax-Exempt
Municipal Lease Agreement and Net
Other Assets and Liabilities 1.7%
Other Municipal Bonds and Notes 9.8%
Education 15.7%
Housing 11.6%
Transportation 5.5%
-----
100.0%
</TABLE>
SUMMARY OF MUNICIPAL BONDS BY COMBINED RATINGS.
<TABLE>
<CAPTION>
Percent
Standard & of
Moody's Poor's Value
<S> <C> <C> <C>
-------------------------------------------
AAA OR AAA 34.6%
-------------------------------------------
AA AA 19.9
-------------------------------------------
A A 21.3
-------------------------------------------
BAA BBB 22.7
-------------------------------------------
NR NR 1.5
-------------------------------------------
100.0%
---------------
</TABLE>
AVERAGE MATURITY 2.2 years
3
<PAGE>266
Smith Barney
Limited Maturity Municipals Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) MAY 31, 1995
- -------------------------------------------------------------
<TABLE>
<S> <C>
KEY TO INSURANCE ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
CGIC -- Capital Guaranty Insurance Corporation
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance
</TABLE>
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
- ----------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 98.3%
ARIZONA -- 1.3%
$ 810,000 Yuma & La Paz County,
Arizona, Community College
District, (Arizona Western
College), (AMBAC Insured),
6.200% due 7/1/98 Aaa AAA $ 844,425
CALIFORNIA -- 1.5%
1,000,000 Central Valley, California,
Financing Authority,
Cogeneration Project
Revenue, (Carson Inc.),
5.000% due 7/1/98 NR BBB- 993,750
COLORADO -- 2.3%
610,000 Arapahoe County, Colorado,
Certificates of
Participation, (AMBAC
Insured),
5.400% due 12/1/96 Aaa AAA 620,675
360,000 Colorado Housing Finance
Authority, Single Family
Project, Series A3,
5.750% due 5/1/97 NR AA 364,950
500,000 Meridian, Colorado,
Metropolitan District,
General Obligation,
Refunding Bonds,
7.000% due 12/1/97 A3 NR 516,875
CONNECTICUT -- 1.0%
625,000 New Haven, Connecticut,
General Obligation, Series
B,
5.700% due 12/1/97 Baa BBB- 635,938
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>267
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
DISTRICT OF COLUMBIA --
3.5%
$ 685,000 District of Columbia,
Certificates of
Participation,
6.000% due 1/1/97 NR B- $ 686,713
250,000 District of Columbia,
General Obligation, Series
A,
5.000% due 6/1/98 Ba B 243,125
1,295,000 District of Columbia,
Metropolitan Area
Transportation, (FGIC
Insured),
6.000% due 7/1/98 Aaa AAA 1,351,656
FLORIDA -- 2.1%
850,000 Broward County, Florida,
Educational Facilities
Authority Revenue,
5.150% due 4/1/99 NR AAA 859,563
500,000 Florida Housing Finance
Agency, Adjustable
Multifamily Mortgage,
Series QQ, (FSA Insured),
5.500% due 11/1/07 Aaa AAA 503,125
GEORGIA -- 2.1%
1,250,000 Municipal Electric
Authority of Georgia,
Special Obligation
Refunding, Second Crossover
Series,
8.125% due 1/1/17 A A+ 1,371,875
GUAM -- 2.9%
1,800,000 Government of Guam, General
Obligation Bonds,
5.750% due 8/15/99 NR BBB 1,849,500
IDAHO -- 0.3%
190,000 Idaho Housing Agency,
Single Family Mortgage,
Refunding Bonds,
5.500% due 1/1/97 Aa NR 191,900
ILLINOIS -- 7.5%
250,000 Hoffman Estates, Illinois,
Tax Increment Revenue,
Junior Lien, (Hoffman
Estates Development
Project),
6.500% due 5/15/01 Baa1 BBB+ 266,563
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>268
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ILLINOIS -- (CONTINUED)
$1,000,000 Illinois Development
Financing Authority,
Adjustable Demand Revenue
Bonds, (Catholic Charities
Housing), Series A,
5.000% due 1/1/28 Aa2 NR $ 1,007,500
500,000 Illinois Educational
Facilities Authority,
Adjustable Demand Revenue
Bonds, (Museum of Science
and Industry),
5.625% due 10/1/26 Aa3 NR 503,750
Illinois Health Facilities
Authority, Revenue Bonds:
1,040,000 (Children's Memorial
Hospital), (MBIA Insured),
6.000% due 8/15/98 Aaa AAA 1,077,700
1,045,000 (Delnor Community
Hospital), (FSA Insured),
4.500% due 5/15/98 Aaa AAA 1,025,406
1,000,000 St. Clair County, Illinois,
General Obilgation, (FGIC
Insured),
4.600% due 10/1/98 Aaa AAA 990,000
INDIANA -- 2.6%
Indiana Bond Bank, Special
Project:
415,000 Series F,
5.800% due 8/1/97 NR A 423,819
500,000 Guaranteed Revolving,
4.900% due 2/1/99 NR A 501,875
750,000 Warrick County, Indiana,
Environmental Improvement,
(Southern Indiana Gas &
Electric Project), Series
A,
4.650% due 5/1/28 Aa2 AA 750,938
IOWA -- 3.9%
500,000 Iowa State, Certificates of
Participation, Series A,
(AMBAC Insured),
5.400% due 7/1/96 Aaa AAA 508,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>269
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
IOWA -- (CONTINUED)
$ 410,000 Iowa State, Housing Finance
Authority, Single Family
Mortgage, Series F, (AMBAC
Insured),
5.150% due 1/1/98 Aaa AAA $ 416,150
350,000 Iowa Student Loan Liquidity
Corporation, Student Loan
Revenue, Series A,
6.000% due 3/1/98 Aa1 NR 361,375
1,190,000 Sioux City, Iowa, Hospital
Revenue Refunding, (Sisters
of Mercy Health), Series D,
(MBIA Insured),
5.000% due 8/15/98 Aaa AAA 1,207,850
KENTUCKY -- 1.5%
990,000 University of Louisville,
Kentucky, Series J,
4.875% due 5/1/98 A1 AA- 988,763
LOUISIANA -- 2.1%
305,000 Louisiana Public Facilities
Revenue, Student Loan,
Louisiana Opportunity Loan,
Series A, (FSA Insured),
5.700% due 1/1/97 Aaa AAA 311,863
500,000 Louisiana State, General
Obligation Refunding Bond,
Series A, (CGIC Insured),
6.600% due 8/1/97 Aaa AAA 521,250
500,000 New Orleans, Louisiana,
Exhibit Hall Authority,
Hotel Occupancy Tax
Revenue, (AMBAC Insured),
5.250% due 1/15/97 Aaa AAA 509,375
MAINE -- 0.4%
250,000 Maine Health & Higher
Educational Facilities,
Special Obligation Revenue,
Medium Term Facilities,
(FSA Insured),
5.500% due 7/1/97 Aaa AAA 254,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>270
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MARYLAND -- 0.5%
$ 320,000 Montgomery County,
Maryland, Housing
Authority, Multifamily
Revenue, Series 85A, (Hunt
Club),
6.000% due 2/1/07++++ Aa AA+ $ 322,000
MASSACHUSETTS -- 8.6%
750,000 Lowell, Massachusetts,
General Obligation,
5.500% due 8/15/97 Baa1 NR 765,938
Massachusetts Municipal
Electric Wholesale Company,
Power Supply System
Revenue:
Series C:
285,000 5.800% due 7/1/96 A BBB+ 289,988
205,000 6.000% due 7/1/97 A BBB+ 211,663
Series E:
100,000 5.100% due 7/1/97 A BBB+ 101,375
445,000 Massachusetts State Health
and Educational Facilities
Authority, Medical Center
of Central Massachusetts,
Series A,
6.000% due 7/1/97 A A 458,350
500,000 Massachusetts Water
Resources Authority, Series
A,
5.600% due 7/15/96 A A 506,875
New England Educational
Loan Marketing Corporation,
Student Loan:
1,000,000 Series B,
5.000% due 6/1/98 A1 A- 1,000,000
1,000,000 Series C,
4.750% due 7/1/98 A1 A- 992,500
500,000 Plymouth County,
Massachusetts, Certificates
of Participation, Series A,
5.700% due 10/1/96 NR BBB- 507,500
720,000 Springfield, Massachusetts,
School Project, Series B,
5.300% due 9/1/97 Baa1 NR 732,600
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>271
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MICHIGAN -- 1.6%
$ 750,000 Detroit, Michigan, District
State Aid,
5.625% due 5/1/97 Baa BBB+ $ 756,563
250,000 Michigan Higher Education
Student Loan, Education
Revenue, Series XIV-A,
5.400% due 10/1/96 A NR 253,125
NEVADA -- 3.4%
1,000,000 Clark County, Nevada,
Airport Systems Revenue,
(MBIA Insured),
7.500% due 7/1/97 Aaa AAA 1,058,750
1,000,000 Clark County, Nevada,
General Obligation, (FGIC
Insured),
7.500% due 7/1/04 Aaa AAA 1,105,000
NEW HAMPSHIRE -- 0.4%
275,000 New Hampshire Higher
Education & Health
Authority Revenue, (Elliot
Hospital of Manchester),
(AMBAC Insured),
5.700% due 10/1/97 Aaa AAA 283,938
NEW JERSEY -- 3.9%
500,000 Atlantic County, New
Jersey, Utilities
Authority, Solid Waste
Revenue,
6.250% due 3/1/97 Baa NR 506,250
435,000 Camden County, New Jersey,
Pollution Control Finance
Authority, Solid Waste
Resource Recovery Revenue,
Series D,
6.350% due 12/1/97 Baa1 BBB+ 440,981
1,075,000 Hudson County, New Jersey,
Improvement Authority,
5.750% due 1/1/98 NR BBB- 1,065,594
500,000 New Jersey Health Care
Facilities Center,
(Atlantic City Medical
Center), Series C,
5.600% due 7/1/96 A A- 506,875
NEW MEXICO -- 0.6%
390,000 New Mexico Mortgage Finance
Authority, Single Family,
Series A1,
5.500% due 1/1/97 Aa AA 393,900
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>272
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
- ----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- 7.7%
$1,450,000 Babylon, New York,
Industrial Development
Authority, Babylon
Community Waste Management,
Series A,
7.650% due 7/1/97 Baa1 NR $ 1,546,062
600,000 Metropolitan Transit
Authority, New York,
Service Contract Transit
Fees, Series 5,
6.100% due 7/1/98 Baa1 BBB 618,000
Metropolitan Transit
Authority, New York,
General Obligation:
500,000 6.600% due 1/1/99 Aaa AAA 533,750
750,000 Series C,
5.400% due 8/1/97 Baa1 A- 757,500
640,000 New York State Medical Care
Facilities Agency, Mental
Health Service Facilities
Improvement, Series D,
6.300% due 8/15/97 Baa1 BBB+ 658,400
North Country, New York,
Solid Waste Disposal,
Series A:
455,000 5.400% due 7/1/95 Baa NR 455,000
400,000 6.000% due 7/1/97 Baa1 NR 407,500
OKLAHOMA -- 0.8%
Cleveland County, Oklahoma,
Home Loan Authority, Single
Family Mortgage Revenue:
165,000 6.000% due 8/1/96 A NR 166,443
145,000 6.100% due 2/1/97 A NR 146,812
180,000 6.100% due 8/1/97 A NR 182,925
OREGON -- 0.8%
500,000 Clackamas County, Oregon,
Hospital Facilities
Authority Revenue, (Sisters
of Providence), Series A,
5.300% due 10/1/96 A1 AA- 508,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>273
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
PENNSYLVANIA -- 7.6%
$ 125,000 Falls Township,
Pennsylvania Hospital
Authority Revenue,
(Delaware Valley Medical),
(FHA Insured),
6.000% due 8/1/01 NR AAA $ 104,375
500,000 Lehigh County,
Pennsylvania, Industrial
and Community Development
Authority, (Strawbridge
Project),
7.200% due 12/15/01 NR BBB 533,125
500,000 Pennsylvania State Higher
Education, (Thomas
Jefferson University),
Series A,
5.500% due 8/15/97 Aa A+ 513,750
1,170,000 Pennsylvania State
Industrial Development
Authority Revenue, (AMBAC
Insured),
6.000% due 1/1/99 Aaa AAA 1,222,650
Philadelphia, Pennsylvania,
Hospitals and Higher
Education Facilities
Authority:
(Albert Einstein Medical
Center):
365,000 6.300% due 10/1/96 A BBB+ 371,386
390,000 6.500% due 10/1/97 A BBB+ 399,750
1,000,000 (Graduate Health Systems),
6.500% due 7/1/97 Baa1 BBB+ 1,026,250
750,000 Westmoreland County,
Pennsylvania, Industrial
Development Authority,
(Valley Landfill Project),
4.375% due 5/1/18++++ Aa1 AA 748,125
PUERTO RICO -- 0.7%
420,000 Puerto Rico Medical
Hospital, Series A, (St.
Luke's Hospital),
5.400% due 6/1/97 NR A- 423,675
RHODE ISLAND -- 0.8%
500,000 Rhode Island State, Student
Loan Authority, Series A,
5.700% due 12/1/96 A NR 508,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>274
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
SOUTH CAROLINA -- 0.8%
$ 500,000 South Carolina, State,
Public Service Authority,
(Santee - Cooper Project),
Series D,
5.500% due 7/1/98 A1 A+ $ 515,000
TEXAS -- 11.4%
500,000 Arlington, Texas,
Waterworks & Sewer Revenue,
Refunding and Improvement,
(FGIC Insured),
5.400% due 6/1/97 Aaa AAA 509,375
2,000,000 Bell County, Texas, Health
Facilities Development
Corporation, Central Texas
Pooled Health, Series A,
4.750% due 10/1/23 NR AA 1,975,000
1,000,000 Brazos, Texas, Higher
Education Authority, Series
A-1,
5.300% due 12/1/97 Aa NR 1,016,250
300,000 Dallas-Fort Worth, Texas,
Regional Airport Revenue,
Series A, (FGIC Insured),
5.875% due 11/1/07 Aaa AAA 309,375
1,000,000 North Texas, Higher
Education Authority,
Student Loan Revenue,
Series B,
4.850% due 4/1/98 Aaa NR 1,002,500
1,000,000 Port Houston Authority,
Harris, Texas, (MBIA
Insured),
5.700% due 5/1/99 Aaa AAA 1,037,500
1,000,000 Tarrant County, Texas,
Housing Finance
Corporation, Multifamily
Housing, (Bedford Springs),
4.500% due 9/1/06 NR AA- 1,000,000
500,000 Texas State Veterans
Housing Assistance, (FHA
Insured),
6.050% due 12/1/12 Aa AA 509,375
VIRGIN ISLANDS -- 1.0%
635,000 Virgin Islands Public
Financing Authority,
Matching Revenue Funding,
Series A,
6.250% due 10/1/96 NR NR 647,700
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>275
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
VIRGINIA -- 1.6%
$ 500,000 Fairfax County, Virginia,
Redevelopment & Housing
Authority, Multifamily
Housing Revenue Refunding,
Mortgage Loan, Kingsley,
Series A, (FHA Insured),
6.500% due 11/1/01 NR AAA $ 523,750
500,000 Virginia Educational Loan
Authority, Guaranteed
Revenue, Series C,
4.850% due 3/1/98 Aaa NR 500,625
WASHINGTON -- 3.1%
445,000 Washington State Housing
Finance, Single Family
Mortgage Revenue, (GNMA and
FNMA Securities Program),
Series D,
5.800% due 7/1/97 NR AAA 446,668
1,500,000 Washington State Public
Power Supply, Series B,
(Nuclear Project No. 3),
7.000% due 7/1/97 Aa AA 1,567,500
WISCONSIN -- 5.7%
Wisconsin Housing Economic
Development Authority:
250,000 Series A,
5.400% due 11/1/97 A1 A 253,436
1,045,000 4.500% due 11/1/98 A1 A 1,029,325
2,360,000 Wisconsin, State, Health & Educational Facilities
Authority, (Aurora Health
Care), (MBIA Insured),
5.500% due 8/15/98 Aaa AAA 2,424,900
WYOMING -- 2.3%
1,500,000 Platte County, Wyoming,
Pollution Control Revenue,
4.200% due 1/1/99 A2 A 1,468,125
----------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES
(COST $63,231,620) 63,489,269
----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>276
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
RATINGS
MARKET VALUE
FACE VALUE MOODY'S
<PAGE>277
S&P (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C>
<C> <C>
PRIVATELY PLACED TAX-EXEMPT MUNICIPAL
LEASE AGREEMENT -- 0.5% (COST $310,941)
TENNESSEE -- 0.5%
$ 308,628 The Health and Educational
Facilities Board of the
Metropolitan Government of
Nashville and Davidson
County, Tennessee, on
behalf of Cooke County,
Baptist Hospital,
7.250% due 9/1/96+++ NR NR $ 311,713
----------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $63,542,561*) 98.8% 63,800,982
OTHER ASSETS AND LIABILITIES (NET) 1.2 782,718
----------------------------------------------------------------------------
NET ASSETS 100.0% $64,583,700
----------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+++ Backed by an irrevocable bank letter of credit in the
amount of $308,628.
++++Put bonds and notes have demand features with
maturities greater than one
year.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>278
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) MAY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$63,542,561) (Note 1)
See accompanying schedule $63,800,982
Interest receivable 1,148,341
Receivable for Fund shares sold 106,894
Unamortized organization costs (Note 7) 19,067
- -----------------------------------------------------------------------------
TOTAL ASSETS 65,075,284
- -----------------------------------------------------------------------------
LIABILITIES:
Due to custodian $188,598
Dividends payable 161,409
Investment advisory fee payable (Note
2) 38,899
Payable for Fund shares redeemed 35,937
Administration fee payable (Note 2) 22,228
Service fee payable (Note 3) 8,276
Custodian fees payable (Note 2) 4,700
Transfer agent fees payable (Note 2) 2,515
Distribution fee payable (Note 3) 146
Accrued expenses and other payables 28,876
- -----------------------------------------------------------------------------
TOTAL LIABILITIES 491,584
- -----------------------------------------------------------------------------
NET ASSETS $64,583,700
- -----------------------------------------------------------------------------
NET ASSETS consist of:
Undistributed net investment income $ 8,275
Accumulated net realized loss on
investments sold (865,643)
Unrealized appreciation of investments 258,421
Par value 7,945
Paid-in capital in excess of par value 65,174,702
- -----------------------------------------------------------------------------
TOTAL NET ASSETS $64,583,700
- -----------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE per share+
($63,571,508 DIVIDED BY 7,820,975 shares of
beneficial interest outstanding) $8.13
- -----------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($8.13
DIVIDED BY 0.98)
(based on sales charge of 2.00% of the offering
price at May 31, 1995) $8.30
- -----------------------------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($1,012,192 DIVIDED BY 124,514 shares of
beneficial interest outstanding) $8.13
- -----------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value
less any applicable contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>279
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------
FOR THE SIX MONTHS ENDED MAY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $1,802,991
- ---------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $121,709
Administration fee (Note 2) 69,548
Service fee (Note 3) 52,161
Transfer agent fees (Notes 2 and 4) 14,513
Legal and audit fees 13,769
Custodian fees (Note 2) 12,341
Amortization of organization costs (Note 7) 6,021
Trustees' fees and expenses (Note 2) 4,065
Distribution fee (Note 3) 528
Other 40,132
Fees waived by investment adviser and
administrator (Note 2) (56,203)
- ---------------------------------------------------------------------------
TOTAL EXPENSES 278,584
- ---------------------------------------------------------------------------
NET INVESTMENT INCOME 1,524,407
- ---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized loss on investments during the period (203,850)
Net unrealized appreciation of investments during the period 1,861,899
- ---------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,658,049
- ---------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,182,456
- ---------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>280
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
5/31/95 ENDED
(UNAUDITED) 11/30/94
<S> <C> <C>
Net investment income $ 1,524,407 $ 3,882,663
Net realized loss on investments sold during the period (203,850) (616,478)
Net unrealized appreciation/(depreciation) of
investments during the period 1,861,899 (3,140,215)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,182,456 125,970
Distributions to shareholders from net investment
income:
Class A (1,514,009) (3,882,660)
Class C (10,398) (3)
Distribution to shareholders from net realized gain on
investments:
Class A -- (8,764)
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A (14,311,352) (16,418,251)
Class C 894,053 106,015
- -------------------------------------------------------------------------------------
Net decrease in net assets (11,759,250) (20,077,693)
NET ASSETS:
Beginning of period 76,342,950 96,420,643
- -------------------------------------------------------------------------------------
End of period $ 64,583,700 $ 76,342,950
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>281
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR PERIOD
5/31/95 ENDED ENDED ENDED
(UNAUDITED) 11/30/94* 11/30/93 11/30/92*
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.94 $ 8.26 $ 8.07 $ 7.90
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+ 0.18 0.34 0.36 0.36
Net realized and unrealized gain/(loss) on
investments 0.19 (0.32) 0.19 0.17
- -------------------------------------------------------------------------------------
Total from investment operations 0.37 0.02 0.55 0.53
Less distributions:
Dividends from net investment income (0.18) (0.34) (0.36) (0.36)
Distributions from net realized capital
gains -- (0.00)** (0.00)** --
- -------------------------------------------------------------------------------------
Total distributions (0.18) (0.34) (0.36) (0.36)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 8.13 $ 7.94 $ 8.26 $ 8.07
- -------------------------------------------------------------------------------------
Total return++ 4.66% 0.23% 6.98% 6.88%
- -------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $63,572 $76,237 $96,421 $36,379
Ratio of operating expenses to average net
assets+++ 0.80%*** 0.80% 0.75% 0.65%***
Ratio of net investment income to average
net assets 4.39%*** 4.15% 4.24% 4.74%***
Portfolio turnover rate 0% 28% 4% 22%
- -------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on December 31, 1991.
Those shares in existence prior to November 7, 1994
were designated Class A shares.
** Amount represents less than $0.01 per share.
*** Annualized.
+ Net investment income per share before waiver of fees
by investment adviser and administrator for the six
months ended May 31, 1995 and years ended
November 30, 1994 and 1993 and waiver of fees by
investment adviser, sub-investment adviser and
administrator, and/or custodian and distributor
for the period ended November 30, 1992 were $0.17,
$0.33, $0.33 and $0.31, respectively.
++ Total return represents aggregate total return for the
period indicated and does not reflect any applicable
sales charges.
+++ Annualized operating expense ratios before waiver of
fees by investment adviser and administrator for the
six months ended May 31, 1995 and years
ended November 30, 1994 and 1993 and waiver of fees by
investment adviser, sub-investment adviser and
administrator, and/or custodian and distributor
for the period ended November 30, 1992 were 0.96%,
0.94%, 1.07% and 1.28%, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>282
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED PERIOD
5/31/95 ENDED
(UNAUDITED) 11/30/94*
<S> <C> <C>
Net asset value, beginning of period $ 7.94 $7.92
- -----------------------------------------------------------------
Income from investment operations:
Net investment income+ 0.16 0.00**
Net realized and unrealized gain on
investments 0.19 0.02#
- -----------------------------------------------------------------
Total from investment operations 0.35 0.02
Less distributions:
Distributions from net investment income (0.16) 0.00**
- -----------------------------------------------------------------
Total distributions (0.16) 0.00
- -----------------------------------------------------------------
Net asset value, end of period $ 8.13 $7.94
- -----------------------------------------------------------------
Total return++ 4.55% 0.31%
- -----------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $1,012 $ 106
Ratio of operating expenses to average net
assets+++ 0.98%*** 1.00%***
Ratio of net investment income to average
net assets 4.21%*** 3.94%***
Portfolio turnover rate 0% 28%
- -----------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares on November 17, 1994.
** Amount represents less than $0.01 per share.
*** Annualized.
+ Net investment income per share before waiver of fees by investment adviser
and administrator for the six months ended May 31, 1995 and period ended
November 30, 1994 were $0.16 and less than $0.01, respectively.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
+++ Annualized operating expense ratio before waiver of fees by investment
adviser and administrator for the six months ended May 31, 1995 and period
ended November 30, 1994 were 1.14% and 1.14%, respectively.
# The amount in this caption for each share outstanding throughout the period
may not accord with the change in aggregate gains and losses in portfolio
securities for the period because of the timing of purchases and withdrawals
of shares in relation to the fluctuating market values of the portfolio.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>283
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Trust (the "Trust") was organized as a "Massachusetts
business trust" under the laws of the Commonwealth of Massachusetts on October
17, 1991. The Trust is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management investment company. The Trust consists of the following
four funds: Smith Barney Limited Maturity Treasury Fund, Smith Barney Limited
Maturity Municipals Fund (the "Fund"), Smith Barney Intermediate Maturity
California Municipals Fund and Smith Barney Intermediate Maturity New York
Municipals Fund. Effective November 7, 1994, the Fund began offering Class C
and Class Y shares and all existing shares were designated Class A shares. As
of May 31, 1995, no Class Y shares have been sold. Class A shares are sold
with a front-end sales charge. Class C shares may be subject to a contingent
deferred sales charge ("CDSC") upon redemption. Class Y shares are available
to investors making an initial investment of at least $5 million and are not
subject to any sales charges, distribution or service fees. All classes of
shares have identical rights and privileges except with respect to the effect
of the respective sales charges, the distribution and/or service fees borne by
each class, expenses allocable exclusively to each class, voting rights on
matters affecting a single class and the exchange privilege of each. The
following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
PORTFOLIO VALUATION: Securities are valued at the closing of trading on the
New York Stock Exchange, Inc. by The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"), after consultation with an independent pricing service (the
"Service") approved by the Board of Trustees. When, in the judgment of the
Service, quoted bid prices for securities are readily available and are
representative of the bid side of the market, these investments are valued at
the mean between the quoted bid prices and asked prices. Securities for
which, in the judgment of the Service, there are no readily obtainable market
quotations (which may constitute a majority of the portfolio securities) are
carried at fair value as determined by the Service, based on methods which
include consideration of: yields or prices of municipal securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers;
20
<PAGE>284
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
and general market conditions. Securities, not valued by the Service, for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees.
Short-term investments that mature in 60 days or less are valued at amortized
cost.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Securities purchased or sold on a when-issued
or delayed delivery basis may be settled a month or more after
the trade date. Interest income is recorded on the accrual basis. Realized
gains and losses from securities sold are recorded on the identified cost
basis. Investment income and realized and unrealized gains and losses are
allocated based upon the relative net assets of each class.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income are determined on a class level. It is the policy of the Fund to
declare dividends from net investment income daily and to pay such dividends
on the last business day of the Smith Barney Inc. ("Smith Barney") statement
month. Distributions of any net realized capital gains are declared and paid
annually, after the end of the fiscal year. Additional distributions of net
investment income and capital gains for the Fund may be made at the discretion
of the Board of Trustees in order to avoid the application of a 4.00%
nondeductible excise tax on certain undistributed amounts of net investment
income and capital gains. To the extent net realized capital gains can be
offset by capital losses and loss carryforwards, it is the policy of the Fund
not to distribute such gains.
Income distributions and capital gain distributions on a Fund level are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments of income and gains on various investment securities
held by the Fund, timing differences and differing characterization of
distributions made by the Fund as a whole.
FEDERAL INCOME TAXES: The Trust intends that the Fund separately qualify as a
regulated investment company, if such qualification is in the best interest of
its shareholders, which distributes exempt-interest dividends, by complying
21
<PAGE>285
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
with the requirements of the Internal Revenue Code of 1986, as amended,
applicable to regulated investment companies and by distributing substantially
all of its earnings to its shareholders. Therefore, no Federal income tax
provision is required.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Smith Barney Mutual Funds Management Inc. ("SBMFM"). SBMFM
(formerly known as Smith Barney Advisers, Inc.), is a wholly owned subsidiary
of Smith Barney Holdings Inc. ("Holdings"), which in turn is a wholly owned
subsidiary of Travelers Group Inc. Under the Advisory Agreement, the Fund pays
a monthly fee at the annual rate of 0.35% of the value of its average daily
net assets.
The Fund has entered into an administration agreement (the "Administration
Agreement") with SBMFM. Under the Administration Agreement, the Fund pays a
monthly fee at the annual rate of 0.20% of the value of its average daily net
assets.
The Fund and SBMFM have also entered into a sub- administration agreement (the
"Sub-Administration Agreement") with Boston Advisors. Under the
Sub-Administration Agreement, SBMFM pays Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors.
From time to time SBMFM may voluntarily waive a portion of its advisory and/or
administrative fees otherwise payable to it. For the six months ended May 31,
1995, SBMFM voluntarily waived advisory fees of $35,766 and administration
fees of $20,437, respectively.
For the six months ended May 31, 1995, Smith Barney Inc. ("Smith Barney")
received $23,258 from investors representing commissions (sales charges) on
sales of Class A shares.
22
<PAGE>286
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
A CDSC is generally payable by Class C shareholders and may be payable by
certain Class A shareholders in connection with the redemption of shares
within one year after the date of purchase. For the six months ended May 31,
1995, $5,962 in CDSC were paid to Smith Barney by Class A shareholders.
No officer, trustee or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as a Trustee or officer
of the Trust. The Trust pays each Trustee who is not an officer, director or
employee of Smith Barney or any of its affiliates $4,000 per annum plus $500
per meeting attended and each Trustee emeritus who is not an officer, director
or employee of Smith Barney or any of its affiliates $2,000 per annum plus
$250 per meeting attended. The Trust reimburses each Trustee for travel and
out-of-pocket expenses incurred in attending such meetings.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Trust's custodian. The Shareholder Services Group Inc.,
a subsidiary of First Data Corporation, serves as the Trust's transfer agent.
3. DISTRIBUTION PLAN
Smith Barney acts as distributor of the Fund's shares
pursuant to a distribution agreement with the Trust and sells shares of the
Fund through Smith Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a service and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A and Class C
shareholders, and covers expenses incurred in distributing Class C shares.
Smith Barney is paid an annual service fee with respect to Class A and Class C
shares of the Fund at the annual rate of 0.15% of the value of the average
daily net assets of each respective class of shares. Smith Barney is also paid
an annual distribution fee with respect to Class C shares at the annual rate
of 0.20% of the value of the average daily net assets attributable to those
shares. For the six months ended May 31, 1995, the Fund incurred
23
<PAGE>287
Smith Barney Limited Maturity Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
$51,765 and $396 in service fees for Class A and Class C shares, respectively.
For the six months ended May 31, 1995, the Fund incurred $528 in distribution
fees for Class C shares.
Under its terms, the Plan shall remain in effect from year to year, provided
that such continuance is approved annually by vote of the Trust's Trustees,
including a majority of those Trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation
of the Plan.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class
of shares are prorated among the classes based upon the relative net assets of
each class. Operating expenses directly attributable to a class of shares are
charged to that class' operations. In addition to the above servicing and
distribution fees, class specific operating expenses for the six months ended
May 31, 1995 included transfer agent fees of $14,462 and $51 for Class A and
Class C shares, respectively.
5. SECURITIES TRANSACTIONS
Proceeds from sales of securities, excluding short-term investments, for the
six months ended May 31, 1995 was $12,868,435. There were no purchases,
excluding short-term investments for the six months ended May 31, 1995.
At May 31, 1995, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $584,388, and aggregate
gross unrealized depreciation for all securities in which there was an excess
of tax cost over value was $325,967.
24
<PAGE>288
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest which
are divided into three class (Class A, Class C and Class Y) with a $.001 par
value. Changes in shares of beneficial interest in the Fund were as follows:
<TABLE>
<CAPTION> SIX MONTHS ENDED YEAR ENDED
5/31/95* 11/30/94 <S> <C>
<C> <C> <C>
CLASS A SHARES: Shares Amount Shares Amount
- -------------------------------------------------------------------------------------
Sold 546,201 $ 4,374,347 3,175,899 $ 26,079,012
Issued as reinvestment of dividends 128,078 1,027,683 353,609 2,875,739
Redeemed (2,458,321) (19,713,382) (5,604,134) (45,373,002)
- -------------------------------------------------------------------------------------
Net decrease (1,784,042) $(14,311,352) (2,074,626) $(16,418,251)
- -------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
5/31/95* 11/30/94*
CLASS C SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Sold 111,231 $ 894,633 13,354 $ 106,015
Issued as reinvestment of dividends 654 5,280 -- --
Redeemed (725) (5,860) -- --
- ----------------------------------------------------------------------------------------------------
Net increase 111,160 $ 894,053 13,354 $ 106,015
- ----------------------------------------------------------------------------------------------------
<FN>
* The Fund began offering Class C and Class Y shares on November 7, 1994. Those
shares in existence prior to November 7, 1994 were designated Class A shares.
</TABLE>
As of May 31, 1995, no Class Y shares had been sold.
7. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations. All such costs are being
amortized on the straight-line method over a period of five years from the
commencement of operations of the Fund. In the event that any of the initial
shares of the Fund are redeemed during such amortization period, the Fund
25
<PAGE>289
Smith Barney
Limited Maturity Municipals Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
will be reimbursed for any unamortized organization costs in the same
proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.
8. CAPITAL LOSS CARRYFORWARD
As of November 30, 1994, the Fund had available for Federal tax purposes an
unused capital loss carryforward of $483,118 expiring in the year 2002.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
On March 20, 1995, a special meeting of shareholders of the Trust was held for
the following purposes:
1. To elect the following ten (10) trustees to the Trust's Board of Trustees:
<TABLE>
<CAPTION>
% OF
OUTSTANDING
SHARES
NOMINEE VOTES RECEIVED VOTED
<S> <C> <C>
- ------------------------------------------------------------------------------
Herbert Barg 15,237,202.665 96.182%
Alfred J. Bianchetti* 15,239,787.601 96.198
Martin Brody 15,239,506.357 96.196
Dwight B. Crane 15,262,039.293 96.338
Burt N. Dorsett 15,249,442.272 96.259
Elliot S. Jaffe 15,253,001.145 96.281
Stephen E. Kaufman 15,256,593.968 96.304
Joseph J. McCann 15,258,212.162 96.314
Heath B. McLendon* 15,246,700.983 96.241
Cornelius C. Rose, Jr. 15,249,666.535 96.260
- -------------------------------------------------------------------------------
<FN>
* Each Trustee who is an "interested person" of the Trust, as defined by the Investment Company Act of 1940, as amended, is
indicated by an asterisk.
</TABLE>
26
<PAGE>290
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney, Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER AND
ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
27
<PAGE>291
Smith Barney
Limited Maturity Municipals Fund
- ---------------------------------------------------------------------------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS) This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates, there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CDSC (CONTINGENT DEFERRED SALES CHARGE) One kind of back-end load, a CDSC is
imposed if shares are redeemed during the first few years of ownership. The
CDSC may be expressed as a percentage of either the original purchase price or
the redemption proceeds. Most CDSCs decline over time, and some will not be
charged if shares are redeemed after a certain period of time.
DISTRIBUTION RATE This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND This is income generated by securities in a portfolio and distributed
after expenses to shareholders.
FRONT-END SALES CHARGE This is the sales charge applied to an investment at
the time of initial purchase.
NET ASSET VALUE (NAV) Net asset value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would be the NAV multiplied by
the number of shares you own.
SEC YIELD This standardized calculation of a mutual fund's yield is based on a
formula developed by the Securities and Exchange Commission (SEC) to allow
funds to be compared on an equal basis. It is an annualized yield based on the
portfolio's potential earnings from dividends, interest and yield to maturity
of its holdings, and it reflects the payments of all portfolio expenses for
the most recent 30-day period. Mutual funds are required to use this figure
when stating yield.
TOTAL RETURN Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the portfolio. It may be expressed on an AVERAGE ANNUAL
basis or CUMULATIVE basis (total change over a given period). In addition,
total return may be expressed with or without the effects of sales charges or
the reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the
average annual total return according to the standardized calculation
developed by the SEC. The SEC AVERAGE ANNUAL TOTAL RETURN calculation includes
the effects of all fees and sales charges and assumes the reinvestment of all
dividends and capital gains.
28
<PAGE>292
LIMITED
MATURITY
MUNICIPALS
FUND
TRUSTEES
Herbert Barg
Alfred J. Bianchetti
Martin Brody
Dwight B. Crane
Burt N. Dorsett
Elliot S. Jaffe
Stephen E. Kaufman
Joseph J. McCann
Heath B. McLendon
Cornelius C. Rose, Jr.
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
AND INVESTMENT OFFICER
Jessica M. Bibliowicz
PRESIDENT
Lewis E. Daidone
SENIOR VICE PRESIDENT
AND TREASURER
Lawrence T. McDermott
VICE PRESIDENT AND
INVESTMENT OFFICER
Christina T. Sydor
SECRETARY
[LOGO]
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND. IT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY AN
EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION CONCERNING THE
FUND'S INVESTMENT POLICIES AND EXPENSES AS WELL AS OTHER PERTINENT
INFORMATION.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 163, 482, 498
[LOGO]
FD2233 7/95
<PAGE>293
PRO FORMA FINANCIAL STATEMENTS
<PAGE>294
SMITH BARNEY MUNI FUNDS
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is incorporated by reference to "Liability
of Trustees" under the caption "Information on Shareholder's Rights"
in Part A of this Registration Statement.
Item 16. Exhibits -- References are to Registrant's Registration Statement
on Form N-1A as filed with the Securities and
Exchange Commission (File Nos. 2-99861 and 811-4395)
(the "Registration Statement").
(1) (a) Restated Declaration of Trust dated as of April 23, 1986 is
incorporated by reference to Exhibit 1 to Pre-Effective
Amendment No. 1 to the Registration Statement.
(1) (b) Instrument of the Trustees Establishing and Designating Classes of
Shares of Certain Series of the Trust is incorporated herein by
reference to Exhibit 1(b) to Post-Effective Amendment No. 24 to the
Registration Statement.
(1) (c) Instruments of the Trustees Establishing and Designating
Classes of Shares and Certain Series of the Trust dated
March 26, 1993, June 4, 1993, March 4, 1994 and October 3,
1994, and Amendment to Declaration of Trust of the Registrant
dated May 20, 1994, are incorporated by reference to
Exhibit 1(c) to Registrant's Registration Statement on Form N-
14 (relating to its New York Portfolio), as filed with the
Securities and Exchange Commission on August 22, 1995 (File No.
33-62017).
(2) By-Laws are incorporated by reference to Exhibit 2 to Pre-Effective
Amendment No. 2 to the Registration Statement.
(3) Not Applicable.
(4) Agreement and Plan of Reorganization (included as Exhibit A to
Registrant's Prospectus/Proxy Statement contained in Part A of this
Registration Statement).*
<PAGE>295
(5) Not Applicable.
(6) Management Agreement between the Limited Term Portfolio, a portfolio
of the Registrant, and Mutual Management Corp. is incorporated by
reference to Exhibit 5(c) to Post-Effective Amendment No. 18 to the
Registration Statement.
(7) Distribution Agreement between Registrant and Smith Barney Inc. is
incorporated by reference to Exhibit 6 to Post-Effective Amendment
No. 7 to the Registration Statement.
(8) Not Applicable.
(9) (a) Custodian Agreement between Registrant and PNC Bank is
incorporated by reference to Exhibit 8 to Pre-Effective
Amendment No. 1 to the Registration Statement.
(9) (b) Transfer Agency Agreement between Registrant and PFPC Inc. is
incorporated by reference to Exhibit 9 to Post-Effective Amendment
No. 12 to the Registration Statement.
(10)(a) Form of Plan of Distribution pursuant to Rule 12b-1 of the
Registrant on behalf of the Limited Term Portfolio.**
(10)(b) Plan of Distribution pursuant to Rule 12b-1 with respect to Class A
shares of the Registrant is incorporated by reference to Exhibit
15(n) to Post-Effective Amendment No. 34 to the Registration
Statement.
(11) (a) Opinion and Consent of Sullivan & Cromwell with respect to
legality.**
(11) (b) Opinion and Consent of Ropes & Gray with respect to certain matters
under Massachusetts law.**
(12) Opinion and Consent of Willkie Farr & Gallagher with respect to tax
matters.**
(13) Not Applicable.
(14) (a) Consent of Coopers & Lybrand L.L.P.*
(14) (b) Consent of KPMG Peat Marwick LLP.*
<PAGE>296
(15) Not Applicable.
(16) Powers of Attorney (included on signature page).
(17) (a) Form of Proxy Card.*
(17) (b) Registrant's Declaration pursuant to Rule 24f-2 is incorporated by
reference to its initial Registration Statement.
* Filed herewith.
** To be filed by amendment.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by
any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) of the Securities Act of 1933, the
reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the Registration Statement and will not be used
until the amendment is effective, and that, in determining any
liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement
for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona
fide offering of them.
<PAGE>297
SIGNATURES
As required by the Securities Act of 1933, this Registration
Statement has been signed on behalf of the registrant, in the City of New York
and State of New York on the 7th day of November, 1995.
SMITH BARNEY MUNI FUNDS
on behalf of its
LIMITED TERM PORTFOLIO
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Heath B. McLendon, Christina T. Sydor
and Caren A. Cunningham and each and any one of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
As required by the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board and November 7, 1995
Heath B. McLendon Chief Executive Officer
<PAGE>298
/s/ Lewis E. Daidone Senior Vice President November 7, 1995
Lewis E. Daidone and Treasurer (Chief
Financial and Accounting
Officer)
/s/ Jessica Bibliowicz President and Trustee November 7, 1995
Jessica Bibliowicz
Trustee November , 1995
Joseph H. Fleiss
/s/ Donald R. Foley Trustee November 7, 1995
Donald R. Foley
/s/ Paul Hardin Trustee November 7, 1995
Paul Hardin
/s/ Francis P. Martin Trustee November 7, 1995
Francis P. Martin
/s/ Roderick C. Rasmussen Trustee November 7, 1995
Roderick C. Rasmussen
/s/ John P. Toolan Trustee November 7, 1995
John P. Toolan
/s/ C. Richard Youngdahl Trustee November 7, 1995
C. Richard Youngdahl
<PAGE>299
EXHIBIT INDEX
Exhibit Number Description Page
(4) Agreement and Plan of Reorganization *
(included as Exhibit A to Registrant's
Prospectus/Proxy Statement contained in Part A
of this Registration Statement).
(10) (a) Form of Plan of Distribution pursuant to Rule 12b-1 of **
Smith Barney Muni Funds on behalf of the Limited Term
Portfolio.
(11) (a) Opinion and Consent of Sullivan & Cromwell **
with respect to legality.
(11) (b) Opinion and Consent of Ropes & Gray **
with respect to certain matters under
Massachusetts law.
(12) Opinion and Consent of Willkie Farr & **
Gallagher with respect to tax matters.
(14) (a) Consent of Coopers & Lybrand L.L.P. *
(14) (b) Consent of KPMG Peat Marwick LLP. *
(16) Powers of Attorney (included on signature *
page)
(17) (a) Form of Proxy Card. *
_______________________________
* Filed herewith.
** To be filed by amendment.
<PAGE>1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees
of Smith Barney Muni Funds:
We hereby consent to the following with respect to the
Registration Statement on Form N-14 under the Securities Act of
1933, as amended, of Smith Barney Muni Funds:
1. The incorporation by reference of our report dated January
18, 1995, accompanying the Annual Report of the Smith Barney
Limited Maturity Municipals Fund (formerly the Smith Barney Shearson
Limited Maturity Municipals Fund) as of November 30, 1994, in the
Prospectus/Proxy Statement.
2. The reference to our firm under the heading "Financial
Statements and Experts" in the Prospectus/Proxy Statement.
3. The reference to our firm under the heading "Financial
Highlights" in the Prospectus dated January 29, 1995 of Smith
Barney Limited Maturity Municipals Fund.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 8, 1995
<PAGE>1
Independent Auditors' Consent
To the Shareholders and Board of Trustees
of the Smith Barney Muni Funds:
We consent to the use of our report dated May 8, 1995 with respect to the
Limited Term Portfolio incorporated herein by reference in the Prospectus and
included in this Registration Statement on Form N-14 for Smith Barney Muni
Funds and to the references to our firm under the headings "Financial
Statements and Experts" in the Prospectus/Proxy Statement and "Financial
Highlights" in the Prospectus incorporated herein by reference.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
November 6, 1995
New York, New York
<PAGE>1
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
SMITH BARNEY LIMITED MATURITY MUNICIPALS FUND
a separate investment portfolio of
SMITH BARNEY INVESTMENT TRUST
PROXY SOLICITED BY THE BOARD OF TRUSTEES
The undersigned holder of shares of Smith Barney Limited Maturity Municipals
Fund ("Limited Maturity Fund"), a separate investment portfolio of Smith
Barney Investment Trust, hereby appoints Heath B. McLendon, Christina T. Sydor
and Caren A. Cunningham attorneys and proxies for the undersigned with full
powers of substitution and revocation, to represent the undersigned and to
vote on behalf of the undersigned all shares of the Limited Maturity Fund that
the undersigned is entitled to vote at the Special Meeting of Shareholders of
Limited Maturity Fund to be held at the offices of Limited Maturity Fund, 388
Greenwich Street, 22nd Floor, New York, New York on January 12, 1996 at 9:30
a.m., and any adjournment or adjournments thereof. The undersigned hereby
acknowledges receipt of the Notice of Special Meeting and Prospectus/Proxy
Statement dated November __, 1995 and hereby instructs said attorneys and
proxies to vote said shares as indicated herein. In their discretion, the
proxies are authorized to vote upon such other business as may properly come
before the Special Meeting. A majority of the proxies present and acting at
the Special Meeting in person or by substitute (or, if only one shall be so
present, then that one) shall have and may exercise all of the power and
authority of said proxies hereunder. The undersigned hereby revokes any proxy
previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Date: ________________________________________________
Note: Please sign exactly as your name appears on this
Proxy. If joint owners, EITHER may sign this Proxy. When
signing as attorney, executor, administrator, trustee,
guardian or corporate officer, please give your full
title.
________________________________________________
________________________________________________
Signature(s) (Title(s), if applicable)
<PAGE>2
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
Please indicate your vote by filling in the appropriate box below, as shown,
using blue or black ink or dark pencil. Do not use red ink. This proxy, if
properly executed, will be voted in the manner directed by the undersigned
shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR APPROVAL
OF THE PROPOSAL.
[ ] [ ] [ ]
1. To approve or disapprove the FOR AGAINST ABSTAIN
Agreement and Plan of Reorganization
dated as of November __, 1995 providing for (i) the acquisition of all or
substantially all of the assets of Smith Barney Limited Maturity Municipals
Fund ("Limited Maturity Fund") by Smith Barney Muni Funds -- Limited Term
Portfolio ("Limited Term Portfolio") in exchange for shares of Limited Term
Portfolio and the assumption by Smith Barney Muni Funds on behalf of
Limited Term Portfolio of scheduled liabilities of Limited Maturity Fund,
(ii) the distribution to shareholders of Limited Maturity Fund of such
shares of Limited Term Portfolio in liquidation of Limited Maturity Fund
and (iii) the subsequent termination of Limited Maturity Fund.
