File No. 2-99861
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 38
to the
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
and
POST-EFFECTIVE AMENDMENT NO. 39
to the
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
SMITH BARNEY MUNI FUNDS
(Formerly, Smith Barney Muni Bond Funds)
(Exact name of Registrant as specified
in the Declaration of Trust)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices)
(212) 816-6474
(Registrant's telephone number)
Christina T. Sydor
388 Greenwich Street New York, New York 10013 (22nd floor)
(Name and address of agent for service)
Rule 24f-2(a) (1) Declaration:
The shares of beneficial interest of Smith Barney Muni Funds previously
registered hereunder as an indefinite number of shares of beneficial
interest are
classified as Florida Portfolio Shares, New Jersey Portfolio Shares,
Limited Term Portfolio Shares, National Portfolio Shares, California
Portfolio Shares, New York Portfolio Shares, California Money Market
Portfolio Shares, New York Money Market Portfolio Shares, California
Limited Term Portfolio Shares, Florida
Limited Term Portfolio Shares, Arizona Portfolio Shares, Connecticut Portfolio
Shares, Georgia Portfolio Shares, Massachusetts Portfolio Shares, Michigan
Portfolio Shares, Ohio Portfolio Shares, Pennsylvania Portfolio Shares, Texas
Portfolio Shares, Washington Portfolio Shares and New Jersey Money Market
Portfolio Shares.
To Register Additional Securities under Reg. 270.24e-2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Title of Share Proposed Proposed
securities Amount Maximum Maximum Amount of
being being offering aggregate registration
registered registered price per offering* fee
share
National 2,321,982 $13.56 $290,000 $100
Portfolio
Florida Limited Term 872,492 $6.68 $290,000 $100
Portfolio
</TABLE>
The fee for the shares to be registered by this filing has been computed on
the basis of the market value
per share in effect on July 17, 1996.
*Calculation of the proposed maximum offering price has been made pursuant to
Rule 24e-2.
During its fiscal year ended March 31, 1996, the fund redeemed 7,891,900
shares of the National Portfolio. During its current fiscal year, the fund
used 5,591,304 shares of the National Portfolio it
redeemed during its fiscal year ended March 31, 1996, for a reduction pursuant
to Rule 24f-2(c).
The fund currently is registering 2,321,982 shares for the National Portfolio,
which is equal to the remaining 2,300,596 shares redeemed during its fiscal
year ended March 31, 1996, plus 21,386
shares.
During its current fiscal year, the fund filed no other post-effective
amendments for the purpose of reduction pursuant to Rule 24e-2(a).
During its fiscal year ended March 31, 1996, the fund redeemed 1,142,516
shares of the Florida Limited Term Portfolio. During its current fiscal year,
the fund used 313,437 shares of the Florida Limited Term
Portfolio it redeemed during its fiscal year ended March 31, 1996, for a
reduction pursuant to Rule 24f-2(c).
The fund currently is registering 872,492 shares for the Florida Limited Term
Portfolio, which is equal to
the remaining 829,079 shares redeemed during its fiscal year ended
March 31, 1996, plus 43,413 shares.
During its current fiscal year, the fund filed no other post-effective
amendments for the purpose of reduction pursuant to Rule 24e-2(a).
Rule 24f-2 (1) Declaration:
Registrant filed its Rule 24f-2 Notice on May 31, 1996 for its most recent
fiscal year ended March 31, 1996
It is proposed that this Post-Effective Amendment will become effective
July 29, 1996 pursuant to paragraph (b) of Rule 485.
CROSS REFERENCE SHEET
(as required by Rule 495(a),
Part A of Form N-1A Prospectus Caption
1. Cover Page cover page
2. Synopsis "Prospectus Table"
3. Condensed Financial Information "Financial Highlights"
4. General Description of Registrant "Additional Information"
cover page
"Investment Objective and
Policies"
5. Management of the Fund "Management of the Fund"
"Prospectus Summary"
6. Capital Stock and Other Securities "Additional Information"
"Redemption of Shares"
cover page
"Dividends, Distributions
and Taxes"
7. Purchase of Securities Being
Offered "Purchase of Shares"
"Prospectus Summary"
"Management of the Fund"
"Valuation of Shares"
8. Redemption or Repurchase "Redemption of Shares"
"Minimum Account Size"
9. Legal Proceedings not applicable
Statement of Additional
Part B of Form N-1A Information Caption
10. Cover Page cover page
11. Table of Contents "Table of Contents"
12. General Information and History not applicable
13. Investment Objectives and Policies cover page
"Additional Information Regarding
Investment Policies"
"Investment Restrictions"
See Prospectus-"Investment
Objective and Management Policies"
14. Management of the Registrant "Trustees and Officers"
15. Control Persons and Principal
Holders of Securities See Prospectus - "Additional
Information"
16. Investment Advisory and
Other Services See Prospectus - "Management
of the Fund"
"Trustees and Officers"
"Independent Auditors"
"Custodian"
17. Brokerage Allocation See Prospectus - "Management of
the Fund"
18. Capital Stock and Other Securities See Prospectus - "Additional
Information"
"Voting Rights"
"The Fund"
19. Purchase, Redemption and Pricing
of Securities Being Offered See Prospectus -
"Purchase of Shares"
"Prospectus Summary"
"Determination of Net Asset
Value"
See Prospectus - "Valuation of Shares"
"Financial Statements"
"Redemption of Shares"
20. Tax Status See Prospectus - "Dividends,
Distributions and Taxes"
21. Underwriters See Prospectus - "Management
of the Fund"
"Purchase of Shares"
22. Calculation of Performance Data "Performance Information"
See Prospectus - "Performance"
23. Financial Statements "Financial Statements"
Part C of Form N-1A
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Post-Effective Amendment to
the Registration Statement.
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
Florida
Portfolio
July 29, 1996
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
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Prospectus July 29, 1996
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388 Greenwich Street
New York, NY 10013
(212) 723-9218
The Florida Portfolio (the "Portfolio") is one of ten 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. The Portfolio will
invest primarily in obligations issued by the State of Florida and its political
subdivisions, agencies and instrumentalities. The Portfolio will seek generally
to select investments that will enable its shares to be exempt from the Florida
intangibles tax. 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 1, 1996, 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 OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRRY IS A CRIMINAL
OFFENSE.
1
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Table of Contents
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Prospectus Summary 3
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Financial Highlights 9
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Investment Objective and Management Policies 11
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Valuation of Shares 16
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Dividends, Distributions and Taxes 16
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Purchase of Shares 19
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Exchange Privilege 27
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Redemption of Shares 30
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Minimum Account Size 33
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Performance 33
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Management of the Fund 34
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Distributor 36
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Additional Information 37
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================================================================================
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
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary
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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. The Portfolio will invest primarily in obligations issued by the
State of Florida and its political subdivisions, agencies and instrumentalities.
The Portfolio will seek generally to select investments that will enable its
shares to be exempt from the Florida intangibles tax. 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 several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment 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 up to 4.00% 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
reduced or 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 -- Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the
3
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
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original purchase. Upon conversion, these shares will no longer be subject to an
annual distribution fee. In addition, a certain portion of Class B shares that
have been acquired through the reinvestment of dividends and distributions
("Class B Dividend Shares") will be converted at that time. See "Purchase of
Shares -- Deferred Sales Charge Alternatives."
Class 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 0.55% 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.
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 reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and 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 these Classes. 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 and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
4
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Smith Barney Muni Funds - Florida Portfolio
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Prospectus Summary (continued)
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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,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price 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." Class A share purchases
may also be eligible for a reduced initial sales charge. See "Purchase of
Shares." Because the ongoing expenses of Class A shares may be lower than those
for Class B and Class C shares, purchasers eligible to purchase Class A shares
at net asset value or at a reduced sales charge 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 B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
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 a brokerage account
maintained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. See
"Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class 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, Class B and Class C
shares and the subsequent investment requirement for all Classes through the
Systematic Invest-
5
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
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Prospectus Summary (continued)
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ment Plan described below is $50. There is no minimum investment requirement in
Class A for unitholders who invest distributions from a unit investment trust
("UIT") sponsored by Smith Barney. It is not recommended that the Portfolio be
used as a vehicle for Keogh, IRA or other qualified retirement plans. 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. See "Management of the Fund."
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 are paid monthly from net investment
income. 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 a 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. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
6
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
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Prospectus Summary (continued)
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RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The Portfolio's concentration
in Florida obligations involves certain additional risks that should be
considered carefully by investors. Additionally, 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. The market value of long-term municipal bonds may be
adversely effected during periods of rising interest rates. Additionally,
changes in Federal income tax laws effecting the tax exemption for interest on
municipal obligations could effect the availability of tax exempt obligations
for purchase and the value of the Portfolio's securities would be affected. See
"Investment Objective and Management Policies."
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:
Class A Class B Class C Class Y**
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Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) .................. 4.00% None None None
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower) .... None* 4.50% 1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees ................... 0.50% 0.50% 0.50% 0.50%
12b-1 Fees*** ..................... 0.15 0.65 0.70 --
Other Expenses .................... 0.05 0.05 0.08 0.05
---- ---- ---- ----
Total Portfolio Operating Expenses ... 0.70% 1.20% 1.28% 0.55%
---- ---- ---- ----
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* 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 Y shares have been estimated because no Class Y
shares were outstanding for the period ended March 31, 1996.
*** 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.
7
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Smith Barney Muni Funds - Florida Portfolio
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Prospectus Summary (continued)
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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 B, Class C 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 B shares an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.15% service
fee. With respect to Class C shares, Smith Barney also receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of that Class, consisting
of a 0.55% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
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."
1 Year 3 Years 5 Years 10 Years*
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An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the
end of each time period:
Class A............................... $47 $61 $77 $124
Class B............................... 57 68 76 132
Class C............................... 23 41 70 155
Class Y............................... 6 18 31 69
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A............................... $47 $61 $77 $124
Class B............................... 12 38 66 132
Class C............................... 13 41 70 155
Class Y............................... 6 18 31 69
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* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the 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. Actual expenses may be greater or
less than those shown.
8
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Smith Barney Muni Funds - Florida Portfolio
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Financial Highlights
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The following information for the five-year period ended March 31, 1996 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
1996 financial statements and the independent auditors' report thereon appear in
the March 31, 1996 Annual Report to Shareholders. No information is presented
for Class Y shares, because no Class Y shares were outstanding for the periods
presented below.
For a Portfolio share outstanding throughout each period:
Class A Shares
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Period Ended March 31, 1996(a) 1995(b) 1994 1993 1992(c)
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Net Asset Value,
Beginning of Period $12.89 $12.82 $13.21 $12.32 $12.00
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Net investment income 0.74 0.75 0.77 0.79 0.73
Net realized and change in
unrealized gains (losses) 0.35 0.08# (0.39) 0.91 0.29
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Total from Operations 1.09 0.83 0.38 1.70 1.02
================================================================================
Less Distributions From:
Net investment income (0.74) (0.76) (0.77) (0.80) (0.70)
Net realized gains -- -- -- (0.01) --
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Total Distributions (0.74) (0.76) (0.77) (0.81) (0.70)
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Net Asset Value,
End of Period $13.24 $12.89 $12.82 $13.21 $12.32
================================================================================
Total Return ## 8.65% 6.77% 2.75% 14.21% 8.70%++
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Net Assets,
End of Period (000's) $117,423 $107,724 $104,681 $102,202 $67,998
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Ratios to Average
Net Assets:
Expenses (1) 0.70% 0.61% 0.54% 0.46% 0.23%+
Net Investment Income 5.62 5.97% 5.71% 6.15% 6.70%+
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Portfolio Turnover Rate 46.92% 43.23% 20.40% 25.57% 41.72%
================================================================================
(a) Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
(b) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(c) For the period from April 2, 1991 (commencement of operations) to March 31,
1992. Smith Barney Muni Funds - Florida Portfolio
+ Annualized.
++ Total returns are not annualized as it may not be representative of the
total return for the year.
## Total returns do not reflect sales loads or contingent deferred sales
charges.
(1) See page 10 for full footnote disclosure for (1).
(#) See page 10 for full footnote disclosure for (#).
9
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Smith Barney Muni Funds - Florida Portfolio
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Financial Highlights (continued)
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<TABLE>
<CAPTION>
Class B Shares Class C Shares
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<S> <C> <C> <C> <C> <C> <C> <C>
Period Ended March 31, 1996(d) 1996(c) 1996(d) 1995(a) 1994 1993 (b)
- ----------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $12.89 $11.91 $12.89 $12.8 $13.20 $12.86
- ----------------------------------------------------------------------------------------
Income from Operations:
Net Investment Income 0.68 0.30 0.66 0.67 0.68 0.19
Net Realized and
Unrealized Gain (Loss) 0.35 0.97# 0.35 0.08 (0.39) 0.33
- ----------------------------------------------------------------------------------------
Total from Operations 1.03 1.27 1.01 0.75 0.29 0.52
========================================================================================
Less Distributions From:
Net Investment Income (0.69) (0.29) (0.68) (0.67) (0.68) (0.18)
Net Realized Gains -- -- -- -- -- --
- ----------------------------------------------------------------------------------------
Total Distributions (0.69) (0.29) (0.68) (0.67) (0.68) (0.18)
- ----------------------------------------------------------------------------------------
Net Asset Value,
End of Period $13.23 $12.89 $13.22 $12.89 $12.81 $13.20
========================================================================================
Total Return ## 8.09% 10.77%++ 7.96% 6.12% 2.05% 4.05%++
- ----------------------------------------------------------------------------------------
Net Assets,
End of Period (000's) $46,267 $1,990 $2,665 $2,750 $2,487 $691
- ----------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses 1.20% 1.20%+ 1.28% 1.25% 1.24% 1.24%+
Net Investment Income 5.00 5.57%+ 5.04 5.40% 4.95% 5.21%+
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 46.92% 43.23% 46.92% 43.23% 20.40% 25.57%
========================================================================================
</TABLE>
(a) On November 7, 1994 the former Class B shares were renamed Class C shares.
(b) For the period from January 5, 1993 (inception date) to March 31, 1993.
(c) For the period from November 16, 1994 (inception date) to March 31, 1995.
(d) Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
++ Total return is not annualized as the result may not be representative of
the total return for the year.
+ Annualized.
## Total returns do not reflect sales loads or contingent deferred sales
charges.
(1) The manager has waived all or part of its fees in each of the periods in
the two-year period ended March 31, 1993. If such fees were not waived, the
per share decrease of net investment income and the ratios of expenses to
average net assets would be as follows:
Expense Ratios
Per Share Decreases without Fee Waivers*
------------------- --------------------
1993 1992 1993 1992
---- ---- ---- ----
Class A $.012 $.040 0.56% 0.59%+
* As a result of voluntary expense limitations, the ratios of expenses to
average net assets will not exceed 0.80%, 1.30% and 1.35% for Class A, B
and C shares, respectively.
# Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
10
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Florida Portfolio seeks as high a level of income exempt from Federal
income taxes as is consistent with prudent investing. The Portfolio invests
primarily in obligations that are issued by the State of Florida and its
political subdivisions, agencies and instrumentalities, the interest from which
is, in the opinion of bond counsel for the various issuers, 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.
The Portfolio will seek generally to select investments which will enable its
shares to be exempt from the Florida intangibles tax.
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 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. Please
see the Statement of Additional Information for a more detailed discussion about
the different types of municipal obligations.
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 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 some-what 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
11
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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 1 or MIG 2, VMIG 1 or VMIG 2 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
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
over 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.
12
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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 primarily 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.
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 1/43% of its
net assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures 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.
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). It is also a fundamental policy that under normal market conditions, the
Portfolio will invest at least 65% of its net assets in municipal obligations
issued by the State of Florida, its political subdivisions and their agencies
and instrumentalities and in other munici-
13
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
pal obligations which are exempt from the Florida intangibles 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 Portfolio's monies available for
investment exceed the municipal obligations available for purchase that meet the
Portfolio's rating, maturity and other investment criteria.
RISK FACTORS AFFECTING FLORIDA
Investors should be aware that Florida municipal obligations may be
adversely affected by political and economic conditions and developments within
the State of Florida. Population growth in Florida since 1985 has increased
approximately 26.1%. The state's current population, estimated at 14 million, is
the fourth highest in the nation. Services and trade continue to be the largest
employment and earning sectors reflecting the tourist element of the economy as
well as growth in these activities to meet the needs of Florida's expanding
population. Manufacturing, primarily high technology, electrical and electronic
equipment industries and financial services are rapidly growing and diversifying
elements of Florida's economy. Agriculture, once sharing with tourism the role
of dominant economic sector, is now only one of several important elements.
Florida's rapid growth is straining resources, but is also having some
positive results. In many cases, the expansion of local governments is creating
greater economic depth and diversity. For example, numerous insurance companies
have located in Jacksonville over the past ten years, making the city a leading
insurance center. During the same period, Miami's financial services sector has
expanded significantly, primarily in international banking and international
trade. Many other Florida cities and counties have also succeeded in their
economic development efforts, as evidenced by the significant business
investment throughout the state.
Florida has taken the lead among U.S. states with a long-term comprehensive
growth management plan for local governments. The plan should enhance economic
development by keeping growth in line with developing resources and costs. The
growth initiative affects population, infrastructure, employment, education,
transportation, and water supply -- all vital elements of economic stability.
("Appendix E" in the Statement of Additional Information provides additional
details.)
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
14
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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 obligations 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, it will invest in
municipal obligations with an emphasis on income rather than stability of net
asset values.
The Fund is registered as a "non-diversified" company under the Investment
Company Act of 1940 (the "1940 Act"), in order for the Portfolio to have the
ability to invest more than 5% of its assets in the securities of any issuer.
The Portfolio intends to comply with Subchapter M of the Internal Revenue Code
that limits the aggregate value of all holdings (except U.S. Government and cash
items, as defined in the Code) that exceed 5% of the Portfolio's total assets to
an aggregate amount of 50% of such assets. Also, holdings of a single issuer
(with the same exceptions) may not exceed 25% of the Portfolio's total assets.
These limits are measured at the end of each quarter. Under the Subchapter M
limits, "non-diversification" allows up to 50% of a Portfolio's total assets to
be invested in as few as two single issuers. In the event of decline of
creditworthiness or default upon the obligations of one or more such issuers
exceeding 5%, an investment in the Portfolio will entail greater risk than in a
portfolio having a policy of "diversification" because a high percentage of the
Portfolio's assets may be invested in municipal obligations of one or two
issuers. Furthermore, a high percentage of investments among few issuers may
result in a greater degree of fluctuation in the market value of the assets of
the Portfolio, and consequently a greater degree of fluctuation of the
Portfolio's net asset value, because the Portfolio will be more susceptible to
economic, political, or regulatory developments affecting these securities than
would be the case with a portfolio composed of varied obligations of more
issuers.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Portfolio's securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased
15
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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, which is currently 4:00 P.M. New York City time on
each day that the NYSE is open, by dividing 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
16
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
declared and paid monthly and any realized capital gains are declared and
distributed annually.
If a shareholder does not otherwise instruct, 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.
Income dividends and capital gains 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 Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data") should notify First Data 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 B and 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 B and 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 B, 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, 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. Capital gains distributions, if any, whether paid in
cash or invested in shares of the Portfolio, will be taxable to shareholders.
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-
17
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
interest dividends) exceeds the amount otherwise determined to be alternative
minimum taxable income. Accordingly, investment in the Portfolio 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 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. 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 concerning an investment in the Fund.
FLORIDA TAXES
Florida currently does not impose an income tax on individuals. Thus
individual shareholders of the Portfolio will not be subject to any Florida
state income tax on distributions received from the Portfolio. However, certain
distributions will be taxable to corporate shareholders that are subject to
Florida corporate income tax.
Florida currently imposes an "intangibles tax" on certain securities and
other intangible assets owned by Florida residents. Certain types of municipal
obligations of Florida issuers, U.S. Treasury securities and municipal
obligations issued by certain U.S. territories and possessions are exempt from
this intangibles tax. Consistent with its fundamental policy to 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 will seek generally to select investments that will enable its shares
to be exempt from the Florida intangibles tax and will attempt to ensure that
all of its assets held on the annual assessment date are exempt from this tax.
The Fund also has received a ruling from the Florida Department of Revenue that,
if on the annual assessment date of any year the Portfolio consists solely of
such exempt assets, then the Portfolio's shares will be exempt from the Florida
intangibles tax. The Portfolio intends to provide shareholders annually
18
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
with information relating to its assets necessary to permit shareholders to
determine whether the value of Portfolio shares held is exempt from the Florida
intangibles tax.
Investors purchasing municipal obligations of their state of residence, or
a fund comprised of such obligations, should recognize that the benefits of the
exemption from local taxes, in addition to the exemption from Federal taxes,
necessarily limits the fund's ability to diversify geographically. The Portfolio
will make available annually to its shareholders information concerning the tax
status of its distributions, including the amount of its dividends designated as
exempt-interest dividends and as capital gain dividends.
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 Information. Investors are urged to consult their
tax advisors with specific reference to their own tax situation.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers four Classes of shares. 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 are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $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 B, Class C or Class Y shares.
No maintenance fee will be charged by the Portfolio in connection with a
brokerage account through which an investor purchases or holds shares.
Investors in Class A, Class B 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
19
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
in the Portfolio's Systematic Investment Plan, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements in Class A for employees of Travelers and its subsidiaries,
including Smith Barney, and their spouses and children, unitholders who invest
distributions from a UIT sponsored by Smith Barney, and Trustees or Directors of
any of the Smith Barney Mutual Funds and their spouses and children. The Fund
reserves the right to waive or change minimums, to decline any order to purchase
its shares and to suspend the offering of shares from time to time. Shares
purchased will be held in the shareholder's account by the Fund's transfer
agent, First Data. Share certificates are issued only upon a shareholder's
written request to First Data. 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. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data 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 First Data. 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.
20
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:
- --------------------------------------------------------------------------------
Sales Charge Dealer's
% of % of Amount Reallowance as % of
Amount of Investment Offering Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than $25,000 4.00% 4.17% 3.60%
$25,000 -49,999 3.50 3.63 3.15
$50,000 -99,999 3.00 3.09 2.70
$100,000 - 249,999 2.50 2.56 2.25
$250,000 -499,999 1.50 1.52 1.35
$500,000 and over * * *
- --------------------------------------------------------------------------------
* Purchases of Class A shares, 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 B and Class C shares is waived. See
"Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the 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. The reduced
sales charge minimums may also be met by 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 to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons
21
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company 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; (f) investments of distributions from a UIT
sponsored by Smith Barney (g) purchases through programs offered
by Travelers Group Diversified Distribution
Services Inc. by employees of participating empl;oyers
and (h) purchases by investors participating in a
Smith Barney fee based arrangement.
In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the 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 the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum
22
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Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
initial investment required. The sales charge applicable to purchases by each
member of such a group will be determined by the table set forth above under
"Initial Sales Charge Alternative -- Class A Shares," and will be based upon the
aggregate sales of Class A shares of Smith Barney Mutual Funds offered with a
sales charge to, and share holdings of, all members of the group. To be eligible
for such reduced sales charges or to purchase at net asset value, all purchases
must be pursuant to an employer-or partnership-sanctioned plan meeting certain
requirements. One such requirement is that the plan must be open to specified
partners or employees of the employer and its subsidiaries, if any. Such plan
may, but is not required to, provide for payroll deductions. Smith Barney may
also offer a reduced sales charge or net asset value purchase for aggregating
related fiduciary accounts under such conditions that Smith Barney will realize
economies of sales efforts and sales related expenses. An individual who is a
member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
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
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 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
23
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If the goal is not achieved within
the period, the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed. Please contact a Smith
Barney Financial Consultant or First Data: 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 First Data 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 Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) 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; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
24
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
the number of years since the shareholder made the purpose payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders:
Year Since Purchase
Payment Was Made CDSC
---------------------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
---------------------------------------------------------------
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total of
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares for Class B shares of
the Portfolio will be offered the opportunity to exchange all such Class B
shares for Class A shares of the Portfolio four years after the date on which
those shares were deemed to have been purchased. Holders of such Class B shares
will be notified of the pending exchange in writing approximately 30 days before
the fourth anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth anniversary
date. See "Prospectus Summary -- Alternative Purchase Arrangements -- Class B
Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of
25
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on:(a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 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.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
26
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
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, Class B and Class C shares are subject to
minimum investment requirements and all shares are subject to the 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 Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income 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.
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
27
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- 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
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc. -- High Growth Portfolio
Smith Barney Concert Series Inc. -- Growth Portfolio
Smith Barney Concert Series Inc. -- Balanced Portfolio
Smith Barney Concert Series Inc. -- Conservative Portfolio
Smith Barney Concert Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
*** Smith Barney Money Funds, Inc. -- Cash Portfolio
*** Smith Barney Money Funds, Inc. -- Government Portfolio
++ Smith Barney Money Funds, Inc. -- Retirement Portfolio
*** Smith Barney Municipal Money Market Fund, Inc.
*** Smith Barney Muni Funds -- California Money Market Portfolio
*** Smith Barney Muni Funds -- New York Money Market Portfolio
- ------------
* Available for exchange with Class A, Class C and Class Y shares of the
Portfolio.
** Available for exchange with Class A, Class B and Class Y shares of the
Portfolio.
*** Available for exchange with Class A and Class Y shares of the Portfolio. +
Available for exchange with Class B and Class C shares of the Portfolio.
++ Available for exchange with Class A shares of the Portfolio.
28
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (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 B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Portfolio, the
exchanged Class B shares will be subject to the higher applicable CDSC. Upon an
exchange, the new Class B shares will be deemed to have been purchased on the
same date as the Class B shares of the Portfolio that have been exchanged.
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 adviser 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 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
29
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 of the Smith Barney Mutual
Funds ordinarily available, which position the shareholder would be expected to
maintain for a significant period of time. All relevant factors will be
considered in determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined, 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 any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's
30
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
benefit without specific instruction and Smith Barney will benefit from the use
of temporarily uninvested funds. Redemption proceeds for shares purchased by
check, other than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Muni Funds/Florida Portfolio
Class A, B, C or Y (please specify)
c/o First Data Investor 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 First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000, must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data 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 First Data 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
31
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Portfolio.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares, may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
32
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven (7) days prior notice to shareholders.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to redeem involuntarily any shareholder's
account if the aggregate value of the shares held in a 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 Portfolio may include its yield, tax equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature the Portfolio may also include its
distribution rate. These figures are computed separately for Class A, Class B,
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
33
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
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 specific period
of time assuming deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and capital 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
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 Portfolio
may also include comparative performance information in advertising or marketing
its 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 adviser,
custodian and transfer agent. The day-to-day operations of the Portfolio are
delegated to the Portfolio's investment adviser. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the Fund.
34
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
MANAGER
Smith Barney Mutual Funds Management Inc. ("SBMFM" or the "Manager"),
manages the day-to-day operations of the Portfolio pursuant to a management
agreement entered into by the Fund on behalf of the Portfolio.
SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. As of March 31, 1996, SBMFM had aggregate assets under management in
excess of $76 billion.
SBMFM provides the Fund 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. At a Meeting of Shareholders
of the Portfolio held on December 15, 1995, the shareholders approved a new
management agreement that increased the effective management fee paid by the
Fund on behalf of the Portfolio from 0.45% to 0.50% of the Portfolio's average
daily net assets. The new management agreement also provides that the
Portfolio's investment manager shall voluntarily reduce its fee to the extent
that in any fiscal year the aggregate expenses of the Portfolio, exclusive of
taxes, brokerage, interest, and extraordinary expenses, such as litigation and
indemnification expenses, exceed 0.70% of such Portfolio's average daily net
assets. (Certain Class specific expenses, such as 12b-1 fees, will also continue
to be excluded when determining whether the expense limitation
applies.)Previously, the expense limitation was 0.65%. The change in the rate of
the expense limitation corresponds to the change in the rate of the management
fee. The increased management fee and expense limitation became effective on
December 18, 1995.
For the fiscal year ended March 31, 1996, total expenses were 0.70% of the
average daily net assets for Class A shares; 1.20% of the average daily net
assets for Class B shares; and 1.28% of the average daily net assets for Class C
shares.
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
(April 2, 1991) and manages the day-to-day operations of the Portfolio,
including making all investment decisions. Mr. Coffey also serves as the
portfolio manager for many of 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, 1996
is included
35
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
in the Annual Report dated March 31, 1996. 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.
- --------------------------------------------------------------------------------
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, Class B 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 B and Class C shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net assets attributable to these Classes.
Class B shares that automatically convert to Class A shares eight years after
the date of original purchase, will no longer be subject to a distribution fee.
The fees are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class 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, Class B 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
36
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Distrubutor (continued)
- --------------------------------------------------------------------------------
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
authorized the issuance of twenty series of shares, each representing shares in
one of twenty separate Portfolios. The assets of each Portfolio are segregated
and separately managed and a shareholder's interest is in the assets of the
Portfolio in which he or she holds shares. Class A, Class B, 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 related to the shareholder service and
distribution of Class A, Class B and Class C shares are borne solely by the
respective Class and each such Class of shares has exclusive voting rights with
respect to provisions of the Fund's Rule 12b-1 distribution plan which pertain
to that particular Class. It is the intention of the Fund not to hold annual
meetings of shareholders. The Trustees may call meetings of
Smith Barney Muni Funds - Florida Portfolio
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
of shareholders upon a vote of 10% of the Fund's outstanding shares for purposes
of voting on removal of a Trustee or Trustees. Shareholders will receive
assistance in communicating with other shareholders in connection with the
removal of Trustees as required by Section 16(c) of the 1940 Act. 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, PA 19103 serves as custodian of the Portfolio's investments.
First Data, 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
37
<PAGE>
Smith Barney Muni Funds - Florida Portfolio
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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.
38
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [LOGO]
Smith Barney
Muni Funds
Florida Portfolio
388 Greenwich Street
New York, New York 10013
FD 0605 6/96
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
Limited
Term Portfolio
JULY 29, 1996
Prospectus begins on page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Prospectus July 29, 1996
- --------------------------------------------------------------------------------
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Limited Term Portfolio (the "Portfolio") is one of ten investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of income exempt from
Federal income taxes as is consistent with prudent investing. The Portfolio will
normally invest in securities with remaining maturities no greater than twenty
years. The dollar-weighted average maturity of the Portfolio will normally be
not less than three nor more than ten 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 1, 1996, 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>
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 16
- --------------------------------------------------------------------------------
Purchase of Shares 18
- --------------------------------------------------------------------------------
Exchange Privilege 24
- --------------------------------------------------------------------------------
Redemption of Shares 27
- --------------------------------------------------------------------------------
Minimum Account Size 30
- --------------------------------------------------------------------------------
Performance 31
- --------------------------------------------------------------------------------
Management of the Fund 32
- --------------------------------------------------------------------------------
Distributor 33
- --------------------------------------------------------------------------------
Additional Information 34
- --------------------------------------------------------------------------------
================================================================================
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>
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 income exempt from Federal income taxes as is consistent with prudent
investing. The Portfolio will normally invest in securities with remaining
maturities no greater than twenty years. The dollar-weighted average maturity of
the Portfolio will normally be not less than three nor more than ten 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
<PAGE>
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 alter native, 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>
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 a brokerage account
maintained with 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. See "Management of the Fund."
5
<PAGE>
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>
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:
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 0.50% 0.50% 0.50%
12b-1 fees 0.15% 0.35% --
Other expenses 0.10% 0.11% 0.08%
---- ---- ----
Total Portfolio Operating Expenses 0.75% 0.96% 0.58%
==== ==== ====
- ------------------------------------------------------------------------------
* 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.
** Class C shares are subject to an ongoing distribution fee and, 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.
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>
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."
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............................. $28 $43 $61 $111
Class C............................. 20 31 53 118
Class Y............................. 6 19 32 73
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A............................. $28 $43 $61 $111
Class C............................. 10 31 53 118
Class Y............................. 6 19 32 73
- --------------------------------------------------------------------------------
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>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for the eight-year period ended March 31, 1996
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 1996 financial statements and the independent auditors' report
thereon appear in the March 31, 1996 Annual Report to Shareholders.
For a Portfolio share outstanding throughout each period:
<TABLE>
<CAPTION>
Period Ended March 31,
- --------------------------------------------------------------------------------------------------------------------------------
Class A Shares(1): 1996 1995 1994 1993 1992 1991 1990 1989(a)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 6.54 $ 6.55 $ 6.68 $ 6.45 $ 6.38 $ 6.28 $ 6.20 $ 6.25
- --------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net Investment Income 0.36 0.36 0.37 0.39 0.42 0.43 0.44 0.13
- --------------------------------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain (or Loss) 0.07 -- (0.13) 0.23 0.07 0.07 0.10 (0.05)
- --------------------------------------------------------------------------------------------------------------------------------
Total Income from Operations 0.43 0.36 0.24 0.62 0.49 0.50 0.54 0.08
================================================================================================================================
Less Distributions From:
Net Investment Income (0.36) (0.37) (0.37) (0.39) (0.42) (0.40) (0.46) (0.13)
- --------------------------------------------------------------------------------------------------------------------------------
Net Realized Gains 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.36) (0.37) (0.37) (0.39) (0.42) (0.40) (0.46) (0.13)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 6.61 $ 6.54 $ 6.55 $ 6.68 $ 6.45 $ 6.38 $ 6.28 $ 6.20
================================================================================================================================
Total Return # 6.65% 5.69% 3.65% 9.82% 7.99% 8.23% 9.07% 1.09%++
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(in millions) $ 278 $ 245 $ 282 $ 242 $ 157 $ 65 $ 20 $ 5
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.75% 0.61% 0.53% 0.55% 0.49% 0.33% 0.30% 0.30%+
Net Investment Income 5.43% 5.61% 5.53% 5.90% 6.42% 6.77% 6.98% 6.58%+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 25.72% 21.80% 24.72% 24.53% 26.27% 14.92% 64.50% 14.27%
================================================================================================================================
</TABLE>
(a) See page 10 for full footnote disclosure for (a).
(1) See page 10 for full footnote disclosure for (1).
(2) See page 10 for full footnote disclosure for (2).
9
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended March 31,
Class C Shares (c) Class Y
- ------------------------------------------------------------------------------------------------
1996 1995 1994 1993(b) 1996(d)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 6.54 $ 6.54 $ 6.68 $ 6.62 $ 6.56
- ------------------------------------------------------------------------------------------------
Income From Operations:
Net Investment Income 0.35 0.35 0.35 0.10 0.37
- ------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(or Loss) on Investments 0.06 0.00 (0.14) 0.05 0.06
- ------------------------------------------------------------------------------------------------
Total from Operations 0.41 0.35 0.21 0.15 0.43
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net Investment Income (0.34) (0.35) (0.35) (0.09) (0.37)
- ------------------------------------------------------------------------------------------------
Net Realized Gains 0.00 0.00 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------
Total Distributions (0.34) (0.35) (0.35) (0.09) (0.37)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 6.61 $ 6.54 $ 6.54 $ 6.68 $ 6.62
================================================================================================
Total Return # 6.45% 5.51% 3.15% 2.28%++ 6.63%++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Period(in millions) $ 29 $ 27 $ 27 $ 6 $ 214
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.96% 0.89% 0.88% 0.88%+ 0.58%+
Net Investment Income 5.22 5.34% 5.10% 5.35%+ 5.56%+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 25.72% 21.80% 24.72% 24.53% 25.72%
================================================================================================
</TABLE>
(2) The Manager has waived all or a part of its fees for each of the years in
the four-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:
Increase in Per Share Expenses 1992 1991 1990 1989
- --------------------------------------------------------------------------------
Class A $.003 $.011 $.018 $.022(a)
- --------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets
- --------------------------------------------------------------------------------
Class A .56% .30%* .30%* .30%*+(a)
- --------------------------------------------------------------------------------
* As a result of expense limitations.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
# Total returns do not reflect sales loads or contingent deferred sales
charges.
(a) For the period from November 28, 1988 (commencement of operations) to March
31, 1989.
(b) For the period 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.
(d) For the period from April 4, 1995 (inception date) to March 31, 1996.
(1) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
10
<PAGE>
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 will normally invest in securities with remaining maturities
no greater than twenty years. The dollar-weighted average maturity of the
Portfolio will normally be not less than three nor more than ten 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.
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 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. Please
see the Statement of Additional Information for a more detailed discussion about
the different types of municipal obligations.
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
11
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
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
12
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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.
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 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.
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
13
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
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.
14
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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.
15
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
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.
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 Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"), should notify First Data 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.
16
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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
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
17
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 Directors or Trustees of any of the Smith
Barney Mutual Funds and their spouses and children. The Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be held
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a share holder's written request to First
Data. 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
18
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data 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 First Data. 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:
================================================================================
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 * * *
================================================================================
* 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
19
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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."
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
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 to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees), the immediate families of
such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company 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; (f) investments of distributions from a UIT
sponsored by Smith Barney; (g) purchases through programs offered by
Travelers Group Diversified Distribution Services Inc. by
employees of participating employers; and (h) purchases by investors
participating in a Smith Barney fee based arrangement. In order to obtain
such discounts, the
20
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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.
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
21
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
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 First Data 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 First Data for further
information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial
22
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class 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) CDSC Shares redeemed more than 12 months after their
purchase.
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time 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
23
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Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 redemp tion proceeds within 60 days and receive pro
rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data 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 Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
24
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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.
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 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
25
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc. -- High Growth Portfolio
Smith Barney Concert Series Inc. -- Growth Portfolio
Smith Barney Concert Series Inc. -- Balanced Portfolio
Smith Barney Concert Series Inc. -- Conservative Portfolio
Smith Barney Concert Series Inc. -- Income Portfolio
Money Market Funds
** Smith Barney Exchange Reserve Fund
* Smith Barney Money Funds, Inc. -- Cash Portfolio
* Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
* Smith Barney Municipal Money Market Fund, Inc.
* Smith Barney Muni Funds -- California Money Market Portfolio
* Smith Barney Muni Funds -- New York Money Market Portfolio
- ----------
* Available for exchange with Class A 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.
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.
26
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 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.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined, 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.
27
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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
submitting a written request for redemption to:
Smith Barney Muni Funds/Limited Term Portfolio
Class A, C or Y (please specify)
c/o First Data Investor 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 First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000, must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data
28
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data 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.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Portfolio.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares, may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
29
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, will be assessed against the shareholder's account
from which shares were redeemed. In order to change the bank account designated
to receive redemption proceeds, a shareholder must complete a new Telephone/Wire
Authorization Form and, for the protection of the shareholder's assets, will be
required to provide a signature guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for the service at any time following
at least seven (7) days prior notice to shareholders.
- --------------------------------------------------------------------------------
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.
30
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
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
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.
31
<PAGE>
Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
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
Smith Barney Mutual Funds Management Inc. ("SBMFM" or the "Manager"),
manages the day-to-day operations of the Portfolio pursuant to a management
agreement entered into by the Fund on behalf of the Portfolio.
SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. As of March 31, 1996, SBMFM had aggregate assets under management in
excess of $76 billion.
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. At a Meeting of Shareholders of the Portfolio
held on December 15, 1995, the Shareholders approved a new management agreement
that increased the effective management fee paid by the Fund on behalf of the
Portfolio from 0.45% to 0.50% of the Portfolio's average daily net assets. The
new management agreement also provides that the Portfolio's investment manager
shall voluntarily reduce its fee to the extent that in any fiscal year the
aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest,
and extraordinary expenses, such as litigation and indemnification expenses,
exceed 0.70% of such Portfolio's average daily net assets. (Certain Class
specific expenses, such as 12b-1 fees, will also continue to be excluded when
determining whether the expense limitation applies.) Previously, the expense
limitation was 0.65%. The change in the rate of the expense limitation
corresponds to the change in the rate of the management fee. The expense
limitation shall be in effect until it is terminated by notice to shareholders
and by supplement to the then current prospectus. The increased management fee
and expense limitation became effective on December 18, 1995.
32
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Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
For the last fiscal year total expenses were 0.75% of the average daily net
assets for Class A shares; 0.96% of the average daily net assets for Class C
shares; and 0.58% of the average daily net assets for Class Y shares.
PORTFOLIO MANAGEMENT
Lawrence J. McDermott, a Managing Director of Smith Barney, has served as
Vice President of the Fund and portfolio manager of the Portfolio since January
1996 and manages the day to day operations of the Fund, including making
all investment decisions. Mr. McDermott also serves as the portfolio manager
for other tax-exempt bond funds sponsored by Smith Barney.
Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1996
is included in the Annual Report dated March 31, 1996. 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.
- --------------------------------------------------------------------------------
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
33
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Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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 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
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,
34
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Smith Barney Muni Funds - Limited Term Portfolio
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
Philadelphia, Pennsylvania 19103, serves as Custodian of the Portfolio's
investments.
First Data, 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.
35
<PAGE>
Smith Barney
------------
A Member of TravelersGroup [Logo}
Smith Barney
Muni Funds
Limited Term
Portfolio
388 Greenwich Street
New York, New York 10013
FD 0664 6/96
PROSPECTUS
SMITH BARNEY
MUNI FUNDS
New York
Portfolio
JULY 29,1996
Prospectus begins on page one
[LOGO]Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Prospectus July 29, 1996
- --------------------------------------------------------------------------------
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The New York Portfolio (the "Portfolio") is one of ten investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund").
The New York Portfolio seeks to pay its shareholders as high a level of
monthly income exempt from Federal income taxes and from New York State and City
personal income taxes as is consistent with prudent investing.
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 1, 1996, 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>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Prospectus Summary 3
- --------------------------------------------------------------------------------
Financial Highlights 10
- --------------------------------------------------------------------------------
Investment Objective and Management Policies 12
- --------------------------------------------------------------------------------
Valuation of Shares 17
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes 18
- --------------------------------------------------------------------------------
Purchase of Shares 20
- --------------------------------------------------------------------------------
Exchange Privilege 28
- --------------------------------------------------------------------------------
Redemption of Shares 31
- --------------------------------------------------------------------------------
Minimum Account Size 34
- --------------------------------------------------------------------------------
Performance 34
- --------------------------------------------------------------------------------
Management of the Fund 35
- --------------------------------------------------------------------------------
Distributor 37
- --------------------------------------------------------------------------------
Additional Information 38
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
Smith Barney Muni Funds - New York 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 New York Portfolio seeks to pay its shareholders
as high a level of monthly income exempt from Federal income taxes and from New
York State and City personal income taxes as is consistent with prudent
investing. 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 several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment 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 up to 4.00% 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
reduced or 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 - Reduced or No Initial Sales Charge."
CLASS B Shares Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first
year after purchase and by 1.00% each year thereafter to zero. The CDSC may be
waived for certain redemptions. Class B shares are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.50% of the
average daily net assets of the Class. The Class B shares' distribution fee
may cause that Class to have higher expenses and pay lower dividends than
Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an
3
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
annual distribution fee. In addition, a certain portion of Class B shares that
have been acquired through the reinvestment of dividends and distributions
("Class B Dividend Shares") will be converted at that time. See "Purchase of
Shares -- Deferred Sales Charge Alternatives."
Class 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 0.55% 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.
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 reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and 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 these Classes. 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 and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
4
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would be immediately invested in each 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." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Purchase
of Shares." Because the ongoing expenses of Class A shares may be lower than
those for Class B and Class C shares, purchasers eligible to purchase Class A
shares at net asset value or at a reduced sales charge 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 B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
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 a brokerage account
maintained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. See
"Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class 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, Class B and
Class C shares and the subsequent investment requirement for all Classes through
the
5
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
Systematic Investment Plan described below is $50. There is no minimum
investment requirement in Class A shares for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. 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 FUND 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. See "Management of the Fund".
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of Smith Barney Mutual Funds at the
respective net asset values next determined, plus any applicable sales charges
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 are paid monthly from net investment
income. 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 a
ns paid on shares of a
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. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
6
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The concentration of New York
Portfolio in municipal obligations involves certain additional risks that should
be considered carefully by investors. Additionally, 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. The market value of long-term municipal bonds may be
adversely effected during periods of rising interest rates. Additionally,
changes in Federal income tax laws effecting the tax exemption for interest on
municipal obligations could effect the availability of tax exempt obligations
for purchase and the value of the Portfolio's securities would be affected. See
"Investment Objectives and Management Policies."
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:
Class A Class B Class C Class Y**
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price)....... 4.00% None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower)................................. None* 4.50% 1.00% None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management fees ......................... 0.50% 0.50% 0.50% 0.50%
12b-1 fees*** ........................... 0.15 0.65 0.70 --
Other expenses .......................... 0.07 0.10 0.08 0.07
---- ---- ---- ----
Total Portfolio Operating Expenses 0.72% 1.25% 1.28% 0.57%
==== ==== ==== ====
- --------------------------------------------------------------------------------
*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 Y shares have been estimated because no Class
Y shares were outstanding for the fiscal year ended March 31, 1996.
***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.
7
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 B, Class C 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 B shares an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.15% service
fee. With respect to Class C shares, Smith Barney also receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of that Class, consisting
of a 0.55% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
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."
1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the
end of each time period:
Class A.................................. $47 $62 $78 $126
Class B.................................. 58 70 79 136
Class C.................................. 23 41 70 155
Class Y.................................. 6 18 32 71
- --------------------------------------------------------------------------------
An investor would pay the following expenses
on the same investment, assuming the
same annual return and no redemption:
1 Year 3 Years 5 Years 10 Years*
- --------------------------------------------------------------------------------
Class A.................................. $47 $62 $78 $126
Class B.................................. 13 40 69 136
Class C.................................. 13 41 70 155
Class Y.................................. 6 18 32 71
- --------------------------------------------------------------------------------
*Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
8
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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, each 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.
9
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information for the ten-year period ended March 31, 1996 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
1996 financial statements and the independent auditors' report thereon appear in
the March 31, 1996 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>
Class A Shares
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period Ended
March 31, 1996 1995(a) 1994 1993 1992 1991 1990 1989 1988 1987(b)
- -------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of
Period $12.83 $12.83 $13.25 $12.33 $11.80 $11.67 $11.48 $11.25 $12.46 $12.50
- -------------------------------------------------------------------------------------------------------
Net investment
income(1) 0.75 0.76 0.78 0.81 0.83 0.85 0.86 0.86 0.83 0.16
Net realized and
change in
unrealized
gains (losses) 0.35 0.01* (0.41) 0.92 0.51 0.13 0.20 0.23 (1.20) (0.07)
- -------------------------------------------------------------------------------------------------------
Total from
Operations 1.10 0.77 0.37 1.73 1.34 0.98 1.06 1.09 (0.37) 0.09
- -------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment
income (0.74) (0.77) (0.79) (0.81) (0.81) (0.85) (0.87) (0.86) (0.85) (0.13)
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.74) (0.77) (0.79) (0.81) (0.81) (0.85) (0.87) (0.86) (0.85) (0.13)
- -------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $13.19 $12.83 $12.83 $13.2 $12.33 $11.8 $11.67 $11.48 $11.25 $12.46
=======================================================================================================
Total Return # 8.71% 6.32% 2.66% 14.48% 11.98% 8.74% 9.28% 10.04% (2.63)% 0.52%++
- -------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (000's) $557,809 $82,768 $70,065 $61,532 $40,370 $33,158 $28,091 $12,022 $9,703 $5,682
- -------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses(1) 0.72% 0.63% 0.55% 0.55% 0.48% 0.28% 0.25% 0.24% 0.37% 0.45%+
Net investment
income 5.84% 6.00% 5.79% 6.32% 6.86% 7.31% 7.10% 7.48% 7.34% 6.49%+
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover
Rate 36.31% 30.38% 19.65% 21.91 %23.80% 69.75% 25.36% 56.49% 62.76% 0.00%
=======================================================================================================
</TABLE>
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
# Total returns do not reflect any sales loads or contingent deferred sales
charges.
(a) On October 10, 1994, the former Class C shares were exchanged into Class A
shares.
(b) For the period from January 16, 1987 (commencement of operations) to March
31, 1987.
(1) See page 11 for full footnote disclosures for (1).
* Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
10
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Class C Shares
- -------------------------------------------------------------------------------------------------------
Period Ended March 31, 1996 1995(a) 1996 1995(b) 1994 1993(c)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $12.84 $11.96 $12.83 $12.82 $13.24 $12.84
- -------------------------------------------------------------------------------------------------------
Income from Operations:
Net Investment Income 0.67 0.31 0.66 0.68 0.68 0.15
Net Realized and Unrealized
Gain (Loss) 0.35 0.86# 0.36 0.01# (0.40) 0.37
- -------------------------------------------------------------------------------------------------------
Total from Operations 1.02 1.17 1.02 0.69 0.28 0.52
=======================================================================================================
Less Distributions From:
Net Investment Income (0.68) (0.29) (0.68) (0.68) (0.70) (0.12)
Net Realized Gains 0.00 0.00 0.00 0.00 0.00 0.00
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.29) (0.68) (0.68) (0.70) (0.12)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.18 $12.84 $13.17 $12.83 $12.82 $13.24
=======================================================================================================
Total Return ## 8.05% 9.92%++ 8.07% 5.66% 1.96% 4.04%++
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000's) $181,144 $3,813 $8,931 $5,896 $5,461 $1,368
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.25% 1.27%+ 1.28% 1.28% 1.23% 1.23%+
Net Investment Income 5.45 5.76+ 5.02 5.38 4.98 5.37+
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36.31% 30.38% 36.31% 30.38% 19.65% 21.91%
=======================================================================================================
</TABLE>
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
## Total returns do not reflect any sales loads or contingent deferred sales
charges.
(a) For the period from November 11, 1994 (inception date) to March 31, 1995.
(b) On November 7, 1994, the former Class B shares were renamed Class C shares.
(c) For the period from January 8, 1993 (inception date) to March 31, 1993.
(1) The Manager has waived all or a part of its fees for each of the years in
the four-year period ended March 31, 1992. If such fees were not waived,
the per share decrease of net investment income and the ratios of expenses
to average net assets would be as follows:
<TABLE>
<CAPTION>
Per Share Decreases Ratios Without Fee Waivers*
Portfolio 1992 1991 1990 1989 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A .007 .031 .030 .030 .53 .50 .49 .50
=======================================================================================================
</TABLE>
* As a result of voluntary expense limitations, the ratio of expenses to
average net assets will not exceed 0.80%, 1.30% and 1.35% for Class A, B
and C shares, respectively.
(#) Includes the net per share effect of shareholder sales and redemptions
activity during the period, most of which occurred at a net asset value
less than the net asset value at the beginning of the period.
11
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies
- --------------------------------------------------------------------------------
The Portfolio seeks as high a level of income exempt from Federal income
taxes and from the personal income taxes of that state as is consistent with
prudent investing. The Portfolio will seek to be fully invested in obligations
of that state and its political subdivisions, agencies and instrumentalities
that were, in the opinion of bond counsel to the issuer, exempt from such
state's as well as Federal income taxes at the time of their issuance. (For
certain shareholders, a portion of each 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. The Portfolio invests its assets in securities of
ranging maturities, without limitation, depending on market conditions.
Typically, the remaining maturity of municipal bonds will range between 5 and 30
years.
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 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.
Please see the Statement of Additional Information for a more detailed
discussion about the different types of municipal obligations.
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 each 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
12
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Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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
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 pur chases 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 1 or MIG 2, VMIG 1 or VMIG 2 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 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 establish ment 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
13
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Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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 each
Port folio's objective in relation to anticipated movements in the general level
of interest rates, but a Portfolio may also engage in short-term trading
consistent with its objective.
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 33 1/3% of its net
assets would be hedged or the amount of margin deposits on the Port folio'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
14
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
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) and not less than 65% of its assets in municipal obligations the interest
on which is also exempt from the personal income taxes of New York State in the
opinion of bond counsel to the issuers. 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 available for investment exceed such state's
municipal obligations available for purchase that meet the Fund's rating,
maturity and other investment criteria.
FACTORS AFFECTING NEW YORK
The Portfolio's ability to achieve its investment objective is dependent
upon the ability of the issuers of New York obligations to meet their continuing
obligations for the payment of principal and interest. New York State and New
York City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York obligations to meet their
financial obligations.
Certain substantial issuers of New York obligations (including issuers
whose obligations may be acquired by the Portfolio) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. In recent
years, several different issues of municipal securities of New York State and
its agencies and instrumentalities and of New York City have been downgraded by
S&P and Moody's. On the other hand, strong demand for New York obligations has
more recently had the effect of permitting New York obligations to be issued
with yields relatively lower, and after issuance, to trade in the market at
prices relatively higher, than comparably rated municipal obligations issued by
other jurisdictions. A recurrence of the financial difficulties previously
experienced by certain issuers of New York obligations could result in defaults
or declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York obligations. Although
as of the date of this Prospectus, no issuers of New York obligations are in
default with respect to the payment of the municipal obligations, the occurrence
of any such default could affect adversely the market values and marketability
of all New York obligations and, consequently, the net asset value
15
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
of the New York Portfolio.
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 budget gaps in order to
achieve a balanced budget as required by laws of the State. 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. ("Appendix
C" in the Statement of Additional Information provides additional details.)
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 obligations 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.
The Fund is registered as a "non-diversified" company under the Investment
Company Act of 1940 (the "1940 Act"), in order for New York Portfolio to have
the ability to invest more than 5% of its assets in the securities of any
issuer. Each Portfolio intends to comply with Subchapter M of the Internal
Revenue Code (the "Code") that limits the aggregate value of all holdings
(except U.S. Govern ment and cash items, as defined in the Code) that exceed 5%
of the Portfolio's total assets to an aggregate amount of 50% of such assets.
Also, holdings of a single
16
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
- --------------------------------------------------------------------------------
issuer (with the same exceptions) may not exceed 25% of the Portfolio's total
assets. These limits are measured at the end of each quarter. Under the
Subchapter M limits, "non-diversification" allows up to 50% of the Portfolio's
total assets to be invested in as few as two single issuers. In the event of
decline of creditworthiness or default upon the obligations of one or more such
issuers exceeding 5%, an investment in either Portfolio will entail greater risk
than in a portfolio having a policy of "diversification" because a high
percentage of the Portfolio's assets may be invested in municipal obligations of
one or two issuers. Furthermore, a high percentage of investments among few
issuers may result in a greater degree of fluctuation in the market value of the
assets of the Portfolio, and consequently a greater degree of fluctuation of the
Portfolio's net asset value, because the Port folio will be more susceptible to
economic, political, or regulatory developments affecting these securities than
would be the case with a portfolio composed of varied obligations of more
issuers.
PORTFOLIO TRANSACTIONS AND TURNOVER
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 ob tained. 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.
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, which is currently 4:00 P.M. New York City time 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
17
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Valuation of Shares (continued)
- --------------------------------------------------------------------------------
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.
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 Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"), should notify First Data 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 B and 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 B and 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 B, Class C and Class Y
shares.
18
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
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 each 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, 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 share holder has elected to receive them in cash
or in additional shares. Capital gains distributions, if any, whether paid in
cash or invested in shares of the Portfolio, will be taxable to shareholders.
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 alter native minimum taxable income. Accordingly, investment in the Portfolio
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
deter mined 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 after offsetting any capital loss
carryover of the Port folio from prior periods.
NEW YORK STATE AND CITY TAXES
New York shareholders will not be subject to New York State and City
personal income tax on Portfolio dividends to the extent that such distributions
qualify as exempt-interest dividends under the Code and represent interest
income attributable to Federally tax-exempt obligations of the State of New York
and its political sub divisions (as well as certain other Federally tax-exempt
obligations the interest on which is exempt from New York State and City income
tax, such as certain obligations of U.S. Territories). To the extent that
distributions on the New York
19
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
Portfolio are derived from taxable income, including long or short-term capital
gains, such distributions will not be exempt from State or City personal income
tax. Dividends on the Portfolio are not excluded in determining New York State
franchise or City business taxes on corporations and financial institutions.
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 concerning an investment in
the Fund.
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 Information. Investors are urged to consult their
tax advisors with specific reference to their own tax situation.
- --------------------------------------------------------------------------------
Purchase of Shares
- --------------------------------------------------------------------------------
GENERAL
The Portfolio offers four Classes of shares. 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 are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $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 B, 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.
20
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Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Investors in Class A, Class B 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, Class B 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 or Directors of any of the
Smith Barney Mutual Funds and their spouses and children. The Fund reserves the
right to waive or change minimums, to decline any order to purchase its shares
and to suspend the offering of shares from time to time. Shares purchased will
be held in the share holder's account by the Fund's transfer agent, First Data.
Share certificates are issued only upon a shareholder's written request to First
Data. 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 accor ding 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. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through pre
authorized 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 First Data. The Systematic Investment Plan
also authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney brokerage
21
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
Sales Charge
---------------------- Dealer's
% of % of Amount Reallowance as % of
Amount of Investment Offering Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than - $25,000 4.00% 4.17% 3.60%
$ 25,000 - 49,999 3.50 3.63 3.15
50,000 - 99,999 3.00 3.09 2.70
100,000 - 249,999 2.50 2.56 2.25
250,000 - 499,999 1.50 1.52 1.35
500,000 and over * * *
- --------------------------------------------------------------------------------
*Purchases of Class A shares, 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 B and Class C shares is waived. See
"Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the 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. The reduced
sales charge minimums may also be met by 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 to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees); the immediate families of
22
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other invest ment company in connection with the combination of
such company with the Port folio 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
a 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; (f) investments of distributions from a UIT sponsored by Smith
Barney; (g) purchases through programs offered by
Travelers Group Diversified
Distribution Services Inc. by employees of participating employers; and (h)
purchases by investors participating in a Smith Barney
fee based arrangement. In order to obtain such discounts,
the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the 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 apply ing the sales charge applicable to such aggregate.
In order to obtain such discount, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
qualifies for the reduced sales charge. The right of accumulation is subject to
modification or discontinuance at any time with respect to all shares purchased
thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or pur
chase 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
23
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
investment required. The sales charge applicable to purchases by each member of
such a group will be determined by the table set forth above under "Initial
Sales Charge Alternative -- Class A Shares," and will be based upon the
aggregate sales of Class A shares of Smith Barney Mutual Funds offered with a
sales charge to, and share holdings of, all members of the group. To be eligible
for such reduced sales charges or to purchase at net asset value, all purchases
must be pursuant to an employer- or partnership-sanctioned plan meeting certain
requirements. One such requirement is that the plan must be open to specified
partners or employees of the employer and its subsidiaries, if any. Such plan
may, but is not required to, provide for payroll deductions. Smith Barney may
also offer a reduced sales charge or net asset value purchase for aggregating
related fiduciary accounts under such conditions that Smith Barney will realize
economies of sales efforts and sales related expenses. An individual who is a
member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
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 Port folio 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
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the pre ceding sales charge table 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 the 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
24
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
Letter of Intent. Each investment made during the period receives the reduced
sales charge applicable to the total amount of the investment goal. If the goal
is not achieved within the period, the investor must pay the difference between
the sales charges applicable to the purchases made and the charges previously
paid, or an appropriate number of escrowed shares will be redeemed. Please
contact a Smith Barney Financial Consultant or First Data 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 First Data 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 a Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) 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) rein vestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
25
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders:
Year Since Purchase
Payment Was Made CDSC
-----------------------------------------------------
First 4.50%
Second 4.00
Third 3.00
Fourth 2.00
Fifth 1.00
Sixth 0.00
Seventh 0.00
Eighth 0.00
Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares for Class B shares of a
Portfolio will be offered the opportunity to exchange all such Class B shares
for Class A shares of the Portfolio four years after the date on which those
shares were deemed to have been purchased. Holders of such Class B shares will
be notified of the pending exchange in writing approximately 30 days before the
fourth anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth anniversary
date. See "Prospectus Summary -- Alternative Purchase Arrangements -- Class B
Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be cal culated 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
26
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
be considered to represent, as applicable, capital appreciation or dividend and
capital gain distribution reinvestments in such other funds. For Federal income
tax purposes, the amount of the CDSC will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption. The amount of any CDSC
will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within 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.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
27
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
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, Class B and Class C shares are subject to
minimum investment requirements and all shares are subject to the 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 Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income 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.
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.
28
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 -- Limited Term Portfolio
Smith Barney Muni Funds -- National 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 World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc. -- High Growth Portfolio
Smith Barney Concert Series Inc. -- Growth Portfolio
Smith Barney Concert Series Inc. -- Balanced Portfolio
Smith Barney Concert Series Inc. -- Conservative Portfolio
Smith Barney Concert Series Inc. -- Income Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
*** Smith Barney Money Funds, Inc. -- Cash Portfolio
*** Smith Barney Money Funds, Inc. -- Government Portfolio
++ Smith Barney Money Funds, Inc. -- Retirement Portfolio
*** Smith Barney Municipal Money Market Fund, Inc.
*** Smith Barney Muni Funds -- California Money Market Portfolio
*** Smith Barney Muni Funds -- New York Money Market Portfolio
- ------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Portfolio.
** Available for exchange with Class A, Class B and Class Y shares of the
Portfolio.
*** Available for exchange with Class A and Class Y shares of the Portfolio.
+ Available for exchange with Class B and Class C shares of the Portfolio.
++ Available for exchange with Class A shares of the Portfolio.
29
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold with
out 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 a 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 B Exchanges. In the event a Class B shareholder (unless such share
holder was a Class B shareholder of the Short-Term World Income Fund on July 15,
1994) wishes to exchange all or a portion of his or her shares in any of the
funds imposing a higher CDSC than that imposed by the Portfolio, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Portfolio that have been exchanged.
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 ex
change 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 ex
change privilege is an important benefit, excessive exchange transactions can be
detrimental to a Portfolio's performance and its shareholders. The investment
manager may determine that a pattern of frequent exchanges is excessive and con
trary to the best interests of the Portfolio's other shareholders. In this
event, the Fund may, at its discretion, decide to limit additional purchases
and/or exchanges by the share holder. Upon such a determination, the Fund will
provide notice in writing or by
30
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
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 of the Smith Barney Mutual Funds
ordinarily available, which position the shareholder would be expected to
maintain for a significant period of time. All relevant factors will be
considered in determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program". Exchanges
will be processed at the net asset value next determined, 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 share holder 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 any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the share holder's benefit without specific instruction and
Smith Barney will benefit from the use of temporarily uninvested funds.
Redemption
31
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Muni Funds/New York Portfolio
Class A,B,C or Y (please specify)
c/o First Data Investor 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 First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corpora tions, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data 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
32
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
share holder is entitled to participate in this program, he or she should
contact First Data at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization Form, along
with a signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Portfolio.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
share holder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
33
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven (7) days prior notice to shareholders.
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate value of the shares held in a Portfolio account is less
than $500. (If a shareholder has more than one account in the 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 Portfolio may include its yield, tax equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature the Portfolio may also include its
distribution rate. These figures are computed separately for Class A, Class B,
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 invest ment 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
34
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
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 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 a 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
Smith Barney Mutual Funds Management Inc. ("SBMFM" or the "Manager")
manages the day-to-day operations of the Portfolio pursuant to a management
35
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
agreement entered into by the Fund on behalf of the Portfolio. SBMFM was
incorporated in 1968 under the laws of Delaware. SBMFM, Smith Barney Holdings
Inc. and Smith Barney are each located at 388 Greenwich Street, New York, New
York 10013. As of March 31, 1996 SBMFM had aggregate assets under management in
excess of $76 billion.
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. At a Meeting of Shareholders
of the Portfolio held on December 15, 1995, the shareholders approved a new
management agreement that increased the effective management fee paid by Smith
Barney Muni Funds on behalf of the Portfolio from 0.45% to 0.50% of the
Portfolio's average daily net assets. The new management agreement also provides
that the Portfolio's investment manager shall voluntarily reduce its fee to the
extent that in any fiscal year the aggregate expenses of the Portfolio,
exclusive of taxes, brokerage, interest, and extraordinary expenses, such as
litigation and indemnification expenses, exceed 0.70% of such Portfolio's
average daily net assets. (Certain Class specific expenses, such as 12b-1 fees,
will also continue to be excluded when determining whether the expense
limitation applies.) Previously, the expense limitation was 0.65%. The change in
the rate of the expense limitation corresponds to the change in the rate of the
management fee. The expense limitation shall be in effect until it is terminated
by notice to shareholders and by supplement to the current prospectus. The
increased management fee and expense limitation became effective on December 18,
1995.
Total expenses for the Portfolio's average net assets for the last fiscal
year were: 0.72%, 1.25% and 1.28% for Class A, Class B and Class C shares,
respectively.
PORTFOLIO MANAGEMENT
Peter M. Coffey, a Managing Director of Smith Barney has served as Vice
President of the Fund and portfolio manager of the New York Portfolio since
their inception (January 16, 1987) and manages the day to day operations of the
Port folio, including making all investment decisions. Mr. Coffey also serves as
the portfolio manager for many of 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, 1996
is included
36
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Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
in the Annual Report dated March 31, 1996. 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.
- --------------------------------------------------------------------------------
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, Class B 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 B and Class C shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net assets attributable to these Classes.
Class B shares that automatically convert to Class A shares eight years after
the date of original purchase, will no longer be subject to a distribution fee.
The fees are used by Smith Barney to pay its Financial Consultants for servicing
share holder accounts and, in the case of Class B and 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, Class B 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
37
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
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
authorized the issuance of twenty series of shares, each representing shares in
one of twenty separate Portfolios. The assets of each Portfolio are segregated
and separately managed. Class A, Class B, 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 related to the shareholder service and distribution of
Class A, Class B and Class C shares are borne solely by the respective Class and
each such Class of shares has exclusive voting rights with respect to provisions
of the Fund'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 Trustee and the Fund will
assist shareholders in calling such a meeting as required by the 1940 Act.)
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, PA 19103, serves as custodian of each Portfolio's investments.
First Data, 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 Fund 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
38
<PAGE>
Smith Barney Muni Funds - New York Portfolio
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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.
39
<PAGE>
SMITH BARNEY
------------
A Member of Travelers Group [Logo]
Smith Barney
Muni Funds
New York Portfolio
388 Greenwich Street
New York, New York 10013
FD 0604 6/96
PART B
JULY 1, 1996
As amended July 29, 1996
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 ten Portfolios, the National Portfolio, the Limited
Term Portfolio, the Florida Portfolio, the Florida Limited Term
Portfolio, the Georgia Portfolio, the New York 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 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 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.
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, Florida Portfolio, Georgia Portfolio, New York
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 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.
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 19
Custodian 19
Independent Auditors 29
The Fund 20
Voting Rights 20
Financial Statements 26
Appendix A 26
Appendix B 29
Appendix C 37
Appendix D 45
Appendix E 50
Appendix F 51
Appendix G 53
TRUSTEES AND OFFICERS
*JESSICA BIBLIOWICZ, Trustee and President
Executive Vice President of Smith Barney Inc. ("Smith Barney"),
President of thirty-nine 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, Director of Salomon
Brothers Inc.; 36.
JOSEPH H. FLEISS, Trustee
Retired, 3849 Torrey Pines Blvd., Sarasota, Florida 34238. Trustee of
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; 78.
DONALD R. FOLEY, Trustee
Retired, 3668 Freshwater Drive, Jupiter, Florida 33477. Trustee of
ten investment companies associated with Smith Barney. Formerly, Vice
President of Edwin Bird Wilson, Incorporated (advertising); 73.
PAUL HARDIN, Trustee
Professor of Law at University of North Carolina at Chapel Hill, 10283
Morehead, 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; 64.
FRANCIS P.. MARTIN, Trustee
Practicing physician, 2000 North Village Avenue, Rockville Centre, New
York 11570. Trustee of ten ten investment companies associated with
Smith Barney. Formerly, President of the Nassau Physicians' Fund, Inc.;
71.
*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; 62.
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); 69.
*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.
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; 65.
C. RICHARD YOUNGDAHL, Trustee
Retired, 339 River Drive, Tequesta, Florida 33469. Trustee of 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;80.
*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; 38.
*PHYLLIS M. ZAHORODNY, Vice President and Investment Officer
*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; 52.
*IRVING DAVID, Controller and Assistant Secretary
Vice President of Smith Barney and the Manager. Prior to March, 1994,
Assistant Treasurer of First Investment Management Company; 34.
*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; 48.
*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; 38.
*THOMAS M. REYNOLDS, Controller
Trustee of Smith Barney and Controller of the Fund and eleven investment
companies associated with Smith Barney; 35.
*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; 45.
__________________
* 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.
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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
<C>
<S> <C> <C> Total
Pension or Compensation Number of
<C> Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which Trustee
<S> 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
Joseph H. Fleiss 3,105.00 0 0 33,300.00 10
Donald R. Foley 3,205.00 0 0 35,900.00 10
Paul Hardin 4,634.00 0 0 43,300.00 12
Francis P. Martin 5,911.00 0 0 56,000.00 10
Heath B. McLendon(!) 0 0 0 41
Roderick C. Rasmussen 5,912.00 0 0 56,100.00 10
John P. Toolan 5,912.00 0 0 56,200.00 10
C. Richard Youngdahl 5,812.00 0 0 51,500.00 10
! Designates an "interested Trustee."
</TABLE>
On May 10, 1996, , the Trustees and officers owned in the aggregate less
than 1% of the outstanding shares of each Portfolio of the Fund; except
for Mr. Toolan and Mr. Fleiss, who, in the aggregate, owned in excess
of 1% of Class A shares of the Florida Portfolio.
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 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 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.
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.
ADDITIONAL TAX INFORMATION
Capital gain distributions, if any, are taxable to shareholders, and are
declared and paid at least annually. At March 31, 1996 the unused
capital loss carryovers of the Fund by Portfolio were approximately as
follows: National Portfolio, $4,174,000; New York Portfolio,
$5,780,000, Florida Portfolio, $250,000, Limited Term Portfolio,
$6,083,000, Georgia Portfolio, $36,179, Ohio Portfolio $28,813,
Pennsylvania Portfolio, $114,695 and Florida Limited Term Portfolio,
$537,000. 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> March 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PORTFOLIO 1997 1998 1999 2000 2001 2002 2003 2004
(in thousands)
National -- -- -- -- -- -- $ 4134 40
Florida -- -- -- -- -- $250 -- --
New York -- -- -- -- -- 1079 4701 --
Georgia -- -- -- -- -- -- -- --
Ohio -- -- -- -- -- -- -- --
Pennsylvania -- -- -- -- -- -- -- --
Limited Term -- -- -- -- $ 920 $ 577 2846 1740
Florida Limited -- -- -- -- -- $ 2 197
338
CA Money $93 $56 $7 $74 $11 $81 1 $38
NY Money -- -- -- -- 299 -- -- --
</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 such 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.
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 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).
Without the approval of a majority of its outstanding voting securities,
the Limited Term Portfolio, the Florida 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 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.
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, 1996 is as follows:
<TABLE>
<CAPTION>
PORTFOLIO One Year Five Years Life Inception Date
<S> <C> <C> <C> <C>
National 4.44% 7.76% 7.72% 8/20/86
Limited Term 4.57% 6.32% 6.79% 11/28/88
New York 4.40% 7.87% 7.02% 1/16/87
Florida 4.28% N/A 7.27% 4/2/91
Georgia 5.33% N/A 5.82% 4/4/94
Ohio 3.33 N/A 4.11% 6/13/94
Pennsylvania 3.73 N/A 6.28% 4/4/94
Florida Ltd. Term 5.27 N/A 5.16% 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, 1996 is as follows:
<TABLE>
<CAPTION>
PORTFOLIO One Year Five Years Life Inception Date
<S> <C> <C> <C> <C>
National 3.76% N/A 10.66% 11/7/94
New York 3.55% N/A 10.36% 11/11/94
Florida 3.59% N/A 4.97% 11/16/94
Georgia 4.59% N/A 4.51% 6/15/94
Ohio 2.60% N/A 3.64% 6/14/94
Pennsylvania 3.11% N/A 4.59% 6/20/94
</TABLE>
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, 1996 is as follows:
<TABLE>
<CAPTION>
PORTFOLIO One Year Five Years Life Inception Date
<S> <C> <C> <C> <C>
National 7.13% N/A 6.29% 1/5/93
Limited Term 5.45% N/A 5.39% 1/5/93
New York 7.07% N/A 6.11% 1/8/93
Florida 6.96% N/A 4.78% 1/5/93
Georgia 8.05% N/A 7.19% 4/14/94
Ohio 6.14% N/A 5.75% 6/14/94
Pennsylvania 6.56% N/A 7.89% 4/5/94
Florida Ltd. Term 6.17% N/A 5.54% 5/4/93
</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, 1996 is as follows:
<TABLE>
PORTFOLIO One Year Five Years Life Inception Date
<S> <C> <C> <C> <C>
National N/A N/A N/A
Limited Term N/A N/A 6.63
New York 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
</TABLE>
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, 1996 was 2.73% (the
effective yield was 2.76%) with an average dollar-weighted portfolio
maturity of 37 days; the New York Money Market Portfolio's yield with
respect to its Class A shares for the seven-day period ended March 31,
1996 was 2.72% (the effective yield was 2.76%) with an average dollar-
weighted portfolio maturity of 46 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.
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 the National Portfolio, the Florida Limited
Term Portfolio, the Georgia Portfolio, the Ohio Portfolio and
Pennsylvania Portfolio provides for a daily management fee at the annual
rate of 0.45% of the Portfolio's average net assets. The Management
Agreement for the Limited Term, the Florida Portfolio and the New York
Portfolio is 0.50% of the Portfolio's average net assets.
At a Meeting of Shareholders of the Limited Term Portfolio, the Florida
Portfolio and the New York Portfolio held on December 15, 1995, the
shareholders of each of these Portfolios approved a new management
agreement that increases the effective management fee paid by Smith
Barney Muni Funds on behalf of each of these Portfolios from 0.45% to
0.50% of each of these Portfolios' average daily net asssets.
The management agreements for the California Money Market Portfolio and
the New York Money Market Portfolio 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%.
<TABLE>
<CAPTION>
For the fiscal years ended March 31, 1994, 1995 and 1996, the management
fee for each Portfolio was as follows:
Portfolio 1996 1995 1994
<S> <C> <C> <C>
National $1,893,904 $ 1,918,961 $ 1,985,609
Limited Term 1,260,753 1,351,567 1,339,152
New York 996,273 373,385 334,878
Florida 622,090 484,744 505,761
California Money (a) 5,870,779 2,239,712 897,858
New York Money (b) 4,035,418 1,525,102 293,600
FL Ltd. Term (c) (d) -- 12,445 --
Georgia (e) -- -- N/A
Ohio (f) -- -- N/A
Pennsylvania (g) -- -- N/A
</TABLE>
(a) The Manager waived its management fee in excess of 0.03% and 0.01% of
the California Money Market Portfolio's average daily net assets for the
period from April 1, 1994 through March 31, 1995 and for the fiscal year
ended March 31, 1996, respectively.
(b) 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 and the fiscal year ended
March 31, 1994.
(c) 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.
(d) 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 and waived its entire management
with respect to
Florida Limited Term Portfolio's average daily net assets for the period
the fiscal year ended March 31, 1996.
(e) 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, 1996.
(f) The Manager waived its entire management fee with respect to the
Ohio Portfolio's average daily net assets for the period from June 14,
1994 through March 31, 1996.
(g) 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, 1996.
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.
For the year ended March 31, 1996, the table below represents the fees
which have been accrued and/or paid to Smith Barney under the plans of
distribution pursuant to Rule 12b-1 for the Fund's Portfolios. The
distribution expenses for 1996 included compensation of Financial
Consultants and printing costs of prospectuses and marketing materials.
Portfolio Class A Class B Class C Class Y Total
National $591,305 $58,602 $123,542 -- $773,449
Limited 366,567 N/A 92,815 -- 459,382
Florida 167,196 107,248 17,029 -- 291,473
Florida Ltd. 18,643 N/A 10,143 -- 28,786
Georgia 12,286 26,278 16,038 -- 54,602
New York 243,626 240,773 48,334 -- 532,733
Ohio 4,842 20,300 6,042 -- 31,184
Pennsylvania 15,018 58,999 27,481 -- 101,498
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, has
been selected as independent auditors to examine and report on the
Fund's financial statements for the fiscal year ending March 31, 1997.
</R
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.
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 May 10, 1996, the following shareholders beneficially owned 5% or
more of a class of shares of a Portfolio of the Fund :
National Portfolio Class B
James R. Scheele
P.O. Box 2477
Williston, ND 58802-2477
owned 189,552.871 (22.1741%) shares
Florida Portfolio Class A
The E.G. Rosenblatt Living Tr.
E.G. Rosenblatt, Ttee.
2295 South Ocean Blvd.
Palm Beach, FL 33480-5357
owned 624,871.770 (7.1394%) shares
Florida Portfolio Class C
Sari Galan
7754 San Miquel Drive
Port Richey, FL 34668-5142
owned 11,189.806 (5.0687%) shares
Florida Limited Term Portfolio Class A
Susan H. Dupuis Trustee
Susan H. Dupuis Liv. Rev. Tr.
DTD 9/26/89
4100 Bay Point Road
Miami, FL 33137-3306
owned 157,537.223 (9.9712%) shares
Florida Limited-Term Portfolio Class C
Alico Inc.
Attn: Craig Simmons
P.O. Box 338
Labelle, FL 33935-0338
owned 46,013.436 (11.2869%) shares
Sylvia Pawliger Ttee. FBO
Sylvia Pawliger Living Tr.
DTD 11/14/94
5440 SW 85th Street
Miami, FL 33143-8330
owned 33,508.824 (8.2195%) shares
Dominick Amatulli Ttee.
FBO Dominick Amatulli
U/A/D 01/25/93
120 Shore Drive
Riviera Beach, FL 33404-2419
owned 32,194.048 (7.8970%) shares
Georgia Portfolio Class A
Jeanne A. Sellers
1 Peachtree Battle, #7
Atlanta, GA 30305
owned 43,685.931 (5.5359%) shares
Lynn P. Cochran
3091 Brandy Station
Atlanta, GA 30339-4425
owned 40,480.158 (5.1297%) shares
C. Alex Kemp
P.O. Box 7710
Tifton, GA 31793-7710
owned 40,049.640 (5.0751%) shares
Georgia Portfolio Class C
Jeanette L. Griffis
Rt. 1 Box 266
Fargo, GA 31631-9801
owned 18,132.538 (7.7431%) shares
Barbara Smith McCoy
7505 South Spalding Lake Drive
Atlanta, GA 30350-1045
owned 15,643.580 (6.6802%) shares
Mary Ann Hillyard
P.O. Box 283
Pelham, GA 31779-0283
owned 12,368.268 (5.2816%) shares
Ohio Portfolio Class A
SBS Seed Oregon Muni Fd.
Dahlia McQueen 38th Flr.
Treasury Admin.
388 Greenwich Street
New York, NY 10013-2375
owned 65,671.432 (19.9232%) shares
Marie P. Suwinski
3505 Muirfield Ave.
Toledo, OH 43614-3638
owned 25,039.092 (7.5963%) shares
Ohio Portfolio Class C
Merle E. Troutwine and
Dorothy D. Troutwine JTWROS
1229 Broadway
Greenville, OH 45331-2450
owned 12,867.522 (17.2595%) shares
Plaford E. Meredith
5063 Waterloo Rd.
Atwater, OH 44201-9345
owned 8,670.478 (11.6299%) shares
John F. LaPlante Ttee.
John F. LaPlante
Self Dir. of Trust
U/A/D 05/14/93
17608 W. River Road
Bowling Green, OH 43402-9297
owned 8,019.800 (10.7571%) shares
Sandhya R. Nuthakki
Municipal Bond Account
4625 Schrubb Dr.
Kettering, OH 45429-1984
owned 4,612.129 (6.1863%) shares
Nancy L. Schardt
1648 West Alex-Bell Rd.
Dayton, OH 45459-1246
owned 3,733.821 (5.0082%) shares
Pennsylvania Portfolio Class A
James J. Broussard
530 Derwyn Rd.
Drexel Hill, PA 19026-1203
owned 177,858.133 (18.8804%) shares
Murray L. Katz and
Harriet L. Katz JTWROS
1130 Countryside Drive
Harrisburg, PA 17110-2801
owned 91,405.046 (9.7030%) shares
James J. Broussard
Marygene Broussard JTWROS
530 Derwyn Road
Drexel Hill, PA 19026-1203
owned 61,774.504 (6.5576%) shares
Carol L. Shields
Idlewild Farm
617 Williamson Road
Bryn Mawr, PA 19010-1932
owned 57,953.917 (6.1520%) shares
FINANCIAL STATEMENTS
The following information is hereby incorporated by reference to the
Fund's March 31, 1996 Annual Reports to Shareholders:
Page(s) in:
Annual Report
Annual Report of Limited
of National Term
Portfolio Portfolio
Schedules of Investments 6 - 20 7 - 22
Statements of Assets and Liabilities 23 25
Statements of Operations 24 26
Statements of Changes in Net Assets 25 27
Notes to Financial Statements 26-29 28 - 32
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 30-32 33 - 35
Independent Auditors' Report 34 36
Page(s) in:
Annual Report Annual Report
of Florida & of
Florida Limited Term CA Money Market
Portfolios Portfolio
Schedules of Investments 10 - 22 3 -9
Statements of Assets and Liabilities 24 12
Statements of Operations 25 13
Statements of Changes in Net Assets 26 14
Notes to Financial Statements 27 - 32 15 - 17
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 33-36 18
Independent Auditor's Report 37 19
Page(s) in:
Annual Report
of NY &
Annual Report New York
of Ohio, Georgia & PA Money Market
Portfolio Portfolios
Schedules of Investments 14 -23 7 - 25
Statements of Assets and Liabilities 26 28
Statements of Operations 27 29
Statements of Changes in Net Assets 28-30 30-31
Notes to Financial Statements 31-35 32 - 39
Financial Highlights (for a share
of each series of beneficial interest
outstanding throughout each year) 36-41 40 - 43
Independent Auditors' Report 42 44 - 45
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.
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.
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
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 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
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.
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.
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%.
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.
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 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 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.
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 budget for the State's 1996 fiscal year was not
adopted by the statutory deadline prior fiscal year commenced on April
1, 1995 and ended March 31, 1996 and is referred to herein as the
State's 1995-96 fiscal year. The State's budget for the 1995-96 fiscal
year was enacted by the Legislature on June 7, 1995, 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 20,
1995 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.
The 1994-95 State Financial Plan contains actions that provide
nonrecurring resources or savings, as well as actions that impose
recurring 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.
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
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.
On February 14, 1994, Standard & Poor's raised its outlook to
positive and on October 3, 1995, confirmed its A- raitng. On October 2,
1995, Moody's reconfirmed its A rating on the State's general obligation
long-term indebtedness.
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.
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, 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.
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 had plummeted by approximately 360,000 jobs since
1987. But, after nearly five years of decline, the City, in calendar
year 1992, began a broad-based recovery which lifted 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. Employment losses moderated toward year-end 1993 and real
Gross City Product (GCP) increased, boosted by strong wage gains.
However, after noticeable improvements in the City's economy during
calendar year 1994, economic growth slowed in calendar year 1995 and the
City's current four-year financial plan assumes the economic growth will
continue to slow in calendar year 1996, with local employment increasing
modestly.
Notwithstanding its recurring projected budget gaps, for fiscal
years 1981 through 1995 fiscal years 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").
For the City's 1995 fiscal year, the City adopted a budget which halted
the trend in recent years of substantial increases in City-funded
spending from one-year to the next.
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.
1996-1999 Financial Plan. On January 31, 1996, the City published
the Financial Plan for the 1996-1999 fiscal years (the "1996-1999
Financial Plan or "Financial Plan"), which relates to 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 1996 fiscal year.
The 1996-1999 Financial Plan projects revenues and expenditures
for the 1996 fiscal year balanced in accordance with GAAP. The
projections for the 1996 fiscal year reflect proposed actions to close a
previously projected gap of approximately $3.1 billion for the 1996
fiscal year, which include City actions, including a reduction in
spending of $400 million, primarily affecting public assistance and
Medicaid payments by the City; expenditure reductions in agencies,
totaling $1.2 billion; transitional labor savings, totaling $600 million
The proposed savings for employee health care costs are subject to
collective bargaining negotiation with the City's unions
The Financial Plan also set forth projections for the 1997 through
1999 fiscal years and outlines a proposed gap-closing program to close
projected gaps of $2.0 billion, $3.3 billion and $4.1 billion for the
1997 through 1999 fiscal years, respectively, after successful
implementation of the gap-closing program for the 1996 fiscal year.
Actions to Close the Gaps. The 1996-1999 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 proposals will be approved by the State Legislature during the
1996 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 fifteen years, and is projected to achieve balanced operating
results for the 1996 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 1996-1999 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
1996 and the concomitant receipt of economically sensitive tax revenues
in the amounts projected. The 1996-1999 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 1996-1999
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 generate sufficient revenues in the future to
meet the costs of its expenditure increases and to provide necessary
services.
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.
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.
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 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.
On March 1, 1996, Moody's stated that the rating for City general
obligation bonds remains under review pending the outcome of the
adoption of the City's budget for the 1997 fiscal year, and, in light of
the status of the debte on public assistance and Medicaid reform; the
enactment of a State budget, upon which major assumptions regarding
State aid are dependent, which may be extensively delayed; and the
seasoning of the City's economy with regard to its strength and
direction in the face of a potential naational economic shutdown. Since
July 15, 1993, Fitch Investors Service, LP ("Fitch") has rated City
bonds A-. On February 28, 1996, Fitch placed the City's general
obligation bonds on FitchAlert with negative implications.
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 1995-96 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 1995-96
fiscal year or thereafter.
APPENDIX D
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, 1994,
ranks fourth with an estimated population of 13.9 million. Florida's
attraction, as both a growth and retirement state, has kept net
migration fairly steady with an average of 235,600 new residents a year
from 1985 through 1994. The U.S. average population increase since 1984
is about 1% annually, while Florida's average annual rate of increase is
about 2.3%. 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 1985, the prime working age population (18-44)
has grown at an average annual rate of 2.2%. 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 1994, the State's real per capita income
rose an average 5.2% a year, while the national real per capita income
increased at an average 5.1%.
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 1994 was
61.5% 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 1994 of $21,677 was
slightly above the national average of $21,809 and significantly ahead
of that for the southeast United States, which was $19,649. Real
personal income in the State is estimated to increase 4.6% in 1995-96
and 3.8% in 1996-97. By the end of 1995-96, real personal income per
capita in the State is projected to average 2.7% higher than its 1994-95
level.
Since 1985, the State's job creation rate is well over twice the
rate for the nation as a whole Contributing to the State's rapid rate
of growth in employment and income is international trade. The State is
now less dependent on employment from construction, construction related
manufacturing and resource based manufacturing, which have declined as a
proportion of total State employment. The State has a concentration of
manufacturing jobs in high-tech and high value-added sectors, such as
electrical and electronic equipment, as well as printing and publishing.
these type of manufacturing jobs tend to be less cyclical. 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. The average
rate in Florida since 1985 has been 6.3% while the national average is
6.4%. 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 6.6% during 1994. As of November 1995,
the Organization estimates that the unemployment rate will be 5.6% for
1995-96 and 5.7% in 1996-97.
The State's economy is expected to decelerate along with the
nation, but is expected to outperform the nation as a whole. Total
non-farm employment in Florida is expected to increase 3.2% in 1995-96
and rise 3.0% in 1996-97. 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 5.3% in 1995-96 while
growing 4.5 in 1996-97. Trade is expected to expand 3.4% in 1995 and
3.0% 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 1994 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 1985,
total housing starts have averaged 148,500 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 235,000 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.
Single and multi-family housing starts in 1995-96 are projected to
reach a combined level of 113,200, increasing to 115,100 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 tax reform legislation discussed above.
Total construction expenditures are forecasted to increase 4.0% this
year and increase 5.3% 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
39.9 million tourists visited the State in 1994, as reported by the
Florida Department of Commerce. In terms of business activities and
state tax revenues, tourists in Florida in 1994 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 1.3% percent this year and 4.3% next year. Tourist arrivals to
Florida by air and car are expected to diverge from each other, air
decreasing 0.5% in 1995-96 and increase by 4.6% in 1996-97 and auto
increasing 3.2% 1995-96 and 4.9% in 1996-97. By the end of the State's
current fiscal year, 41.4 million domestic and international tourists
are expected to have visited the State. In 1996-97, tourist arrivals
should approximate 43.2 million.
Revenues and Expenses
Estimated fiscal year 1995-96 General Revenue plus Working Capital
funds available to the State total $15,149.12 million, a 2.2% increase
over 1994-95. Of the total General Revenue plus Working Capital funds
available to the State, $14,456.7 million of that is Estimated Revenues
(excluding the Andrew impact) which represents an increase of 5.9% over
the previous year's Estimated Revenues. With effective General Revenues
plus Working Capital Fund appropriations at $14.824.0 million,
unencumbered reserves at the end of 1995-96 are estimated at $325.1
million. Estimated, fiscal year 1996-97 General Revenue plus Working
Capital and Budget Stabilization funds available total $15,717.8
million. a 3.8% increase over 1995-96. The $15,262.3 million in
Estimated Revenues represents an increase of 5.6% over the previous
year's Estimated Revenues.
In fiscal year 1994-95, 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 67%, 7%, 4% and
4%, respectively, of total General Revenue Funds available during
fiscal 1994-95. In that same year, expenditures for education, health
and welfare, and public safety amounted to approximately 49%, 32%, and
11%, respectively, of total expenditures from the General Revenue Fund.
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, 1995, sales and use tax receipts (exclusive of the tax on
gasoline and special fuels) totaled $10,672.0 million, an increase of
6.0% over fiscal year 1993-1994.
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 $437.3 million in fiscal year ending
June 30, 1995. 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, 1995, receipts from this source were $1,063.5
million, and increase of 1.5% from fiscal year 1993-94.
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 $695.3 million
during fiscal year 1994-95, a 11.4% increase from the previous fiscal
year. Beginning in fiscal year 1993-94, 62.63% of these taxes are to be
deposited to the General Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas
and telecommunications services. All gross receipts utilities tax
collections are credited to the State's Public Education Capital Outlay
and Debt Service Trust Fund. In fiscal year 1993-94, this amounted to
$508.4.
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
$818.0 million, a 2.1% decrease 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 $61.2 million during fiscal
year 1994-95, up 1.1% 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
administering the lottery. Fiscal year 1994-95 lottery ticket sales
totaled $2.19 billion, providing education with approximately $853.2
million.
Debt-Balanced Budget Requirement
At the end of fiscal 1994, approximately $6.07 billion in
principal amount of debt secured by the full faith and credit of the
State was outstanding. In addition, since July 1, 1994, the State
issued about $1.17 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, AA and AA from Moody's
Investors Service, Standard & Poors Corporation and Fitch,
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.
APPENDIX E
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.
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.
APPENDIX F
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 shares if the Pennsylvania Portfolio
should consider the fact that it consists of 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 million. As of June 30, 1994, the General Fund balance increased
$194.0 million due largely to an increased reserve for encumbrances and
an increase in other designated funds. 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. The
unreserved-undesignated balance increased by $14.8 million to $79.2
million as of June 30, 1994.
Commonwealth revenues for the fiscal year 1995 were above
estimate and exceeded fiscal year expenditures and encumbrances. Fiscal
1995 was the fourth consecutive fiscal year the Commonwealth reported an
increase in the fiscal year-end unappropriated balance.
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 Portfolio 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 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) on April 12, 1995, Envirotest Systems
Corporation, Envirotest Partners and the Commonwealth entered into a
Standstill Agreement pursuant to which the parties will proceed to
discuss the reslution of claims which Envirotest might have against the
Commonwealth arising from the suspension of the emissions testing
program. Envirotest filed a Statement of Claim with the Pennsylvania
Board of Claims by May 10, 1995 and filed a complaint with the
Commonwealth Court on May 15, 1995 to preserve its position. In those
pleadings, Envirotest ascerted damages in excess of $350 million. The
Office of General Counsel believes it is premature at this time to
estimate the nature and size of Envirotest's potential recovery in this
matter.
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 experienced 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. However, the audited General Fund
balance of the City as of June 30, 1994, showed a surplus of
approxiamately $15.4 million, up from approximately $3 million as of
June 30, 1993. City preliminary unaudited General Fund financial
statements at June 30, 1995 project a surplus approximating $59.6
million.
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 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.
APPENDIX G
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 Portfolio will invest substantially all of its net assets
in Ohio Obligations. The Ohio Portfolio 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 However, for the years 1991
through 1994 the State rate (6.4%, 7.2%, 6.5% and 5.5%, respectively)
was below the national rate(6.7%, 7.4%, 6.8% and 6.1%); the State rate
for 1995 (through November 1995) (range from 4.4% to 5.3%) was also
below the national rate (range from 5.2% to 6.2%). 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.
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 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.
For the last complete fiscal biennium (ended June 30, 1995) the
GRF ending fund balance was $928,000,000 of which $535,200,000 was
transferred into the Budget Stabilization Fund (which has a current
balance of over $828,000,000). In addition, the GRF cash balance was
$1.3 billion.
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 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 , Ohio voters have
authorized the incurrence of State debt to which taxes or excesses were
pledged for payment. At January 31, 1995, $777.9 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 $55 million of obligations for coal
research and development may be outstanding at any one time; (b) $1.2
billion of obligations authorized for local infrastructure improvements,
no more than $120 million may be issued in any calendar year ($839.98
million outstanding or awaiting delivery, plus the Series 1996 Bonds
issued in January 1996). A November 1995 constitutional amendment
extends this authority to an additional 10 years and $1.2 billion; and
(c) up to $138.6 million in general obligation bonds for capital
improvements for elementary and secondary public school facilities
purposes ( $68,640,000 issued).
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 44%) 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 program ( Emergency School
Advancement Fund ) provided 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.
This program has been replaced with enhanced provisions for
individual direct local borrowing, including direct applicatoin of
Foundation Program distributions to repayment if needed. Experience
through Fiscal Year 1995 demonstrates that not all applying for laon
approval borrow the amounts authorized.
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 19 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
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.
PART C Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements Location In:
Part A Part B
Annual
Report
Investment Portfolios -- *
Statement of Assets and Liabilities-- *
Statements of Operations -- *
Statements of Changes in Net Assets-- *
Notes to Financial Statements -- *
Supplementary Information -- *
* The Registrant's Annual Reports for the fiscal year ended March 31, 1996 and
the Reports of Independent Accountants dated May 14, 1996 and May 15, 1996 are
incorporated by reference to the N-30D filed on June 10, 1996 as Accession #
91155-96-223.
All other statements and schedules are omitted because they are not applicable
or the required information will be shown in the financial statements or notes
thereto.
(b) Exhibits
(1) (a) Restated Declaration of Trust dated as of April 23, 1986 is
incorporated herein by reference to Exhibit 1 to Pre-Effective
Amendment No. 1 to the Registration Statement No. 2-99861.
(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.
(2) Bylaws of the Trust are incorporated by reference to Exhibit 2 to
Pre-Effective Amendment No. 2.
(3) Not applicable.
(4) Not applicable.
(5) (a) Management Agreement between the National Portfolio & Mutual
Management Corp. is incorporated by reference to Exhibit 5(b) to Post-Effective
Amendment No. 18.
(b) Management Agreement between the Limited Term Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit 5(c) to
Post-Effective Amendment No. 18.
(c) Management Agreement between the California Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit 5(d) to
Post-Effective Amendment No. 18.
(d) Management Agreement between the New York Portfolio and Mutual
Management Corp. is incorporated by reference to Exhibit 5(e) to
Post-Effective Amendment No. 18.
(e) Management Agreement between the New Jersey Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit 5(g) to
Post-Effective Amendment No. 18.
(f) Management Agreement between the Florida Portfolio and Mutual
Management Corp. is incorporated by reference to Exhibit (5)(h) to
Post-Effective Amendment No. 16.
(g) Management Agreement between the California Limited Term
Portfolio and Mutual Management Corp. is incorporated by reference to
Exhibit 5(i) to Post-Effective Amendment No. 25.
(h) Management Agreement between the Florida Limited Term
Portfolio and Mutual Management Corp. is incorporated by reference to
Exhibit 5(j) to Post-Effective Amendment No. 25.
(i) Management Agreement between the Arizona Portfolio and Mutual
Management Corp. is incorporated by reference to Exhibit 5(k) to
Post-Effective Amendment No. 27.
(j) Management Agreement between the Connecticut Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit 5(l) to
Post-Effective Amendment No. 27.
(k) Management Agreement between the Georgia Portfolio and Mutual
Management Corp. is incorporated by reference to Exhibit 5(m) to
Post-Effective Amendment No. 27.
(l) Management Agreement between the Massachusetts Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit 5(n) to
Post-Effective Amendment No. 27.
(m) Management Agreement between the Michigan Portfolio and Mutual
Management Corp. is incorporated by reference to Exhibit 5(o) to
Post-Effective Amendment No. 27.
(n) Management Agreement between the Ohio Portfolio and Mutual
Management Corp. is incorporated by reference to Exhibit 5(p) to
Post-Effective Amendment No. 27.
(o) Management Agreement between the Pennsylvania Portfolio and
Mutual Management Corp. is incoporated by reference to Exhibit 5(q) to
Post-Effective Amendment No. 27.
(p) Management Agreement between the Texas Portfolio and Mutual
Management Corp. is incorporated by reference to Exhibit 5(r) to
Post-Effective Amendment No. 27.
(q) Management Agreement between the Washington Portfolio and
Mutual Management Corp. is incorporated by reference to Exhibit 5(s) to
Post-Effective Amendment No. 27.
(r) Management Agreement between the New Jersey Money Market
Portfolio and Mutual Management Corp. is incorporated by reference to
Exhibit 5(t) to Post-Effective Amendment No. 27.
(s) Form of Management Agreement between California Money Market
Portfolio (or New York Money Market Portfolio, as the case may be)
and & Mutual Management Corp. is incorporated by reference to Exhibit
5(s) to Post-Effective Amendment No. 34.
(t) Form of Management Agreement between Florida Portfolio (or Limited Term
Portfolio or New York Portfolio, as the case may be) and Smith Barney
Mutual Funds Management Inc. is incorporated by reference to Exhibit 5(t)
to Post-Effective Amendment No. 36.
(6) Distribution Agreement between Registrant and Smith Barney, Harris
Upham & Co. Incorporated is incorporated by reference to Exhibit 6 to
Post-Effective Amendment No. 7.
(7) Not applicable.
(8) Custodian Agreement between Registrant and Provident National Bank
is incorporated by reference to Exhibit 8 to Pre-Effective Amendment No. 1.
(9) Transfer Agency Agreement between Registrant and Provident
Financial Processing Corp. is incorporated by reference to Exhibit
9 to Post-Effective Amendment No. 12.
(10) Opinion of Gaston & Snow is incorporated by reference to Exhibit 10
to Pre-Effective Amendment No. 1.
(11) (i) Auditors' Report (See the Annual Report to Shareholders which
is incorporated by reference in the Statement of Additional
Information).
(ii) Auditors' Consent
(iii) Power of Attorney is incorporated by reference to Exhibit
11(iii) to Post-Effective Amendment No. 23
(12) Not applicable.
(13) Subscription Agreement between Registrant and Mutual Management
Corp. is incorporated by reference to Exhibit 13 to Pre-Effective
Amendment No. 1.
(14) Not applicable.
(15) (a) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
California Money Market Portfolio is incorporated by reference
to Exhibit 15 to Post-Effective Amendment No. 21.
(b) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
California Limited Term Portfolio is incorporated by reference
to Exhibit 15(b) to Post-Effective Amendment No. 25.
(c) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Florida Limited Term Portfolio is incorporated by reference to
Exhibit 15(c) to Post-Effective Amendment No. 25.
(d) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Arizona Portfolio is incorporated by reference to Exhibit
15(d) to Post-Effective Amendment No.27.
(e) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Connecticut Portfolio is incoporated by reference to Exhibit
15(e) to Post-Effective Amendment No. 27.
(f) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Georgia Portfolio is incorporated by reference to Exhibit
15(f) to Post-Effective Amendment No.27.
(g) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Massachusetts Portfolio is incorporated by reference to
Exhibit 15(g) to Post-Effective Amendment No. 27.
(h) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Michigan Portfolio is incorporated by reference to Exhibit
15(h) to Post-Effective Amendment No. 27.
(i) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Ohio Portfolio is incorporated by reference to Exhibit 15(i)
to Post-Effective Amendment No. 27.
(j) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Pennsylvania Portfolio is incorporated by reference to Exhibit
15(j) to Post-Effective Amendment No. 27.
(k) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Texas Portfolio is incorporated by reference to Exhibit 15(k)
to Post-Effective Amendment No. 27.
(l) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
Washington Portfolio is incorporated by reference to Exhibit
15(l) to Post-Effective Amendment No. 27.
(m) Plan of Distribution pursuant to Rule 12b-1 on behalf of the
New Jersey Money Market Portfolio is incorporated by reference
to Exhibit 15(m) to Post-Effective Amendment No. 27.
(n) Form of Plan of Distribution pursuant to Rule 12b-1 on behalf
of Class A shares of each Portfolio, except the California Money Market
and the New York Money Market Portfoliois incorporated by reference to
Exhibit 15(n) to Post-Effective Amendment No. 34.
(16) Schedule of Computation of Performance Quotations is incorporated
by reference to Exhibit 16 to Post-Effective Amendment No. 5.
(18) Plan pursuant to Rule 18f-3 is incorporated by reference
to Exhibit 18 to Post-Effective Amendment No. 35..
Item 25. Persons Controlled by or under Common Control with Registrant
The Registrant is not controlled directly or indirectly by any person.
Information with respect to the Registrant's investment manager is set
forth under the caption "Management of the Fund" in the prospectus
included in Part A of this Post-Effective Amendment on Form N-1A.
Item 26. Number of Holders of Securities Number of Recordholders on
Title of Class May 10, 1996
National Portfolio 11,385
New York Portfolio 16,734
Limited Term Portfolio 8,111
California Money Market Portfolio 42,970
Florida Portfolio 4,442
New York Money Market Portfolio 39,144
Florida Limited Term Portfolio 423
Arizona Portfolio 0
Connecticut Portfolio 0
Georgia Portfolio 588
Massachusetts Portfolio 0
Michigan Portfolio 0
Ohio Portfolio 366
Pennsylvania Portfolio 1,003
Texas Portfolio 0
Washington Portfolio 0
New Jersey Money Market Portfolio 0
Item 27. Indemnification
Reference is made to ARTICLE V of Registrant's Declaration of Trust for
a complete statement of its terms. Section 5.2 of ARTICLE V provides:
"No Trustee, officer, employee or agent of the Trust shall be liable to
the Trust, its Shareholders, or to any Shareholder, Trustee, officer,
employee or agent thereof for any action or failure to act (including
without limitation the failure to compel in any way any former or acting
Trustee to redress any breach of trust) except for his own bad faith,
willful misfeasance, gross negligence or reckless disregard of his or
its duties." Emphasis added.
Item 28. Business and other Connections of Investment Adviser
See the material under the caption "Management of the Fund"
included in Part A (Prospectus) of this Registration Statement
and the material appearing under the caption "Management
Agreement" included in Part B (Statement of Additional
Information) of this Registration Statement.
Information as to the Directors and Officers of Smith Barney
Mutual Funds Management Inc. is included in its Form ADV (File
No. 801-8314), filed with the Commission, which is incorporated
herein by reference thereto.
Item 29. Principal Underwriters
(a) Smith Barney Inc. ("Smith Barney ") also acts
as principal underwriter for Smith Barney Money
Funds, Inc.; Smith Barney Muni Funds; Smith Barney
Funds, Inc., Smith Barney Variable Account Funds;
Smith Barney Intermediate Municipal Fund, Inc.,
Smith Barney Municipal Fund, Inc., High Income
Opportunity Fund Inc., Smith Barney/Travelers
Series Fund Inc., Smith Barney World Funds, Inc.,
Greenwich Street California Municipal Fund Inc.,
The Inefficient-Market Fund, Inc., Smith Barney
Adjustable Rate Government Income Fund, Smith
Barney Equity Funds, Smith Barney Income Funds,
Smith Barney Massachusetts Municipals Fund, Zenix
Income Fund Inc., Smith Barney Arizona Municipals
Fund Inc., Smith Barney Principal Return Fund,
Municipal High Income Fund Inc., The Trust for TRAK
Investments, Smith Barney Series Fund, Smith Barney
Income Trust, Smith Barney Oregon Municipals Fund
Inc., Smith Barney Municipal Money Market
Fund,Inc., Smith Barney Aggressive Growth Fund
Inc., Smith Barney Appreciation Fund Inc., Smith
Barney California Municipals Fund Inc., Smith
Barney Fundamental Value Fund Inc., Smith Barney
Managed Governments Fund Inc., Smith Barney Managed
Municipals Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., Smith Barney Natural
Resources Fund Inc., Smith Barney Investment Funds
Inc., Smith Barney FMA (R) Trust, The Italy Fund
Inc., Smith Barney Telecommunications Trust,
Managed Municipals Portfolio Inc., Managed
Municipals Portfolio II Inc., Smith Barney Concert
Series Inc.,Managed High Income Portfolio Inc. and
Greenwich Street Municipal Fund Inc.; USA High
Yield Fund N.V.; Smith Barney International
Funds(Luxemburg); Smith Barney Worldwide Securities
Limited (Bermuda); Smith Barney Worldwide
Special Fund N.V. (Netherlands, Antilles); Global Horizons
Investment Series (Cayman Islands).
Smith Barney, the distributor of Registrant's shares, is a
wholly owned subsidiary of Travelers Group Inc.
(b) The information required by this Item 29 with
respect to each director and officer of Smith Barney
is incorporated by reference to Schedule A of Form BD
filed by Smith Barney pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-8177).
(c) Not applicable
Item 30. Location of Accounts and Records
PNC Bank, National Association, 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, and First Data Investor Services Group Inc., One
Exchange Place, Boston, Massachusetts 02109, will maintain the custodian
and the shareholders servicing agent records, respectively required by
Section 31(a).
All other records required by Section 31(a) are maintained at the
offices of the Registrant at 388 Greenwich Street, New York, New York
10013 (and preserved for the periods specified by Rule 31a-2).
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Registrant undertakes, if requested to do so by the holders of at
least 10% of Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
Trustee or Trustees and to assist in communications with other
shareholders as required by Section 16(c).
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of Registrant's latest report to shareholders,
upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment
to the Registration Statement pursuant to Rule 485 (b) under the Securities
Act of 1933 and has duly
caused this Post-Effective Amendment to its Registration Statement to be
signed on its behalf by the undersigned and where applicable, the true and
lawful attorney-in-fact, thereto duly authorized, in the
City of New York, and State of New York on the 26th of July, 1996.
SMITH BARNEY MUNI FUNDS
By/s/ Heath B. McLendon
Heath B. McLendon, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature Title Date
/s/ Heath B. McLendon Chief Executive Officer July 26, 1996
(Heath B. McLendon) (Principal Executive Officer)
and Trustee
/s/ Jessica M. Bibliowicz President and Trustee July 26, 1996
(Jessica M. Bibliowicz)
Joseph H. Fleiss* Trustee
(Joseph H. Fleiss)
Donald R. Foley* Trustee
(Donald R. Foley)
Paul Hardin* Trustee
(Paul Hardin III)
Francis P. Martin* Trustee
(Francis P. Martin)
Roderick C. Rasmussen* Trustee
(Roderick C. Rasmussen)
John P. Toolan* Trustee
(John P. Toolan)
C. Richard Youngdahl* Trustee
(C. Richard Youngdahl)
/s/ Lewis E. Daidone Senior Vice President July 26, 1996
(Lewis E. Daidone) and Treasurer (Principal Financial
and Accounting Officer)
*By: /s/ Christina T. Sydor
Christina T. Sydor
Pursuant to Power of Attorney July 26, 1996
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
11(ii) Auditor's Consent
17 Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Smith Barney Muni Funds:
We consent to the use of our reports dated as summarized below, with
respect to the Portfolios listed below of Smith Barney Muni Funds
incorporated herein by reference and to the references to our Firm under the
headings "Financial Highlights" in the Prospectuses and "Independent
Auditors" in the Statement of Additional Information.
Date
of
Portfolio Auditors' Report
Limited Term Portfolio May 14, 1996
Florida Portfolio May 14, 1996
New York Portfolio May 15, 1996
KPMG PEAT MARWICK LLP
New York, New York
July 26, 1996
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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[GROSS-EXPENSE] 166,662
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[PER-SHARE-NII] 0.37
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NUMBER> 091
<NAME> OHIO PORTFOLIO - CLASS A
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<NAME> PENNSYLVANIA PORTFOLIO - CLASS A
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<NAME> SMITH BARNEY MUNI FUNDS
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<NAME> PENNSYLVANIA PORTFOLIO - CLASS C
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<NUMBER-OF-SHARES-REDEEMED> 28,320
<SHARES-REINVESTED> 11,472
<NET-CHANGE-IN-ASSETS> 13,499,207
<ACCUMULATED-NII-PRIOR> 641,755
<ACCUMULATED-GAINS-PRIOR> (114,695)
<OVERDISTRIB-NII-PRIOR> 39,711
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 281,633
<AVERAGE-NET-ASSETS> 22,991,419
<PER-SHARE-NAV-BEGIN> 12.39
<PER-SHARE-NII> 0.64
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.66
<RETURNS-OF-CAPITAL> 0.05
<PER-SHARE-NAV-END> 12.61
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
